Macro Mondays: The Unemployment Rate

Oh, unemployment. A dreaded word for millions of Americans (and workers around the globe). While some countries may have a cushy amount of time for workers to relax and rejuvenate in between jobs, most Americans feel the need to collect as little unemployment money as possible and jump right back into the workforce. We all know that we'd like for this rate to be as low as humanly possible, though what many do not know is that there is a natural rate of unemployment -- between 4% and 5% -- because in a capitalistic democracy, it is not possible for 100% employment to occur. There will always be people leaving and starting new jobs. What else don't we fully understand about the unemployment rate? Check out these details from Investopedia and learn some more:

What is the 'Unemployment Rate'?

The unemployment rate is the share of the labor force that is jobless, expressed as a percentage. It is a lagging indicator, meaning that it generally rises or falls in the wake of changing economic conditions, rather than anticipating them. When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the economy is growing at a healthy rate and jobs are relatively plentiful, it can be expected to fall. 

In the U.S., the U3 or U-3 rate, which the Bureau of Labor Statistics (BLS) releases as part of its monthly employment situation report, is the most commonly cited national rate. It is not the only metric available, however, and it receives criticism for giving the impression that the labor market is healthier than alternative measures would indicate. For this reason, some observers prefer to track the more comprehensive U6 rate (see below).

So What is the Headline Number and What Does it Mean?

The official unemployment rate is known as U3. It defines unemployed people as those who are willing and available to work, and who have actively sought work within the past four weeks. Those with temporary, part-time or full-time jobs are considered employed, as are those who perform at least 15 hours of unpaid family work.

To calculate the unemployment rate, the number of unemployed people is divided by the number of people in the labor force, which consists of all employed and unemployed people. The ratio is expressed as a percentage.

Many people who would like to work but cannot (due to a disability, for example), or have become discouraged after looking for work without success, are not considered unemployed under this system; since they are not employed either, they are categorized as outside the labor force. Critics see this approach as painting an unjustifiably rosy picture of the labor force. U3 is also criticized for making no distinction between those in temporary, part-time and full-time jobs, even in cases where part-time or temporary workers would rather work full-time but cannot due to labor market conditions.

The unemployment rate is seasonally adjusted to account for predictable variations, such as extra hiring during the holidays. The BLS also provides the unadjusted rate: