What Is Unemployment?

How Unemployment Works

Economic slowdowns are the primary cause of unemployment on a national level. Businesses are forced to cut costs when the economy slows by reducing payroll expenses.

The COVID-19 outbreak created higher employment rates than the Great Recession of 2007 to 2009. In fact, during the first few months of the pandemic, they were actually closer to the unemployment rates experienced during the Great Depression. The history of recessions shows that an increase in the unemployment rates has always accompanied them.

Competition in particular industries or companies can also cause unemployment. Advanced technology, such as computers or automation, can cause unemployment by replacing workers who normally handle tasks with machines.

Unemployment isn't evenly distributed among the population. The rate of unemployment can be higher or lower for certain groups, depending on multiple factors, including:

• Region
• Industry
• Gender
• Race
• Socioeconomic class

Example of Unemployment

You're considered to be unemployed when you can work, and you want to work, but you can't find a suitable job. The term "unemployment" quantifies or measures a group of unemployed people. The U.S. Bureau of Labor Statistics (BLS) has a more specific definition: the number of people who don't have a job, have actively looked for work in the past four weeks, and are available for work.

The BLS also includes in unemployment statistics people who are temporarily laid off and are waiting to be called back to their jobs.

The BLS reports unemployment statistics in its U-3 report, part of the monthly jobs report. It measures unemployment through monthly household surveys referred to as the Current Population Survey (CPS). The CPS has been conducted every month since 1940. It was originally part of the government's response to the Great Depression, and it's been modified several times since then.

A major redesign of the CPS occurred in 1994. The questionnaire was revamped, and computer-assisted interviewing was used. Some of the labor force concepts were also revised.

Types of Unemployment

The BLS doesn't count everyone who is jobless as being unemployed. It excludes those who haven't looked for work within the last four weeks. The BLS also removes them from the labor force, which includes both the employed and unemployed.

Most people who voluntarily leave the labor force do so because of:

• Retirement
• A disability that keeps them from working
• School
• Family responsibilities
• Lack of need or interest in working

The BLS also doesn't include in the labor force those people who would like to work but aren't actively looking for work. They may have stopped looking due to school, health problems, transportation issues, or a lack of available jobs.

But the BLS does track these people in the U-6 unemployment rate. Some people call this the "real unemployment rate." It includes those who have looked for work in the past 12 months, but not the past four weeks. The BLS identifies people in this group as "marginally attached to the labor force." "Discouraged workers" are a subset of the marginally attached. They've given up looking, because they don't think there are jobs out there for them.

Those younger than age 16 aren't included in the American labor force, even if they're working.

Disadvantages of Unemployment

The consequences of unemployment are financially and emotionally destructive for individuals. Long-term unemployment can lead to financial instability or poverty, which can also cause physical and mental health problems.

The consequences can be harmful to the economy when unemployment rises above 5% or 6%. The economy loses one of its key growth drivers when that many people are unemployed: consumer spending. Workers have less money to spend until they find another job.

Lower consumer spending reduces business revenue, and this forces companies to cut more payroll to reduce their costs. It can contribute to a downward economic spiral.

Those who are unemployed long-term may find that their job skills no longer match the requirements of jobs being offered. This is called "structural unemployment." Many who are facing this type of unemployment are age 55 or older. This group may not be able to get good jobs, despite laws prohibiting age discrimination. They may get part-time or low-paying entry-level jobs to make ends meet until they can take early Social Security benefits at age 62.

It can deepen a recession or depression when high national unemployment continues.

Frequently Asked Questions (FAQs)