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The classical economic model of labor market relies on supply-demand analysis for studying the wage rate and the level of employment in an economy. And for showing how these variables are linked to output and productivity. The employment model is based on the assumption that all workers who are willing to work at the prevailing wage rate are able to find jobs. In reality, of course, not everyone who is wants to work finds a job. There’s always some unemployment. It implies that, at any point of time, there’s always under-utilization of society’s labor.
Who are employed and who are not:
1. Employed: If a person worked full-time or part-time during the past week (or was on sick leave or vacation from a job).
2. Unemployed: If a person didn’t work during the past week but looked for work during the past four weeks and
3. Not in the labor force: If the person didn’t work during the past week and didn’t look for a work during the past four weeks. Ex: full-time students, homemakers and retirees.
There’s always unemployment. Why?
Even the economy is growing vigorously and many new jobs are being created, some people remain unemployed. Why unemployment has become a permanent feature in any economy. Here, we need to the kinds of unemployment. There are two kinds, one is frictional and the other is structural.
The labor market is characterized by a great deal of searching by both workers and firms. Unemployed workers search for suitable jobs, and firms with vacancies search for suitable workers. If all workers were identical and all jobs were identical, these searches would be short and easy. The problem is that neither the jobs nor workers are identical. Workers vary in their talent, skills, experience, goals and geographic location and the amount of time and energy they are willing to spend on the job. Similarly, jobs vary in skills and experience required, working conditions, locations, hours and pay. Because of these differences, an unemployed worker may search for several weeks before finding a suitable job. Similarly, a firm may search for a considerable time before It is able to hire a suitable worker. The unemployment that arises as workers and firms search for jobs and workers respectively is called frictional unemployment. Because, the economy is dynamic, with jobs continually being created and destroyed and workers continually entering and exiting the labor force, there’s always some frictional unemployment.
The workers who are not able to find jobs for a long time are called as chronically unemployed. This is not due to the matching process, but due to many other factors. People in these situations don’t seem to search for a work very intensively and don’t find a stable job. Structural employment can be of two reasons. First, unskilled or low-skilled workers often are unable to find suitable and long-term jobs. Second, is the reallocation of labor from industries that are shrinking, or regions that are depressed, to areas that are growing. If one industry is failing and another industry is prospering then the labor from the failing industry can be shifted to the prospering industry. But, the transition will take time and there will be unemployment until the workers are hired by the new industry and/or skilled enough to find a job. According to Okun’s law, a 1 percentage point in the increase in the rate of cyclical unemployment reduces the output by 2.5 percentage points.
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What is '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).
BREAKING DOWN 'Unemployment Rate'
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:
In response to concerns that the official rate does not fully convey the health of the labor market, the BLS publishes five alternative measures: U1, U2, U4, U5 and U6. Though these are often referred to as unemployment rates (U6 in particular is often called the "real" unemployment rate), U3 is technically the only unemployment rate. The others are measures of "labor underutilization."
People who have been unemployed for 15 weeks or longer, expressed as a percentage of the labor force.
People who lost their jobs, or whose temporary jobs ended, as a percentage of the labor force.
Unemployed people, plus discouraged workers, as a percentage of the labor force (plus discouraged workers).
Discouraged workers are those who are available to work and would like a job, but have given up actively looking for one. This category includes people who feel they lack necessary qualifications or education, who believe there is no work available in their field, or who feel they are too young or old to find work. Those who feel unable to find work due to discrimination also fall under this category. Note that the denominator – normally labor force – is adjusted to include discouraged workers, who are not technically part of the labor force.
Unemployed people, plus those who are marginally attached to the labor force, as a percentage of the labor force (plus the marginally attached).
People who are marginally attached to the labor force include discouraged workers and anyone else who would like a job and has looked for one in the past 12 months, but have given up actively searching. As with U4, the denominator is expanded to include the marginally attached, who are not technically part of the labor force.
Unemployed people, plus people who are marginally attached to the labor force, plus those who are employed part-time for economic reasons, as a percentage of the labor force (plus marginally attached).
This metric is the BLS' most comprehensive. In addition to the categories included in U5, it accounts for people who have been forced to settle for part-time work even though they want to work full-time. This category is often referred to as "underemployed," although that label arguably includes full-time workers who are overqualified for their jobs. The denominator for this ratio is the same as in U5.
How Is Unemployment Data Collected?
Official U.S. employment statistics are produced by the BLS, an agency within the Department of Labor. Every month the Census Bureau, part of the Department of Commerce, conducts the Current Population Survey using a sample of around 60,000 households, or around 110,000 individuals. The survey collects data on individuals in these households by race, ethnicity, age, veteran status and gender, all of which – along with geography – add nuance to the employment data. The sample is rotated so that 75% of the households are constant from month to month and 50% are from year to year. Interviews are conducted in-person or by phone.
The survey excludes individuals under the age of 16 and those who are in the Armed Forces (hence references to the "civilian labor force"). People in correctional facilities, mental healthcare facilities and other similar institutions are also excluded. Interviewers ask a series of questions to determine employment status, but do not ask whether respondents are employed or unemployed. Nor do the interviewers themselves assign employment status; they record the answers for the BLS to analyze. Interviewers also collect information on industry, occupation, average earnings, union membership and – for the jobless – whether they quit or were discharged (fired or laid off).
Where to Find the Unemployment Rate
The unemployment rate is reported on the first Friday of every month for the preceding month. The current report and past editions are available on the BLS' website. Users can generate and download tables showing any of the labor market measures named above for a specified date range here.