Unemployment, Its Causes, and Its Consequences

Not Everyone Who Is Jobless Is Unemployed

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Unemployment is defined by the Bureau of Labor Statistics as people who do not have a job, have actively looked for work in the past four weeks, and are currently available for work. Also, people who were temporarily laid off and were waiting to be called back to that job are included in the unemployment statistics. The BLS reports this in the U-3 report, a part of the monthly jobs report.

The BLS measures unemployment through monthly household surveys called the Current Population Survey. It has been conducted every month since 1940, as part of the government's response to the Great Depression. It has been modified several times since then and experienced a major redesign in 1994. That included a revamping of the questionnaire, the use of computer-assisted interviewing, and revisions to some of the labor force concepts.

The BLS does not count everyone who is jobless as unemployed. It excludes those who have not looked for work within the past four weeks. The Bureau also removes them from the labor force. Most people leave the labor force when they retire, go to school, have a disability that keeps them from working, or have family responsibilities. The BLS doesn't count people who would like to work but they aren't actively looking for work.

The BLS does keep track of those people, though. They are reported in the U-6 unemployment rate. Some people call this the real unemployment rate. It includes those who have looked for work within the past 12 months, but not within the past four weeks. The Bureau calls them "marginally attached to the labor force." A subset of the marginally attached is called discouraged workers. They have given up looking because they don't think there are jobs out there for them.

The line chart below compares the U-6 or "real rate" with the U-3 or commonly reported rate. The shaded area in between both lines shows how the two rates differ during the same period.

How the BLS Measures Employment

Employment is anyone 16 or older who worked any hours during the past week. That's according to the BLS. They can be paid employees or self-employed. They can be unpaid workers in a family-owned business, as long as they work at least 15 hours a week. The BLS also includes people who didn't work during the week if they were temporarily absent due to vacation, illness, or other reason.

The BLS doesn't count residents of any institution as employees. That includes prisons, jails, mental facilities, and homes for the aged. It also does not count those on active military duty. To be counted, workers must be members of the U.S. civilian non-institutional population.

How Unemployment Fits into the Big Picture

These definitions summarize how unemployment fits into the population.

Population = Civilian noninstitutional population + Active duty military + Institutional population

Civilian noninstitutional populationLabor force + Not in labor force

Labor force = Employed + Unemployed

Not in labor force = These following three groups:

  1. People who would like work, but haven't looked for it in the last month. They include the "marginally attached," who did look in the past year. They had school, ill health, or transportation problems that kept them from looking in the past month. Others are "discouraged workers." They don't believe there are any jobs.
  2. Groups who aren't looking for work. They include students, homemakers, and retired people.
  3. Anyone under 16 is not included in the labor force, even if they are working. 

How Unemployment Statistics Are Used

The Bureau uses its definition of unemployment to calculate the unemployment rate formula. In a nutshell, it is Unemployment Rate = Unemployed / Civilian Labor Force. 

The Bureau also uses this definition of unemployment to calculate the Labor Force Participation Rate.

The government, central banks, and businesses use unemployment statistics to gauge the health of the economy. If the unemployment rate gets too high, at around 6 percent or more, the government will try to create jobs. The Federal Reserve will first step in with expansionary monetary policy and lower the federal funds rate.

If this doesn't work, then the federal government will use expansionary fiscal policy. It can directly create jobs by hiring employees for public works projects. It can indirectly create jobs by stimulating demand with extended unemployment benefits. These benefits aid the unemployed until they can find jobs. These are some of the unemployment solutions the government has at its disposal.

You may think that unemployment can't get too low, but it can. Even in a healthy economy, there should always be a natural rate of unemployment of 4.5 to 5 percent. Some people move before they get a new job. Others are getting retrained for a better job. Many have just started looking for work and are waiting until they find the right job. When looking at unemployment rates by year we see that since the end of World War II, the lowest the unemployment rate has ever been is 2.5 percent in May and June of 1953.

Even when the unemployment rate is in the natural range, it's difficult for companies to expand. They have a hard time finding good workers.

Causes of Unemployment

Nationally, unemployment is caused when the economy slows down, and businesses are forced to cut costs by reducing payroll expenses. The 2008 financial crisis created the worst unemployment since the 1980s. The history of recessions reveals that they always cause an increase in unemployment rates.

Competition in particular industries or companies can also cause unemployment. Advanced technology, such as computers or robots, cause unemployment by replacing worker tasks with machines. Jobs outsourcing is a significant cause of unemployment. It's especially common in technologycall centers, and human resources.

Consequences of Unemployment

The consequences of unemployment for the individual is financially and often emotionally destructive. The consequences for the economy can also be harmful if unemployment rises above 5 or 6 percent. When that many people are unemployed, the economy loses one of its key drivers of growth, consumer spending. Quite simply, workers have less money to spend until they find another job. If high national unemployment continues, it can deepen a recession or even cause a depression. Less consumer spending from unemployed workers reduces business revenue, which forces companies to cut more payroll to reduce their costs.

It can become a downward spiral very quickly. 

One of the consequences of the Great Recession is that workers have been unemployed for a very long time. These long-term unemployed have been out of work, and looking, for more than six months.

If they've been out of work even longer, their job skills may no longer match the requirements of the new jobs being offered. That's called structural unemployment. Many of them are 55 or older. They may not be able to get a good job again, despite laws prohibiting age discrimination. They may get part-time or low-paying entry jobs to make ends meet. Then become unemployed again until they can take down early Social Security benefits at age of 62. For this reason, many economists think the recession permanently increased the natural rate of unemployment.