The unemployment rate is one of the most closely watched indicators of economic health. When it’s low, most people assume that means the economy is strong and workers have plenty of job opportunities. But the truth is more complicated than that.
The official unemployment rate—which is calculated by dividing the number of unemployed people by the labor force—leaves out some groups of people who want and are available for work, including students and homemakers. It also excludes those who have been out of the labor market for so long that they have given up looking for jobs, or “discouraged workers.” This makes it harder to gauge true demand for jobs in an economy.
Unemployment rates are determined by a complex combination of economic, political, and social factors. Government policies, such as the strength of unions or the existence of strict labor regulations, can make it more difficult for some people to find employment. This is referred to by economists as structural unemployment.
Other factors affect unemployment rates, such as the cyclicality of the economy and the size of the workforce. In addition, the quality of a nation’s education and training programs can make some occupations more desirable than others.
When people lose their jobs, they and their families suffer financially. And the country as a whole loses out on the goods and services those workers could have produced. Economists have a term for the remaining level of unemployment that occurs even when the economy is healthy: the natural rate of unemployment.
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