The unemployment rate is a key economic indicator used to judge the health of an economy’s job market and to make policy decisions. It is based on a monthly survey of the civilian labor force, which excludes those who are retired or have dropped out of the workforce for any reason.
While there may be a certain natural level of unemployment that cannot be eliminated, elevated levels of unemployment impose high costs on individuals and society as a whole. They cost money in the form of benefits such as unemployment compensation and food stamps; they cost companies by reducing productivity and thus output; and they rob the economy of workers with valuable skills that could have been put to use in new jobs.
Unemployment rates are determined by a number of factors, many of which are outside the control of government. For example, technological changes can alter the “natural rate of unemployment” (NAIRU) by making each worker more valuable to employers; demographic shifts, such as a rapidly aging population, can also affect NAIRU. Other factors, such as the strength of unions and the presence or absence of strict labor regulations, can have long-term effects on unemployment.
Although there are several ways to measure unemployment, the rate most people are familiar with is the official unemployment rate, or U-3, which measures the number of people out of work for 15 weeks or more. Other measures, including the underemployment rate, which includes involuntarily part-time workers who want full-time jobs and discouraged workers who have given up looking for work, and the labor force participation rate, which is the percentage of the population who are either employed or actively seeking employment, can give a more complete picture of slack in the job market.