Unemployment and the Labor Market

Why the jobs numbers move markets

For most people, the economy is experienced through work: whether jobs are available, how secure they feel, and how fast pay is rising. That is why the monthly U.S. jobs report, published by the Bureau of Labor Statistics on the first Friday of most months, is one of the most closely watched releases in the world. It shapes central bank decisions, moves stock and bond prices, and becomes a political talking point within minutes.

To read it well, you need to know what the numbers actually measure.

Who counts as unemployed

Being without a job is not enough to be counted as unemployed. Statisticians divide the working-age population into three groups:

• Employed: did any paid work during the survey week, even part-time, or had a job they were temporarily away from.
• Unemployed: had no job, were available to work, and actively looked for work in the past four weeks (or were waiting to be recalled from a temporary layoff).
• Not in the labor force: everyone else, including retirees, full-time students, people caring for family, and those who want a job but have stopped looking.

The labor force is the employed plus the unemployed. Two key ratios follow:

For example, if the labor force is 160 million people and 6.4 million of them are unemployed, the unemployment rate is 4%.

Two surveys, two stories

The U.S. jobs report combines two different surveys:

• The household survey asks about 60,000 households about their work status. It produces the unemployment rate.
• The establishment survey asks a large sample of employers how many people are on their payrolls. It produces the headline figure for nonfarm payroll jobs added, along with average hourly earnings and hours worked.

The two can disagree from month to month because they measure different things with different samples. Both are revised as more data arrive, sometimes significantly.

Beyond the headline rate

The official unemployment rate, known as U-3, misses some forms of labor market weakness. The BLS publishes broader measures, the widest of which is U-6. It adds:

• Discouraged workers, who want a job but have stopped looking because they believe none is available.
• Other marginally attached workers, who want and are available for work and have looked recently, but not in the past four weeks.
• Involuntary part-time workers, who work part-time only because they cannot find full-time work.

U-6 is always higher than U-3, and the gap tends to widen in downturns.

The participation rate matters too. If many people give up looking, the unemployment rate can fall even though the job market is getting worse, because those people leave the labor force. That is why economists also watch the employment-to-population ratio, especially for people aged 25 to 54, which is less affected by retirement and schooling.

The unemployment rate can fall for a bad reason: people who stop looking for work are no longer counted.

The four kinds of unemployment

Not all unemployment has the same cause, and the right response depends on which kind you are looking at.

Frictional unemployment

People are between jobs, entering the workforce for the first time, or moving to a new city. Matching workers to the right jobs takes time, and some of this unemployment is healthy: it means people are searching for positions that suit them rather than taking the first offer.

Structural unemployment

There is a mismatch between the skills or locations of workers and the jobs available. When a factory closes because of automation or competition, its workers may not have the skills that growing industries need, or may live far from where new jobs are. Structural unemployment can last a long time and calls for retraining, education, and help with relocation.

Cyclical unemployment

This is the unemployment caused by recessions, when total demand falls and firms cut jobs across the economy. It rises in downturns and falls in recoveries, and it is the kind that monetary and fiscal policy try to reduce.

Seasonal unemployment

Some jobs follow the calendar: farm work, ski resorts, holiday retail. Official figures are seasonally adjusted to remove these predictable swings, so you can see the underlying trend.

The "natural" rate of unemployment

Because frictional and structural unemployment always exist, unemployment never reaches zero, even in a strong economy. The rate that remains when the economy is at full strength is called the natural rate of unemployment. A closely related idea is the NAIRU, the non-accelerating inflation rate of unemployment: the lowest rate the economy can sustain without inflation starting to rise.

Neither can be observed directly; they are estimated, and the estimates change as the economy changes. When actual unemployment falls well below the estimated natural rate, employers compete harder for scarce workers, wages rise faster, and inflation pressure can build.

Unemployment and inflation

In the 1950s, the economist A. W. Phillips noticed that periods of low unemployment tended to come with faster wage growth. This became the Phillips curve: a trade-off in which lower unemployment comes with higher inflation in the short run.

The relationship has proved unstable. In the 1970s, many countries suffered stagflation, high inflation and high unemployment at the same time, after oil price shocks and rising inflation expectations. The modern view is that the trade-off exists only in the short run and depends heavily on what people expect inflation to be. If workers and firms expect high inflation, it can persist even with high unemployment.

This links the labor market directly to central banks. The Federal Reserve's mandate includes both maximum employment and stable prices, and much of its work involves judging how tight the labor market is.

Unemployment and output

Rising unemployment means lost output: people who want to work are not producing anything. A rule of thumb called Okun's law says that in the United States, each percentage point of unemployment above the natural rate has historically been associated with output roughly 2% below its potential. The exact ratio varies, but the lesson is clear: unemployment is costly for the whole economy, not just for those out of work.

For individuals, the costs go beyond lost wages. Long spells of unemployment can erode skills, reduce future earnings, and damage health. Workers who lose jobs in recessions often earn less for years afterward.

Reading the jobs report like an economist

When the next jobs report comes out, look beyond the headline:

1. Payroll growth vs. the breakeven pace. How many jobs does the economy need to add each month just to absorb population growth? Growth well above that level means the market is tightening.
2. Revisions to the previous two months, which can change the story.
3. The unemployment rate and participation together, to see whether a falling rate reflects jobs found or people leaving the labor force.
4. Wage growth compared with inflation: are real wages rising?
5. Which industries are adding or cutting jobs.

No single month tells you much. Trends over three to six months are far more reliable.

Key ideas to remember

• To be unemployed you must be without work, available, and actively looking.
• The unemployment rate is the unemployed divided by the labor force; participation shows how many people are in that labor force at all.
• U-6 adds discouraged and involuntary part-time workers for a broader picture.
• Unemployment can be frictional, structural, cyclical, or seasonal; only cyclical unemployment is the main target of stabilization policy.
• Some unemployment is natural, and pushing it too low can fuel inflation.