Unemployment Rate Explained Simply

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The Unemployment Rate explained simply.

The Unemployment rate gives us a picture of the strength of the American economy. If there is high unemployment one can expect consumer spending to fall, so there is a ripple effect to this very important measurement. Unemployment will affect spending and often the pricing of goods and services such as furniture, appliances and autos, etc. When unemployment falls it can put pressure on wages.

It is helpful to understand how unemployment is calculated and measured. There is the Establishment Report Survey which samples employees across the country on the state of their payroll. They also utilize the Current Population Survey where ~60,000 households are asked work questions looking for trends. The Bureau of Labor Statistics calculations start with the smallest measure of unemployment and then broaden their definition with six distinct measures of Unemployment.

BLS Statistics:

    U-1 – Unemployed 15 weeks or longer.

    U-2 – U-1 plus workers that have completed temporary work or recently lost their jobs.

    U-3 – U-2 plus U-3 give us the official unemployment rate, the total unemployed as a percentage of the civilian labor force.

    U-4 – The total of unemployed (U-3), plus the total of discouraged workers – those who have given up looking for work because they do not think there are jobs available.

    U-5 – The total of unemployed (U-3), plus discouraged workers (U-4), plus all those “marginally attached” to the labor force – those unemployed who would like to work but have not looked for work recently.

    U-6 – The total of unemployed (U-3), plus discouraged workers (U-4), plus marginally attached workers (U-5), plus part-time or underemployed workers who want to work full-time but cannot because of economic reasons.

U-3 is often used as the most popular measurement for getting a sense of trends. Let us look at some definitions and how they work.

The civilian non-institutional population is US civilians, 16 or older, who are not in an institution, such as criminal, mental, or other types of facilities, or an active- duty military personnel.

The civilian labor force is US residents, 16 years old or older, that is not employed by any government or military institution, and either employed or unemployed.

The Labor Force Participation Rate measures the active workforce of an economy. The formula to measure the participation rate is the sum of all employed workers and those actively looking for work divided by the total noninstitutionalized civilian working age population.

Not in the labor force represents people who are not working or looking for work. For example, retired people, stay-at-home moms, and students are not part of the labor force. Discouraged workers who would like a job but have given up looking are not in the labor force. You must be available, willing to work, and have looked for a job recently to be considered part of the labor force.

The Causes of Unemployment:

Frictional Unemployment-Frictional unemployment is always present in an economy. It comes from temporary transitions that workers make when moving from job to job looking for a job that more precisely matches their skills, or because of a move to a new place, or change in the family situation, or for better pay. It is also a reflection of new or returning workers into the labor force (e.g., graduating college students or the kids have grown and moved out of the house and have decided to rejoin the marketplace).

Frictional unemployment may also be the result of employers refraining from hiring or laying off workers for reasons unrelated to the economy.

Structural Unemployment-Structural unemployment is created when there is a gap in the demographic or industrial makeup of a local economy. For example, structural unemployment can be high in a place where there are technically advanced jobs available but the workers in that area lack the skills to perform them, or conversely, in a locale where there are workers available but no jobs for them to get hired for.

Advances in new technologies can cause a decline in mature industries, which then must drop workers to stay competitive. For example, the U.S. newspaper industry. Many newspaper editors, writers and production workers have lost their jobs over the past fifteen years as web-based advertising surpassed newspapers’ traditional sources of revenue, and circulation declined as more consumers got their news from the Internet. Laid-off journalists, printers, deliverer people, etc., all increased the structural unemployment numbers.

Another example is small family farmers, whose farms cannot match the economic power of wealthy agriculture businesses. Scores of farmers left the land and entered the workforce. When they fail to find jobs, they add to the structural unemployment statistics, as do factory workers whose employers have moved operations to low-wage countries like China.

Cyclical Unemployment-Cyclical unemployment occurs when there is not enough demand for goods and services in the economy to be able to provide jobs for everyone that is looking for one. According to Keynesian economics, it is a natural result of the boom-and-bust business cycles embedded in a capitalist system. When businesses contract during a recessionary cycle, workers are let go and unemployment rises.

When unemployed consumers have less money to spend on goods and services, businesses must contract even further, causing more layoffs and more unemployment. The cycle continues to spiral downward unless and until the situation is improved, usually requiring some form of government intervention.

The Unemployment Rate has a ripple affect on the economy as a whole and should be watched as trends, and once a trend is violated figuring out why and how long it might last. It is an important statistic.