Unemployment is an important economic indicator that can tell us about the health of the economy. It’s one of the most closely watched numbers, along with GDP and inflation. It plays a major role in setting monetary policy and making strategic economic decisions. But it can be hard to understand how the unemployment rate is calculated and what it actually means.
The unemployment rate is the percentage of people who are jobless and actively seeking employment. The government calculates this number by surveying households on a monthly basis. The number excludes individuals who are in prison or active military personnel and those who receive unemployment benefits.
There are several different ways to measure unemployment, but the official rate is called U3. Economists classify these figures into three general categories – structural, frictional and cyclical – depending on the underlying cause of a jobless period. For example, a cyclical rise in unemployment may occur when a group of workers lose their jobs, which causes a decline in economic activity, and then slowly recovers when these workers return to the workforce.
Another common way to measure unemployment is to include individuals who are working part time but would like to work more hours, which is referred to as underemployment. This is a more comprehensive measurement of labor underutilization and can help identify trends that are independent of the business cycle.
Finally, many economists consider a 5% unemployment rate to be full employment. This level prevents inflation, allows workers to move between jobs and retrain for new opportunities, and ensures that those who want to work can find a job.