Unemployment rates tell us whether a nation’s labor market is healthy or not. The official unemployment rate (U-3) measures people who are jobless and actively looking for work as a percentage of the total workforce. This number tends to rise during recessions and fall during expansions. This is because overall economic conditions shift the demand for labor downward, and wages are sticky and don’t adjust upward as fast. This is called cyclical unemployment.
However, the official unemployment rate doesn’t include discouraged workers who give up looking for jobs. This group can include people who retire, go back to school, or drop out of the workforce for other reasons such as illness, family caregiving, or a desire to travel or spend time with loved ones.
For this reason, many economists believe that the official unemployment rate is an incomplete measure of labor market health. Instead, it’s important to follow more disaggregated metrics like U-1 through U-6, which add in other types of workers including those who are marginally attached to the workforce and those working part-time for economic reasons.
You can find more information on all of these metric by using our online resource, FRED (Federal Reserve Economic Data), or reading the Bureau of Labor Statistics’ monthly report on household and employment surveys. The most comprehensive of these is U-6, which includes the officially unemployed as well as those working below their preferred labor force participation level and those who are “discouraged workers.” This broadest metric tends to be the best indicator of the overall strength of the labor market.
