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July 27, 2016
Introduction to U.S. Economy: Unemployment
How is the Unemployment Rate
individuals who had previously given up looking for work
Calculated?
rejoin the labor force by restarting their job search.
The official unemployment rate, also known as U3, released
on a monthly basis by the Bureau of Labor Statistics (BLS),
Alternative Measures of Unemployment
measures the number of unemployed individuals as a
BLS reports other measures of unemployment—officially
percentage of the entire labor force. It is important to define
called “measures of labor underutilization”—that include
these terms, as the BLS definitions are not entirely intuitive.
additional groups with different employment statuses in the
calculation. These rates can provide a broader sense of
labor market conditions. The most prominent alternative
measure is the U6 unemployment rate.


The U6 unemployment rate measures the number of
The labor force is defined as all individuals aged 16 and
unemployed, as defined under U3, but also includes the
over who are either unemployed or employed, excluding
number of marginally attached workers and individuals
active duty military personnel. Individuals are considered
working part time for economic reasons as a percentage of
employed if they did any work for pay or profit in the
an expanded labor force. Marginally attached workers
previous week. Individuals are considered unemployed if
include individuals who are available for work, have
they satisfy the following three criteria: (1) they do not have
expressed a desire to work, and have looked for work in the
a job, (2) they have actively looked for work in the previous
past 12 months. The expanded labor force under U6
four weeks, and (3) and they are currently available to
includes all individuals employed, unemployed, and
work. If an individual does not have a job, but has not
marginally attached to the labor force. Figure 1 displays the
looked for work in the previous four weeks, or are not
U6 unemployment rate over time, which dropped below
currently available for work, that individual is not
10% beginning in October 2015.
considered part of the labor force. Figure 1 displays the U3,
which has been equal to or below 5% since October 2015.
The U6 unemployment rate may provide a better sense of
labor market conditions, especially since the last recession.
Figure 1. Unemployment Rate
Many individuals dropped out of the labor force as a result
of the recession and the subsequent poor labor market
prospects. This caused the difference between the U6 and
U3 rates to grow higher than pre-recession rates, and the
elevated gap still persists six years after the recession, as
shown in Figure 2.
Figure 2. Unemployment Measure Divergence

Source: BLS.

This formulation of the unemployment rate can cause
confusion because the size of the labor force, employment,
and unemployment can all change simultaneously. For

example, the jobs report for June 2016 found that
Source: CRS calculations based on data from BLS.
employment increased by 287,000 jobs, yet the

unemployment rate also increased by 0.2 percentage points.
This can occur if the number of individuals joining the
Unemployment Across Demographics
labor force outnumbers those who found work, and often
The average unemployment rate in the United States varies
happens temporarily as the economy recovers from a
significantly across groups depending on educational
recession. As employment prospects improve, many
attainment and race or ethnicity. See Figure 3.
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Introduction to U.S. Economy: Unemployment
Figure 3. Unemployment Across Demographics,
business cycle. As the economy slows or enters a recession,
June 2016
firms reduce their hiring, or even lay individuals off, and
cyclical unemployment rises. When the economy grows,
firms hire and cyclical unemployment falls.
When the economy is growing at a steady sustainable pace,
cyclical unemployment is zero and the unemployment rate
is roughly equal to the sum of structural unemployment and
frictional unemployment. This is referred to as the “natural
unemployment rate,” which is said to occur when the
economy is at full employment. The Federal Reserve
estimates the U.S. natural unemployment rate is between
4.6% and 5.0%. The unemployment rate has hovered in this
range for the first half of 2016, suggesting the economy
may be approaching full employment if the Federal
Reserve’s estimates are accurate.
Source: BLS.
How is the Unemployment Rate Data
Unemployment and the Broader
Collected?
Economy
The unemployment rate is most often used as a measure of
The unemployment rate is not based on unemployment
labor market strength but it is also a useful indicator and
insurance claims. Rather, it is calculated based on the
predictor of movements in the broader economy.
results from the Current Population Survey (CPS)
conducted by the Census Bureau. The monthly survey has a
Unemployment and Economic Activity
sample size of about 110,000 individuals, significantly
Gross Domestic Product (GDP) and the unemployment rate
larger than most public survey samples.
are inversely related. For economic production to be high, a
larger number of individuals have to be put to work.
Interviewers contact individuals either over the phone or in
Therefore, as economic growth increases, unemployment
person to collect information on individual’s labor force
tends to decrease and vice versa. Other factors can impact
activities and a number of personal characteristics.
unemployment and GDP—such as changes in the labor
Individuals are not directly asked if they are unemployed or
force participation rate, the number of hours individuals
in the labor force. Rather, interviewers ask questions about
work, and changes in productivity—so the two do not move
labor market activities, such as when the person last worked
perfectly in sync. However, over time the relationship tends
or looked for work. An individual’s labor force status is
to hold.
determined from their responses.
Reasons for Unemployment
Unemployment and Inflation
Most economists agree that unemployment and inflation are
Economists categorize unemployment into three general
also inversely related in the short term. As discussed earlier,
categories—structural, frictional and cyclical—depending
a certain unemployment rate is expected to persist when the
on the cause of unemployment.
economy is growing at a steady pace, often referred to as
the full employment or the natural rate of unemployment.
Structural unemployment refers to unemployment
Economists have found that as the unemployment rate falls
resulting from a mismatch of skills or interest between
below this natural rate, inflation tends to accelerate, and
workers and the jobs available. This mismatch can occur for
when the unemployment rate increases above this rate
a number of reasons, including shifting consumer
inflation tends to decelerate.
preferences, technological changes, or trade. For example,
automated elevators likely led to a large number of elevator
Most economists believe that policymakers cannot keep the
operator layoffs in the early 20th century; those operators
unemployment rate below its natural rate with fiscal or
would be considered structurally unemployed.
monetary policy for an extended period without causing
rising inflation. Excessive inflation is thought to slow
Frictional unemployment refers to short-term
economic growth by distorting market prices and altering
unemployment due to job searching or job transition. After
individual behavior. However, policymakers may be able to
an individual leaves a job, it generally takes some period of
decrease unemployment without causing inflation by
time to find a new position. Individuals engaging in this
lowering the natural rate of unemployment through policies
search are considered frictionally unemployed. Frictional
that reduce structural and frictional unemployment.
unemployment tends to be present in the economy at all
times because there is a certain amount of churn in the labor
force as individuals move from one employer to another.
Jeffrey M. Stupak, Analyst in Macroeconomic Policy
IF10443
Cyclical unemployment results from the somewhat regular
ups and downs of the economy, often referred to as the

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Introduction to U.S. Economy: Unemployment



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