The unemployment rate is a key indicator that tells us how well or how badly the economy is performing. It is closely watched and is considered a key factor when setting monetary policy and making strategic economic decisions. High unemployment negatively affects the incomes of jobless workers and their families, erodes purchasing power in the economy, stifles business confidence, and reduces the amount of goods and services produced by the country.
Unemployment is measured by dividing the number of people out of work by the total population. The United States Bureau of Labor Statistics (BLS) calculates the official unemployment rate, which is known as the U-3 measure, by analyzing results from a monthly survey of households that covers a sample of more than 100,000 individuals. In order to be counted as unemployed, a person must not only be out of work but also actively looking for a job—such as sending out resumes.
There are a few different ways the BLS tracks employment. The most familiar is the headline unemployment rate, which is calculated by dividing the number of unemployed people by the total number of people in the labor force. However, this statistic is not as comprehensive as it may seem. Some people who would like to work but are not actively looking for a job—such as students or retirees who stay at home to take care of their children—are not included in the statistics.
When economic conditions are challenging, it is common for the number of workers in the labor force to decline, as many people become discouraged and stop searching for jobs. This makes the official unemployment rate look lower than it should be.
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