Introduction to Unemployment
When workers are unemployed, they, their families, and the country as a whole lose. Workers and their families lose wages, and the country loses the goods or services that could have been produced. In addition, the purchasing power of these workers is lost, which can lead to unemployment for yet other workers. (9)
Unemployment can be a terrible and wrenching life experience—like a serious automobile accident or a messy divorce—the consequences of which can be fully understood only by someone who has gone through it. For unemployed individuals and their families, there is the day-to-day financial stress of not knowing where the next paycheck is coming from. There are painful adjustments, like watching your savings account dwindle, selling a car and buying a cheaper one, or moving to a less expensive place to live. For many people, their job is an important part of their self-worth. When unemployment separates people from the workforce, it can affect family relationships as well as mental and physical health.
The human costs of unemployment alone would justify making a low level of unemployment an important public policy priority. But unemployment also includes economic costs to the broader society. When millions of unemployed but willing workers cannot find jobs, an economic resource is going unused. An economy with high unemployment is like a company operating with a functional but unused factory. The opportunity cost of unemployment is the output that could have been produced by the unemployed workers. (10)
Addressing the issue of unemployment requires information about the extent and nature of the problem. How many people are unemployed? How did they become unemployed? How long have they been unemployed? Are their numbers growing or declining? Are they men or women? Are they young or old? Are they White, or Black, or Asian, or of Hispanic ethnicity? How much education do they have? Are they concentrated in one area of the country more than another? These statistics—together with other economic data—can be used by policymakers to determine whether measures should be taken to influence the future course of the economy or to aid those affected by joblessness. (9)
Unemployment is typically described in newspaper or television reports as a percentage or a rate. A recent BLS report states: “The unemployment rate declined by 0.7 percentage point over the year, to 5.0 percent in the fourth quarter of 2015. The rate reached a quarterly peak of 9.9% in the wake of the most recent recession and has been trending downward for the past 5 years. The rate at the start of the recent recession was 4.8%.” (11)
Figure 4.1 shows a quarterly data time series of the unemployment rate in the U.S. since 1969. The shaded regions represent economic recessions. During a recession, the unemployment rate may increase drastically. The highest increase in the rate of unemployment post-WWII was recorded during the last recession (Dec 2007-June 2009) and immediately following the end of the last recession, known as the Great Recession.
Current Population Survey
Early each month, the Bureau of Labor Statistics (BLS) of the U.S. Department of Labor announces the total number of employed and unemployed people in the United States for the previous month, after conducting a monthly survey called the Current Population Survey (CPS) since 1940. In 1942, the U.S. Census Bureau took over responsibility for the CPS. The survey has been expanded and modified several times since then. In 1994, for instance, the CPS underwent a major redesign to computerize the interview process as well as to obtain more comprehensive and relevant information. There are about 60,000 eligible households in the sample for this survey, which translates into approximately 110,000 individuals each month. The CPS sample is selected to be representative of the entire population of the United States. (9)
Measuring Unemployment: Breaking Things Down
We begin by discussing the most commonly watched indicator of the state of the labor market: the unemployment rate. In the United States, the unemployment rate is measured by the Bureau of Labor Statistics (BLS). The BLS classifies under the working-age civilian noninstitutional population those individuals aged 16 years and over who are not part of the U.S. Armed Forces, or in prisons, hospitals, or some other form of institutional care. (12)
The working-age civilian noninstitutional population consists of the following three categories:
- Employed. Individuals with a job, either full time or part time.
- Unemployed. Individuals who do not currently have a job but are searching for employment.
- Not in the labor force. Individuals who are not employed and not looking for work.
Before defining the unemployment rate, let’s first look at the BLS definitions of the categories of the employed and the unemployed. People with jobs are employed. For example, someone who reported to the interviewer that last week she worked 40 hours as an accountant for a manufacturing company is employed. More broadly speaking, per the BLS definitions, people are considered employed if they did any work at all for pay or profit during the survey reference week. This includes all part-time and temporary work, as well as regular full-time, year-round employment. Individuals are also counted as employed if they have a job at which they did not work during the survey week, whether they were paid or not, because they were either on vacation, ill, experiencing child care problems, were on maternity or paternity leave, were taking care of some other family or personal obligation, were involved in a labor dispute, or were prevented from working by bad weather. (9)
People who are jobless, looking for a job, and available for work are unemployed. For example, someone who lost his job when the local branch of a financial institution closed and, since then, has been contacting other banks in town trying to find a job, is considered unemployed. Broadly speaking, people are classified as unemployed if they do not have a job, have actively looked for work in the prior four weeks, and are currently available for work. Actively looking for work may consist of any of the following activities:
- an employer directly or having a job interview
- a public or private employment agency
- friends or relatives
- a school or university employment center
- Submitting resumes or filling out applications
- Placing or answering job advertisements
- Checking union or professional registers
- Searching active jobs through different ways
Workers expecting to be recalled from temporary layoff are counted as unemployed, whether or not they have engaged in a specific job-seeking activity. In all other cases, the individual must have been engaged in at least one active job search activity in the four weeks preceding the interview and be available for work (except for temporary illness). The total unemployment figures cover more than the number of people who have lost jobs. They include people who have quit their jobs to look for other employment, workers whose temporary jobs have ended, individuals looking for their first job, and experienced workers looking for jobs after an absence from the labor force (for example, stay-at-home parents who return to the labor force after their children have entered school). (9)