Reviewed by Sep 28, 2020| Updated on
What is an Unemployment Rate?
The unemployment rate is the proportion of the jobless population, expressed as a percentage. It is a lagging indicator, which means this typically rises or falls in the wake of changing economic conditions instead of predicting them.
The unemployment rate can be expected to rise when the economy is in poor shape, and jobs are scarce. If the economy grows at a healthy rate, and jobs are fairly abundant, it can be expected to fall.
Calculating the Unemployment Rate
The official jobless rate is known as U-3. This describes the unemployed as those who are eager and willing to work, and who have been actively seeking work in the past four weeks. Those with temporary, part-time, or full-time jobs are deemed to be working, as are those who do unpaid family work for at least 15 hours.
When measuring the unemployment rate, the number of unemployed people is divided by the number of jobs and unemployed people in the labour force. The ratio is expressed in terms of percentage.
Most people who want to work but cannot (for example, because of a disability), or who have become discouraged since searching for work without success are not considered unemployed under this system. Since they are not working, they are counted as outside the labour force. This approach is seen by critics as presenting an unjustifiably rosy picture of the labour force.
U-3 is also criticized for not distinguishing between those working in temporary, part-time, and full-time jobs even in situations where part-time or temporary workers may prefer to work full-time, but are unable to do so because of labour market conditions.
Why the Unemployment Rate Matters?
When workers are unemployed, their families lose wages, and the nation as a whole loses their contribution to the economy in terms of the goods or services that could have been produced. Unemployed workers also lose their purchasing power, which can lead to unemployment for other workers, creating a cascading effect that ripples through the economy.