Unemployment rate

The unemployment rate is the percentage of unemployed people within the economy. This is expressed in a percent to explain how many people are jobless. This is an important number for economist, investors, and traders because it will give us an idea of where the economy is in the business cycle. High unemployment could mean that an economy is going through a downturn and full unemployment could represent a peak in the economy.

Where Does The U.S. Unemployment Rate Come From?

The unemployment data is reported by the Bureau of Labor Statics. This agency calculates the unemployment percentage and releases the data to the public every month. There are two simple questions that I have outlined below that they survey to acquire this calculation. If you have been around an economist, they will tell you that these two number should be doubled to get a true feel for a true unemployment percent.

Two Questions to Get the Percentage

  1. Are you looking for work?
  2. Are You Gainfully Employed?

There are a lot of factors that these two questions don’t take into account and that is why many business people and economist will double this number. In Reality, there are multiple reasons why people are unemployed, but some are voluntary and others are involuntary. These two questions don’t take those factors into account.

Frictional Unemployment

Economist uses this term to describe the period of time when someone is not employed and searching for employment. Another way to put this is that it is the time someone spends in between jobs and not in the market. This is can be because the person is holding out for the correct job opportunity and is holding out for a better opportunity.

Structural Unemployment

This type of unemployment is caused by changes in the labor force. One example of this type of change would change in technology. During the early 90’s there was a rapid technology change within the business in the United States where people needed to understand how to use a certain technology. Those who couldn’t use computers and certain software were no longer demanded in the workforce.

Cyclical Unemployment

The market is constantly going through boom periods and recessions. By definition, a recession only happens when the countries GDP contracts for two-quarters in a row. During the boom periods, there is a demand for labor and during recessions there are unemployed. This comes in two forms. First, there is the business cycle slow down which causes cyclical unemployment. There are extreme versions of this such as the great depression, 1988 farming collapse, or the 2008 housing crisis. Those would be a major economic contraction know as a recession.

What does all this actually mean?

Full employment

It is impassable for the unemployment number to be zero. The lowest this number will go is 3% and some economist thinks that 4% unemployment means that the economy is fully employeed. The reason why we talked about structural and frictional unemployment first is that these will always exist in any economy.

Two Reasons Why The Unemployment Figures Are Doubled

Part-time employment

Is a part time worker gainfully employed? Yes, they technically are but that isn’t always voluntary. This is one reason why the employment figures get doubled because it doesn’t take into account the people working less than 40 hours a week. Some of these people only want to be employees part time. Other times part-time employment it is involuntary.

Discouraged workers

This happens during times of economic slowdown where people just give up on looking for a new job. These are people who would like to be employed but simply have given up due to the economic circumstances. For these people they wouldn’t pass the second test to be considered unemployed by the Bureau of Labor. This is one reason why economists argue that the figures need to be doubled.

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