Unemployment

What it is:

Unemployment occurs when one does not have a job. In the financial world, the term is often short for unemployment rate, which is the percentage of employable people in a country’s workforce who are over the age of 16 and actively seeking work.

The formula for unemployment rate is:
Number of Unemployed/ Total Labor Force

How it works/Example:

The Bureau of Labor Statistics reports unemployment in its Employment Situation report, which is released on the first Friday of each month at 8:30 a.m. EST. The report discloses the current unemployment rate, the change in the unemployment rate and other labor statistics. The report presents data for one week of the month, which always includes the 12th day of that month. The data in the report comes from surveys of more than 250 parts of the U.S. and from almost every major industry. Two surveys are conducted: the household survey, which interviews 60,000 households, and the establishment survey, which reviews data from 160,000 nonfarm businesses and agencies.

It is important to note that unemployment is different from not working. Some people may be in school full-time, working in the home, disabled or retired. They are not considered part of the labor force and therefore are not considered unemployed. Only people not working who are looking for work or waiting to return to a job are considered unemployed.

There are three kinds of unemployment. Frictional unemployment exists when a lack of information prevents workers and employers from becoming aware of each other. It is usually a side effect of the job-search process, and may increase when unemployment benefits are attractive enough to prolong job searches. Structural unemployment occurs when changing markets or new technologies make the skills of certain workers obsolete. Cyclical unemployment occurs when there is a general decline in business activity concurrent with a typical economic cycle.

There are four kinds of unemployed people, and it is important to note that not all unemployed people are unemployed because they lost their last job. Indeed, job losers are people who have been laid off or fired, either temporarily or permanently. However, job leavers are people who have voluntarily left their jobs, and the size of this group may actually indicate confidence in the strength of the economy. Re-entrants are people who left the labor force for a time and are now returning, such as parents who left to rear families or those who left to pursue additional schooling. New entrants are people seeking employment for the first time.

Some level of unemployment will always be present in an economy as industries expand and contract, as technological advances occur, as new generations enter the labor force, and as long as workers can voluntarily seek better opportunities. This is why most economists agree that there is a natural rate of unemployment in the economy (usually 4%-6%). This natural rate is most affected by the number of youthful workers in the labor force, who tend to experience more unemployment as they change jobs and move in and out of the labor force, and public policies that may discourage employment or the creation of jobs (such as a high minimum wage, high unemployment benefits, and low opportunity costs associated with laying off workers).

Why it Matters:

Employment is the primary source of personal income in the U.S. and thus a source of economic growth. This is primarily why unemployment, which is a lagging indicator, can provide considerable information about the state of the economy and about particular sectors of that economy. For example, high unemployment is generally indicates an economy is underperforming or has a falling gross domestic product, suggesting weak labor demand, unproductive labor policies, or mismatches between the demands of workers and employers. Low or falling unemployment may signal increases in the supply of whatever the new jobs produce, which suggests an expanding economy. Unemployment can also point to changes in industry sectors. For example, changes in one job sector, such as construction jobs, can signal changes in other economic measures, such as housing starts. For these reasons, unemployment is one of the most widely used economic indicators, and its timeliness is especially appreciated.

Because unemployment statistics are so heavily relied upon, differences between the expected unemployment rate and the reported rate may affect other parts of the economy. For example, unexpectedly low unemployment may motivate the Federal Reserve to increase interest rates in order to curb a possibly overheating economy, and this in turn affects stock and bond prices. The currency markets are especially sensitive to unemployment rates because an unexpected decrease in employment usually corresponds to a rise in the value of the U.S. dollar.

There is some controversy regarding how unemployment is measured. For example, the establishment survey only counts employees of companies that provide payroll counts, thereby excluding the self-employed. Likewise, the relatively small size of the household survey is often criticized for introducing volatility to the calculations. Additionally, critics state that some workers are incorrectly categorized. Discouraged workers, for example, are not considered unemployed, because they are no longer searching for work even though most would accept employment if it were offered. Part-time workers are considered employed even if they work only one hour a week. People in the underground economy (such as drug dealers or prostitutes) or those rejecting employment paying less than welfare, food stamps, and other forms of public assistance are also considered unemployed. These measurement controversies are why many analysts consider the rate of employment (which is not simply 1 minus the unemployment rate—it is separately measured by the Bureau of Labor Statistics) a better indicator of job availability.

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