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How Is Unemployment Defined?

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definition of unemployment

Unemployment rose to 25% during the Great Depression of 1929.

Photo: Library of Congress, Prints & Photographs Division, FSA-OWI Collection
Question: How Is Unemployment Defined?
Answer: Unemployment is defined by the Bureau of Labor Statistics (BLS) as people who do not have a job, have actively looked for work in the past four weeks, and are currently available for work. Also, people who were temporarily laid off and are waiting to be called back to that job are included in the unemployment statistics.

Those who have not looked for work within the past four weeks are not only no longer counted among the unemployed, they are also removed from the labor force by the BLS. Most people leave the labor force when they retire, go to school, have a disability that keeps them from working, or have family responsibilities. However, even people who would like to work are excluded if they aren't actively looking for work.

The BLS does keep track of those people, though. They are separately reported in the Jobs Report. Those who have looked for work within the past 12 months, but not within the past four weeks, are categorized as "marginally attached to the labor force." There is a subset of the marginally attached, those who have just given up looking because they don't think there are jobs out there for them. The BLS calls them discouraged workers, and they will probably start looking for work again whenever the job market improves. For this reason, many people feel that the BLS does not report the real unemployment rate.

The BLS measures unemployment through monthly household surveys, called the Current Population Survey (CPS). It has been conducted every month since 1940, as part of the government's response to the Great Depression. It has been modified several times since then, and experienced a major redesign in 1994. This included a revamping of the questionnaire, the use of computer-assisted interviewing, and revisions to some of the labor force concepts.

How Are Unemployment Statistics Used?

Unemployment is an important statistic used by the government to gauge the health of the economy. If the unemployment rate gets too high (around 6% or more), the government will try to stimulate the economy and create jobs. The Federal Reserve will first step in with expansionary monetary policy, and lower the Federal funds rate. If this doesn't work, then the Federal government will use fiscal policy. It can directly create jobs by hiring employees for public works projects. It can indirectly create jobs by stimulating demand with extended unemployment benefits. These benefits aid the unemployed until they can find jobs. These are just some of the unemployment solutions the government has at its disposal.

You may think that unemployment can't get too low, but actually it can. Even in a healthy economy, there should always be a natural rate of unemployment. That's because people move before they get a new job, they are getting retrained for a better job, or they have just started looking for work and are waiting until they find just the right job. The lowest unemployment has ever been is 2.5%. Even when the unemployment rate is 4%, it's difficult for companies to expand because they have a hard time finding good workers.

Causes of Unemployment

Nationally, unemployment is caused when the economy slows down, and businesses are forced to cut costs by reducing payroll expenses. Unemployment can also be caused by competition in specific industries or companies. Advanced technology, such as computers or robots, cause unemployment by replacing worker tasks with machines. For more, and to share your thoughts, see Causes of Unemployment.

Consequences of Unemployment

The consequences of unemployment for the individual is financially and often emotionally destructive. The consequences for the economy can also be destructive if unemployment rises above 5-6%. When that many people are unemployed, the economy loses one of its key drivers of growth -- consumer spending. Quite simply, workers have less money to spend until they find another job. If high national unemployment continues, it can deepen a recession or even cause a depression. That's because less consumer spending from unemployed workers reduces business revenue, which forces companies to cut more payroll to reduce their costs. This can become a downward spiral very quickly.

One of the consequences of the 2008 financial crisis is that workers have been unemployed for a very long time. These long-term unemployed have been out of work, and looking, for more than six months.

If they've been out of work even longer, their job skills may no longer match the requirements of the new jobs being offered. This is called structural unemployment. Many of them are 55 or older. They may not be able to get a good job again, despite laws prohibiting age discrimination. They may get part-time or low-paying entry jobs to make ends meet, then become unemployed again until they can take down early Social Security benefits at age 62. For this reason, many economists think the recession increased the natural rate of unemployment permanently. (Article updated September 10, 2013)

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