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Updated July 7, 2020
Introduction to U.S. Economy: Unemployment
The U.S. economy has seen historically high levels of
force outnumbers those who found work, then the
unemployment as a result of the Coronavirus Disease 2019
unemployment rate would increase despite the increase in
(COVID-19) pandemic. This In Focus provides an
employment. This can happen as the economy recovers
introduction to the official unemployment rate and
from a recession and individuals who had previously given
alternative measures of unemployment, briefly examines
up looking for work rejoin the labor force by restarting their
the reasons for unemployment, and places the
job search.
unemployment rate in a broader economic context.
Alternative Measures of Unemployment
How Is the Unemployment Rate
BLS reports other measures of unemployment—called
Calculated?
“measures of labor underutilization”—that include
The Bureau of Labor Statistics (BLS) releases the official
additional underemployed groups. These measures can
unemployment rate, commonly known as the U3 series, on
provide a broader sense of labor market conditions. The
a monthly basis. The U3 rate measures the number of
most prominent alternative measure is the U6
unemployed individuals as a percentage of the entire labor
unemployment rate, also shown in Figure 1.
force.
Alternative measures of labor underutilization include (1)
the U1 rate—individuals unemployed for 15 weeks or
longer; (2) the U2 rate—individuals who lost jobs or
completed temporary jobs; (3) the U4 rate—the U3 rate
plus discouraged workers (individuals who give a job-
The labor force is all employed and unemployed individuals
market-related reason for not currently looking for work);
(4) the U5 rate—the U4 rate plus marginally attached
aged 16 and older, excluding active duty military personnel
or the institutionalized. Individuals are considered
workers (individuals who are available to work, have
employed if they did any work for pay or profit in the
expressed a desire to work, and have looked for work in the
previous week. Individuals are considered unemployed if
past 12 months); and (5) the U6 rate—the U5 rate plus
they do not have a job, have actively looked for work in the
individuals working part time for economic reasons.
previous four weeks, and are currently available to work. If
an individual does not have a job, but has either not looked
These alternative measures are particularly useful during
for work in the previous four weeks or is not currently
recessions in pinpointing the effects on the labor market.
Figure 2 compares each measure of underutilization in
available for work or both, that individual is not considered
part of the labor force. Figure 1 displays the official
January and May 2020. Whereas the U4 and U5 rates have
unemployment rate (U3) since 2010, which has increased
remained similar to the official U3 rate, each increasing by
sharply as a result of COVID-19.
about 10 percentage points between January and May, the
U6 rate has increased by about 14 percentage points. This
Figure 1. Unemployment Rate
indicates that the number of individuals working part time
for economic reasons has increased more rapidly than other
underutilization measures during this recession.
Figure 2. Comparison of Unemployment Rates
January and May 2020
Source: Bureau of Labor Statistics (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, if the number of individuals joining the labor
Source: BLS.
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Introduction to U.S. Economy: Unemployment
Unemployment Across Demographics
shifts and create policies that reduce structural
The average U3 rate in the United States varies
unemployment.
significantly across groups depending on educational
attainment and race or ethnicity, as shown in Figure 3.
Frictional unemployment refers to short-term
Recessions, such as the one caused by COVID-19, can
unemployment due to job searching or transition. After an
cause disproportionate effects among groups as well.
individual leaves a job, it generally takes some period of
time to find a new position. Frictional unemployment tends
Figure 3. Unemployment Comparison by Educational
to be present in the economy at all times because there is a
Attainment and Race or Ethnicity
certain amount of churn in the labor force as individuals
January and May 2020
move from one employer to another.
Cyclical unemployment results from the normal ups and
downs of the economy, often referred to as the business
cycle. As the economy slows or enters a recession, firms
reduce hiring or lay individuals off and cyclical
unemployment rises. When the economy grows, firms hire
and cyclical unemployment falls. Short-term deviations are
mostly attributable to cyclical factors, and are difficult to
predict, as was the case with the COVID-19 pandemic.
When the economy is operating at its full potential, cyclical
unemployment is zero and the unemployment rate is
roughly equal to the sum of structural and frictional
unemployment. This is referred to as the natural
Source: BLS.
unemployment rate. It is not directly observable, but the
Notes: Hispanic or Latino ethnicity is a separate demographic
Congressional Budget Office estimates the U.S. natural
concept from race in the Current Population Survey statistics.
unemployment rate is about 4.4%.
Individuals of Hispanic or Latino ethnicity may be of any race.
Unemployment and the Broader
How Is the Unemployment Rate Data
Economy
Collected?
The unemployment rate is most often used as a measure of
BLS calculates the unemployment rate based on the results
labor market strength, but it is also a useful indicator and
from the Current Population Survey conducted by the
predictor of the broader state of the economy.
Census Bureau. This monthly survey has a sample size of
about 110,000 individuals who are selected to be
Unemployment and Economic Activity
representative of the U.S. population. Interviewers contact
Gross domestic product (GDP) and the unemployment rate
individuals to collect information on their labor force
have a negative long-run relationship. In general, for
activities and a number of personal characteristics.
economic production to increase, the number of individuals
Interviewers ask questions about labor market activities,
who work must increase. Therefore, as economic growth
such as when the person last worked or looked for work. An
increases, unemployment tends to decrease, and vice versa.
individual’s labor force status is determined from their
Other factors can impact unemployment and GDP—such as
responses.
changes in the labor force participation rate, the number of
hours individuals work, and changes in productivity—so
A common misconception about the unemployment rate is
the two do not move perfectly in sync. However, over time
that it is based on unemployment insurance claims. This is
the relationship tends to hold.
not the case, as some unemployed individuals do not apply
or qualify for unemployment insurance or remain jobless
Unemployment and Inflation
after their benefits run out. Another common misconception
Inflation refers to the general upward trend of prices across
is that the government collects data from every household
the economy. Most economists agree that unemployment
each month, which is also not the case, as this would be
and inflation are inversely related in the short term.
prohibitively time consuming and costly.
Unemployment is expected to gravitate toward a certain
rate, called the nonaccelerating inflation rate of
Reasons for Unemployment
unemployment (NAIRU), when the economy is at full
Economists classify unemployment into three general
potential. Economists have found that as the unemplo yment
categories—structural, frictional, and cyclical—depending
rate falls below NAIRU, inflation tends to accelerate, and
on the underlying cause.
when the unemployment rate increases above NAIRU,
inflation tends to decelerate. However, this relationship has
Structural unemployment refers to unemployment
been weaker in recent years.
resulting from a mismatch of skills or interest between
workers and the jobs available. This mismatch can occur for
Lida R. Weinstock, Analyst in Macroeconomic Policy
a number of reasons, including shifting consumer
preferences, technological changes, or trade. These shifts
IF10443
are often permanent but policymakers can respond to these
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Introduction to U.S. Economy: Unemployment
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