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Updated July 12, 2022
Introduction to U.S. Economy: Unemployment
This In Focus provides an introduction to the official
employment. This can happen as the economy recovers
unemployment rate and alternative measures of
from a recession and individuals who had previously given
unemployment, briefly examines the reasons for
up looking for work rejoin the labor force by restarting their
unemployment, and places the unemployment rate in a
job search.
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);
aged 16 and older, excluding active duty military personnel
(4) the U5 rate—the U4 rate plus marginally attached
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
These alternative measures are particularly useful during
an individual does not have a job, but has either not looked
recessions in pinpointing the effects on the labor market.
for work in the previous four weeks or is not currently
Using the COVID-19 pandemic as an example, Figure 2
available for work or both, that individual is not considered
compares each measure of underutilization in February
part of the labor force. Figure 1 displays the official
2020 (before the pandemic began), April 2020 (the peak of
unemployment rate (U3) since 2010, which increased
unemployment), and May 2022. As a general observation,
during the past two recession.
rates are largely recovered to pre-pandemic rates at this
point, although there is some variation in the rate and
Figure 1. Unemployment Rate
amount of recovery. However, earlier in the pandemic, the
U6 rate increased 14 percentage points as compared with
the roughly 10 percentage-point increase from the U3, U4,
and U5 rates. This indicates that the number of individuals
working part-time for economic reasons was a more volatile
category than other measures of underutilization during the
pandemic.
Figure 2. Comparison of Unemployment Rates
Source: Bureau of Labor Statistics (BLS).
Notes: Gray bars denote recessions.
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
force outnumbers those who found work, then the
unemployment rate would increase despite the increase in
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
Frictional unemployment refers to short-term
attainment and race or ethnicity, as shown in Figure 3.
unemployment due to job searching or transition. After an
Recessions, such as the one caused by COVID-19, can
individual leaves a job, it generally takes some period of
cause disproportionate effects among groups as well.
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
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 a sustainable level given
its available inputs, 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
Source: BLS.
natural unemployment rate. It is not directly observable, but
Notes: Hispanic or Latino ethnicity is a separate demographic
the 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
labor market strength, but it is also a useful indicator and
BLS calculates the unemployment rate based on the results
predictor of the broader state of the economy.
from the Current Population Survey conducted by the
Census Bureau. This monthly survey has a sample size of
Unemployment and Economic Activity
about 110,000 individuals who are selected to be
Gross domestic product (GDP) and the unemployment rate
representative of the U.S. population. Interviewers contact
have a negative long-run relationship. In general, for
individuals to collect information on their labor force
economic production to increase, the number of individuals
activities and a number of personal characteristics.
who work must increase. Therefore, as economic growth
Interviewers ask questions about labor market activities,
increases, unemployment tends to decrease, and vice versa.
such as when the person last worked or looked for work. An
Other factors can impact unemployment and GDP—such as
individual’s labor force status is determined from their
changes in the labor force participation rate, the number of
responses.
hours individuals work, and changes in productivity—so
the two do not move perfectly in sync. However, over time
A common misconception about the unemployment rate is
the relationship tends to hold.
that it is based on unemployment insurance claims. This is
not the case, as some unemployed individuals do not apply
Unemployment and Inflation
or qualify for unemployment insurance or remain jobless
Inflation refers to the general upward trend of prices across
after their benefits run out. Another common misconception
the economy. Most economists agree that unemployment
is that the government collects data from every household
and inflation are inversely related in the short term. When
each month, which is also not the case, as this would be
the economy is at, but not beyond, its long-run capacity,
prohibitively time consuming and costly.
unemployment is expected to gravitate toward a certain
Reasons for Unemployment
rate, called the nonaccelerating inflation rate of
unemployment (NAIRU). Economists have found that as
Economists classify unemployment into three general
the unemployment rate falls below NAIRU, inflation tends
categories—structural, frictional, and cyclical—depending
to accelerate, and when the unemployment rate increases
on the underlying cause.
above NAIRU, inflation tends to decelerate. Given the high
Structural unemployment refers to unemployment
inflation seen in 2021 and 2022, it is possible
resulting from a mismatch of skills or interest between
unemployment is currently below NAIRU.
workers and the jobs available. This mismatch can occur for
a number of reasons, including shifting consumer
Lida R. Weinstock, Analyst Macroeconomic Policy
preferences, technological changes, or trade. These shifts
are often permanent but policymakers can respond to these
IF10443
https://crsreports.congress.gov
Introduction to U.S. Economy: Unemployment
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