A country’s unemployment rate measures how many people are jobless and actively looking for work. This figure is a key economic indicator and has been the subject of much discussion. The unemployment rate is defined in different ways by different countries, so it is important to understand the nuances of the data to get the best sense of what is happening in the labor market.
The Bureau of Labor Statistics (BLS) collects monthly household and employment surveys that give us a picture of the labor market. There are various measures of unemployment, but the most comprehensive is U-6, which includes unemployed workers and discouraged workers in its denominator. The BLS also publishes the more narrowly defined U-5 measure, which is a combination of those two plus marginally attached workers.
Another way to think about unemployment is the “natural rate.” This is not a physical law like 32 degrees Fahrenheit or boiling water at 212 degrees Fahrenheit, but rather the unemployment rate that would result in a typical downturn without any unusual social or economic forces (such as businesses expanding and contracting their workforces, public policies affecting workers’ desire to work or employers’ willingness to hire, etc).
The natural unemployment rate tends to rise during recessions and decline during expansions. This is a result of the normal shift in the labor demand curve and sticky wages. For this reason, the relationship between the unemployment rate and the overall economy is referred to as cyclical.
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