What the Unemployment Rate Measures:
The unemployment rate is the number in the civilian labor force divided by the number of unemployed. The Bureau of Labor Statistics (
BLS) defines unemployment as people who do not have a job, have actively looked for work in the past four weeks, and are currently available for work. It also includes people who were temporarily laid off and are waiting to be called back to that job. It doesn't count the jobless who didn't look for a job in the past four weeks, or are so discouraged that they have stopped looking for a job.
Unemployment is reported by the BLS on the first Friday of each month. It is useful to compare this month's unemployment rate compared to that of the same month last year. This rules out the effects of seasonality. If you only compare this month's unemployment rate to last month's, it could be higher because of something that always happens that month, such as the school year ending. It may not indicate an ongoing trend.
How the Unemployment Rate Affects the U.S. Economy:
Obviously, the unemployment rate is important as a gauge of joblessness. For this reason, it is also a gauge of the economy's
growth rate.
However, the unemployment rate is a lagging indicator. This means it measures the effect of a recession and so occurs after one has already started. It also means unemployment will continue to rise even after the economy has started to recover.Employers are reluctant to lay people off when the economy turns bad. For large companies, it can take months to put together a layoff plan. Companies are even more reluctant to hire new workers when the economy improves.
For that reason, the unemployment rate can only confirm what the other indicators are already showing. For example, if the other indicators show a quickening economy, and the unemployment rate is declining, then you know for sure businesses are confident enough to start hiring again. Since it is a lagging indicator, unemployment can worsen even after the economy starts to improve. In the last recession, unemployment went from 5.6% in 2002 to 6% in 2003, even though the recession ended in 2002.
The unemployment rate is another indicator used by the
Federal Reserve to determine the health of the economy when setting monetary policy. Investors use unemployment statistics to look at which sectors are losing jobs faster. They can then determine which sector-specific
mutual funds to sell.
How the Unemployment Rate Affects You:
The
year-over-year unemployment rate will tell you if unemployment is worsening. If more people are looking for work, less people will be buying, and the retail sector will decline. Also, if you are unemployed yourself, it will tell you how much competition you have, and how much leverage you might have in negotiating for a new position. As the unemployment rate reaches 6-7%, the government gets concerned, and tries to create jobs through stimulating the economy. It may also extend or add benefits to help the unemployed.
Recent Unemployment Trends:
Unemployment peaked at 10.2% in October 2009. It rose steadily from its low of 4.4% in March 2007. It did not really become a concern until a year later when it broke above 5% in March 2008. By then, the
economy had contracted .7%. Unemployment rose rapidly, breaking 6.2% in August 2008, 7.2% by November 2008, 8.1% by February 2009, 9.4% three months later, finally reaching 10.2% in October.
Unemployment hadn't been so high since the 1983 recession, when it above 10% for 10 months. During the 2001 recession, the unemployment rate peaked at 6.3% in June 2003. (Source: BLS, Historical Tables)
The Unemployment Outlook:
Unemployment is projected to drop slightly to 9.7% by the end of 2010, according to OMB's
Mid-Year Budget Projections. By the end of 2011, it will fall significantly, to 8%. After that, it will decline slowly, falling to 7.5% in 2012, 6.5% in 2013, and 5.7% in 2014.
For current unemployment rates, see Current Unemployment Rate Statistics. For current Job Statistics, see Employment Statistics. (Updated December 30, 2009)
