The rate of unemployment for a nation is a key indicator of the strength or weakness of its economy. Beginning a macroeconomic look at unemployment in the United States must start with the definition of the term and how the rate thereof is calculated.
The national unemployment rate of a nation is defined as the percentage of unemployed workers present within the total labor force. So as to investigate causes and potential remedies for high unemployment rates, information on various aspects of unemployment is needed by the nation's policymakers. However, surveying each and every unemployed worker would prove to be impractical and cost-prohibitive.
Since 1940 in the United States, a Current Population Survey has been utilized to measure the degree of unemployment nationwide [see, Bureau of Labor Statistics. "Labor Force Statistics From the Current Population Survey." https://www.bls.gov/cps/definitions.htm (Accessed May 24, 2021)]. This survey is implemented by Census Bureau employees, and consists of an interview of 60,000 households seeking information on the non labor force status and labor force activities of household members during the survey reference period which generally includes the 12th of each month [see, Census Bureau. "Collecting Data." https://www.census.gov/programs-surveys/cps/technical-documentation/methodology/collecting-data.html. (Accessed May 24, 2021). The Bureau of Labor Statistics suggests that the survey results obtained in this fashion provide a 90% probability that said results are within plus/minus 110,000 of the results obtainable through a full census review. [see, Bureau of Labor Statistics. "Employment Situation Technical Note." https://www.bls.gov/news.release/empsit.tn.htm. (Accessed May 24, 2021.
Basic definitions used by the Bureau of Labor Statistics are elementary. People are employed if they currently have a job. People are unemployed if jobless, looking for a job, or are otherwise available for work. If a person is neither employed or unemployed pursuant to the definitions, that person is not counted as part of the total labor force. Therefore, the total labor force is defined as the sum of the total employed plus the total unemployed. The remainder of people are excluded as they lack a job and are not looking for work. It is important to note that the numbers obtained relative to these categories are derived from the civilian non-institutional U.S. population ages 16 and older. Excluded are those younger than 16 years of age, institutionalized people, and active duty members of the military.
The official defined rate of unemployment has been widely disputed as being overly restrictive and fails to present a true picture of inherent problems within the labor market. To address these disputes, the Bureau of Labor Statistics in 1976 introduced a range system of measures for the labor market, commonly referred to as U-1 through U-6. U-1 is the most restrictive measure within the range - it includes only those persons who remained jobless for 15 weeks or more. U-6 is the least restrictive measure - it includes the total number of unemployed for any period of time plus the total of those persons employed part-time for economic reasons plus all persons currently unemployed but are marginally attached to the labor market [see, Bureau of Labor Statistics. "Table A-15. Alternative Measures of Labor Underutilization." https://www.bls.gov/news.release/empsit.t15.htm (Accessed May 25, 2021)].
In the United States, the U-3 measure is considered to be the official rate of unemployment and is the number most widely disseminated by the media. The U-3 number is also referred to as 'total unemployment' and consists of those persons who are currently jobless and have actively looked for work within a period of the prior 4 weeks and are currently available for work.
However, many economists claim this U-3 official rate marginalizes the true magnitude of underutilization of labor within the market. They suggest that the U-6 category is the true measure of the unemployment market rate. The reasons for this may be summarized as follows:
- it includes all people who are jobless;
- it includes those who have the desire to work but have not applied for the same within the prior 4 week period due to any variety of temporary personal issues;
- it includes discouraged workers ["...discouraged workers were not currently looking for work specifically because they believed no jobs were available for them or there were none for which they would qualify". Bureau of Labor Statistics. "Labor Force Statistics from the Current Population Survey". https://www.bls.gov/cps/lfcharacteristics.htm#discouraged. (Accessed May 25, 2021)].
- it includes persons marginally attached to the labor market ["Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months". Supra. "Table A-15...."]; and,
- it includes underemployed persons including those who are employed but are working fewer hours than desired.
All of the alternative measures of unemployment [U-1 through U-6] demonstrate similar trends throughout fluctuations in aggregate economic activity within a nation. But even though the trends may be similar, each may display a significant deviation in magnitude from the U-3 official rate. The U-3 official rate, with its restrictive definition, if utilized in a vacuum may cause a resulting understatement of the true unemployment landscape. Simply put, the U-3 measure may not tell the whole unemployment story existing within the economy. Therefore, the U-6 measure being the least restrictive category and producing the highest yield of systemwide unemployment, in all likelihood, provides the best picture of the degree of labor underutilization in the economy.
As one of the more widely watched economic indicators, the unemployment rate grabs tons of media attention, especially in times where the economy is experiencing trouble. While it is very true that unemployment has potentially devastating effects on the unemployed individual, unemployment also has the potential to create wide ranging negative impacts across the systemwide economy.
When a worker suffers a job loss and becomes unemployed, their entire family unit experiences the impact of the lost wage. As a result of the lost wage, the unemployed worker and their family lose purchasing power in the system that by virtue of declining demand for goods can lead to unemployment of other workers systemwide. With more workers becoming unemployed demand falls further creating a negative circular economic pattern causing unemployment rates to further rise. More than 70% of the goods and services produced in the economy are purchased and used by domestic consumers as a direct result of their personal consumption practices [see, Bureau of Labor Statistics. "Consumer Spending and U.S. Employment From the 2007–2009 Recession Through 2022". https://www.bls.gov/opub/mlr/2014/article/consumer-spending-and-us-employment-from-the-recession-through-2022.htm. (Accessed May 25, 2020)]. Due to diminished discretionary income, unemployed workers consume less than their salaried counterparts causing additional problems for the economy by virtue of decreased system demand.
In a broader sense, when a worker loses their job, the nation's economy is deprived of that worker's individual economic contributions. The goods and/or services the unemployed worker would have provided the economy but for the job loss, are lost which on a wider scale negatively effects Gross Domestic Product. [See, Bureau of Labor Statistics. "How the Government Measures Unemployment". https://www.bls.gov/cps/cps_htgm.pdf, Page 1. (Accessed May 25, 2021)].
In times of economic distress, companies may be forced to reduce the number of employees it utilizes as a method to maintain profit. In this situation, the remaining employees may suffer increased hours of work, usually without the benefit of additional pay. As a result of this cost savings measure, the company's remaining employees may experience depression, undue fatigue, increased concern over losing their own job, a feeling that they are lucky to have a job at all which leads to a hesitancy to seek employment elsewhere, and even feeling guilt over possessing a job while their co-workers are jobless. Clearly this general malaise in the workforce has a negative impact on worker productivity which in turn negatively effects the economy on the whole by virtue of decreased system supply.
So as to gain an understanding of the causes of unemployment and with the goal of remedying its negative effects, governmental policymakers seek information of the type above described. Armed with this information, it is hoped that said policymakers will use the tools available to make better informed decisions on the direction in which to drive the economy alleviating the negative impacts of unemployment
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