What do changes in the unemployment rate indicate

The late s is an obvious reference for highlighting how unresponsive wage and productivity growth have been to low unemployment in recent years. In these years, low unemployment coincided with notable accelerations in both wage and productivity growth. In this newsletter, we highlight some reasons why the headline unemployment rate measured in the late s does not provide quite the expected apples-to-apples comparison with the unemployment rate of today. Key findings are: The unemployment rate that signifies labor market tightness falls as the workforce gets older and becomes better educated.

All else equal, a workforce that is growing older and more educated should steadily, over time, reduce the unemployment rate that is consistent with a given wage target. These compositional changes in the workforce have occurred and have reduced unemployment by roughly 0.

Growing nonresponse in the survey used to calculate the unemployment rate has reduced the unemployment rate consistent with a given wage target over time by another 0.

Growing evidence shows that nonresponse to this survey is not random: rather it is jobless workers who are less likely to respond to the survey that is used to calculate unemployment. This biases the measured unemployment rate downward. There may be a bigger pool of workers competing for jobs than the unemployment rate suggests.

For example, the share of newly employed workers who enter employment from out of the labor force is substantially higher in recent years than in past periods of low unemployment, and the downward pressure that adults not participating in job searches put on wages is higher now than in the late s.

In short, many potential workers today are not being classified as unemployed, and hence may be missed by focusing only on the unemployment rate as a measure of labor slack. The rest of this brief highlights evidence on these three points.

A lower unemployment rate is needed to signify labor market tightness with an older and better-educated workforce All else equal, workers with more experience and education credentials have lower rates of unemployment. Figure A. Actual Adjusted — 4. Chart Data Download data The data below can be saved or copied directly into Excel. Interviews are conducted in person or by phone. The survey excludes individuals under the age of 16 and those who are in the Armed Forces hence references to the "civilian labor force".

People in correctional facilities, mental healthcare facilities, and other similar institutions are also excluded. Interviewers ask a series of questions that determine employment status, but do not ask whether respondents are employed or unemployed.

Nor do the interviewers themselves assign employment status; they record the answers for the BLS to analyze. And while men and women are not the only genders, the study graphed only looked at data for these two gender identities. Interviewers also collect information on industry, occupation, average earnings, union membership, and—for the jobless—whether they quit or were discharged fired or laid off.

In response to criticisms that the official rate paints an unjustifiably rosy picture of the health of the labor market, the BLS publishes five alternative measures: U-1, U-2, U-4, U-5, and U Though these are often referred to as unemployment rates U-6, in particular, is often called the "real" unemployment rate , U-3 is the official and the most commonly cited national unemployment rate.

The others are characterized as measures of "labor underutilization. U-3 defines unemployed people as those who are willing and available to work, and who have actively sought work within the past four weeks. Those with temporary, part-time, or full-time jobs are considered employed, as are those who perform at least 15 hours of unpaid family work.

U-6 adds on to U-3 the people who are marginally attached to the labor force, which includes discouraged workers, plus those who are employed part-time for economic reasons. Every month the Census Bureau, part of the Department of Commerce, conducts the Current Population Survey using a sample of around 60, households, or around , individuals. These surveys are conducted in person or over the phone.

The responses are categorized by race, ethnicity, age, veteran status, and gender, all of which—along with geography—add nuance to the employment data. Bureau of Labor Statistics. Alternative measures of labor underutilization. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Part Of. Know the Lingo. As a result, people looking for work will also find it harder to become employed.

The opposite situation occurs when demand strengthens. Cyclical unemployment is often described as being medium term in nature one to 12 months. Examples can be seen in the unemployment rate rising sharply with the early s recession, declining to low levels by the mid s before rising again around the time of the global financial crisis.

An increase in cyclical unemployment might suggest the economy is operating below its potential. With more people competing for jobs, businesses might offer lower wage increases, which would contribute to lower inflation.

Policies that stimulate aggregate demand, such as expansionary monetary policy, can help reduce this type of unemployment because businesses experiencing stronger demand are likely to employ more people. Structural unemployment occurs when there is a mismatch between the jobs that are available and the people looking for work.

Workers may become unemployed if they work in industries that are declining in size or have skills that could be automated as a result of large-scale technological advances. It may be difficult for them to find work in another industry and they may need to develop new skills or move to a region that has more opportunities. For example, there has been a noticeable decline in the share of people employed in routine manual jobs over recent decades with some of these jobs being automated because of advances in technology.

The manufacturing industry is an example of an industry that has a high share of routine manual jobs and its size in the economy has declined both in terms of production and employment. Structural unemployment tends to be longer lasting than other types of unemployment. This is because it can take a number of years for workers to develop new skills or move to a different region to find a job that matches their skills.

As a result, workers who are unemployed because of structural factors are more likely to face long-term unemployment for more than 12 months. In contrast to cyclical unemployment, structural unemployment exists even when economic conditions are good.

In theory, this type of unemployment should not directly influence wages or inflation and is best addressed through policies that focus on skills and the supply of labour. The rate has been steadily dropping for nearly a decade, which would seem to indicate that the economy is strong and that things are going well in the labor market. The unemployment rate in the United States is the percentage of workers who are unemployed, and are actively looking for a job.

Unemployment ups and downs are directly connected with business ups and downs. As American products and services decline, businesses need to lay off workers. Workers who are suddenly out of a job, have less money to spend, which reduces revenue for companies. Reduced revenue causes businesses to cut employees to reduce costs. And the cycle goes downward, causing devastation on the way. It takes a while to start to fall, and a while to rise back up after economic shifts. So, how could more people having jobs be a bad thing for the economy?

When the unemployment rate is low, fewer of the new jobs added are worth the cost of paying the employees. And thus, every job added after that is inefficient. This is often called slack in the labor market.

Ideally, the labor market would have no slack.