Introduction to U.S. Economy: Unemployment

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Updated November 6, 2020
Introduction to U.S. Economy: Unemployment
The U.S. economy has seen historically high levels of
up looking for work rejoin the labor force by restarting their
unemployment as a result of the Coronavirus Disease 2019
job search.
(COVID-19) pandemic. This In Focus provides an
Alternative Measures of Unemployment
introduction to the official unemployment rate and
BLS reports other measures of unemployment—called
alternative measures of unemployment, briefly examines
“measures of labor underutilization”—that include
the reasons for unemployment, and places the
unemployment rate in a broader economic context.
additional underemployed groups. These measures can
provide a broader sense of labor market conditions. The
How Is the Unemployment Rate
most prominent alternative measure is the U6
Calculated?
unemployment rate, also shown in Figure 1.
The Bureau of Labor Statistics (BLS) releases the official
Alternative measures of labor underutilization include (1)
unemployment rate, commonly known as the U3 series, on
the U1 rate—individuals unemployed for 15 weeks or
a monthly basis. The U3 rate measures the number of
longer; (2) the U2 rate—individuals who lost jobs or
unemployed individuals as a percentage of the entire labor
force.
completed temporary jobs; (3) the U4 rate—the U3 rate
plus discouraged workers (individuals who give a job-
market-related reason for not currently looking for work);
(4) the U5 rate—the U4 rate plus marginally attached

workers (individuals who are available to work, have

expressed a desire to work, and have looked for work in the
The labor force is all employed and unemployed individuals
past 12 months); and (5) the U6 rate—the U5 rate plus
individuals working part time for economic reasons.
aged 16 and older, excluding active duty military personnel
or the institutionalized. Individuals are considered
These alternative measures are particularly useful during
employed if they did any work for pay or profit in the
recessions in pinpointing the effects on the labor market.
previous week. Individuals are considered unemployed if
Figure 2 compares each measure of underutilization in
they do not have a job, have actively looked for work in the
January, May, and October 2020. Similar to the U3 rate, the
previous four weeks, and are currently available to work. If
U4, U5, and U6 rates remain roughly doubled in October
an individual does not have a job, but has either not looked
from January. However, earlier in the pandemic, the U6 rate
for work in the previous four weeks or is not currently
increased 14 percentage points as compared with the
available for work or both, that individual is not considered
roughly 10 percentage-point increase from the U3, U4, and
part of the labor force. Figure 1 displays the official
U5 rates. This indicates that the number of individuals
unemployment rate (U3) since 2010, which increased as a
working part-time for economic reasons has been a more
result of COVID-19.
volatile category than other measures of underutilization.
Figure 1. Unemployment Rate
Figure 2. Comparison of Unemployment Rates
January, May, and October 2020

Source: Bureau of Labor Statistics (BLS).

Source: BLS.
This formulation of the unemployment rate can cause
confusion because the size of the labor force, employment,
Unemployment Across Demographics
and unemployment can all change simultaneously. For
The average U3 rate in the United States varies
example, if the number of individuals joining the labor
significantly across groups depending on educational
force outnumbers those who found work, then the
attainment and race or ethnicity, as shown in Figure 3.
unemployment rate would increase despite the increase in
Recessions, such as the one caused by COVID-19, can
employment. This can happen as the economy recovers
cause disproportionate effects among groups as well.
from a recession and individuals who had previously given
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Introduction to U.S. Economy: Unemployment
Figure 3. Unemployment Comparison by Educational
Frictional unemployment refers to short-term
Attainment and Race or Ethnicity
unemployment due to job searching or transition. After an
January, May, and October 2020
individual leaves a job, it generally takes some period of
time to find a new position. Frictional 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.
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.
Source: BLS.
When the economy is operating at its full potential, cyclical
Notes: Hispanic or Latino ethnicity is a separate demographic
unemployment is zero and the unemployment rate is
concept from race in the Current Population Survey statistics.
roughly equal to the sum of structural and frictional
Individuals of Hispanic or Latino ethnicity may be of any race.
unemployment. This is referred to as the natural
How Is the Unemployment Rate Data
unemployment rate. It is not directly observable, but the
Collected?
Congressional Budget Office estimates the U.S. natural
unemployment rate is about 4.4%.
BLS calculates the unemployment rate based on the results
from the Current Population Survey conducted by the
Unemployment and the Broader
Census Bureau. This monthly survey has a sample size of
Economy
about 110,000 individuals who are selected to be
The unemployment rate is most often used as a measure of
representative of the U.S. population. Interviewers contact
labor market strength, but it is also a useful indicator and
individuals to collect information on their labor force
predictor of the broader state of the economy.
activities and a number of personal characteristics.
Interviewers ask questions about labor market activities,
Unemployment and Economic Activity
such as when the person last worked or looked for work. An
Gross domestic product (GDP) and the unemployment rate
individual’s labor force status is determined from their
have a negative long-run relationship. In general, for
responses.
economic production to increase, the number of individuals
who work must increase. Therefore, as economic growth
A common misconception about the unemployment rate is
increases, unemployment tends to decrease, and vice versa.
that it is based on unemployment insurance claims. This is
Other factors can impact unemployment and GDP—such as
not the case, as some unemployed individuals do not apply
changes in the labor force participation rate, the number of
or qualify for unemployment insurance or remain jobless
hours individuals work, and changes in productivity—so
after their benefits run out. Another common misconception
the two do not move perfectly in sync. However, over time
is that the government collects data from every household
the relationship tends to hold.
each month, which is also not the case, as this would be
prohibitively time consuming and costly.
Unemployment and Inflation
Inflation refers to the general upward trend of prices across
Reasons for Unemployment
the economy. Most economists agree that unemployment
Economists classify unemployment into three general
and inflation are inversely related in the short term.
categories—structural, frictional, and cyclical—depending
Unemployment is expected to gravitate toward a certain
on the underlying cause.
rate, called the nonaccelerating inflation rate of
unemployment (NAIRU), when the economy is at full
Structural unemployment refers to unemployment
resulting from a mismatch of skills or interest between
potential. Economists have found that as the unemplo yment
workers and the jobs available. This mismatch can occur for
rate falls below NAIRU, inflation tends to accelerate, and
when the unemployment rate increases above NAIRU,
a number of reasons, including shifting consumer
inflation tends to decelerate. However, this relationship has
preferences, technological changes, or trade. These shifts
are often permanent but policymakers can respond to these
been weaker in recent years.
shifts and create policies that reduce structural
unemployment.
Lida R. Weinstock, Analyst in Macroeconomic Policy
IF10443


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Introduction to U.S. Economy: Unemployment


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