Unemployment Rate

What the Unemployment Rate Measures:

The unemployment rate is the number in the civilian labor force divide 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.
• Are so discouraged that they have stopped looking for a job.

Unemployment is measured by the BLS monthly. The most important thing to compare is this month's unemployment compared to this time last year. If you compare this month to last month, there could be a reason based on the season, such as the school year ending.

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.

Employers are reluctant to lay people off when the economy turns bad, and even more reluctant to hire them when the economy improves. For that reason, the unemployment rate can only confirm what the other indicators are 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. For example, 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 and investors to determine the health of the economy. In addition to the unemployment rate, they also look at which sectors are losing jobs faster. Investors might use this to 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 may start to 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:

During the 2001 recession, the unemployment rate was at its worst at 6.3% in June 2003. It steadily improved until it reached a low of 4.6% in 2007. After that, it slowly worsened again, rising to 7.6% in January 2009. The last time unemployment was this high was in 1992, when it was 7.5%. In 1983 it reached a high of 9.7%. (Source: BLS, Historical Tables)

The Unemployment Outlook:

Unemployment will probably get worse through 2009. As of January 2009, the Congressional Budget Office (CBO) predicted the unemployment rate will rise to 8.3% in 2009, and 9% in 2010. Christina Romer, chairman of the Council of Economic Advisers, said in February 2009 that “the unemployment rate could reach double digits” without the Economic Stimulus Package. (Source:CBO, Economic Outlook); Bloomberg, U.S. Jobless Rate Soared in January, February 7, 2009)

For updates on the unemployment rate, see Employment Statistics.