The economy—and unemployment in particular—topped the list of issues important to voters in the 2012 presidential election. Figure 12.1 shows the U.S. unemployment rate from 1948 to the early part of 2013. As you can see, the labor market hit a difficult patch starting in mid-2008, with the unemployment rate rising from 4.8% in February 2008 to 10.1% in October 2009. What did the rise in the unemployment rate mean, and why was it still a major concern for U.S. citizens in 2012 and beyond? To make sense of the attention paid to employment and unemployment, we need to understand how they are both defined and measured.

It’s easy to define employment: you’re employed if and only if you have a job.

Unemployment, however, is a more subtle concept. Just because a person isn’t working doesn’t mean that we consider that person unemployed. For example, in April 2014 there were 38 million retired workers in the United States receiving Social Security checks. Most of them were probably happy that they were no longer working, so we wouldn’t consider someone who has settled into a comfortable, well-earned retirement to be unemployed. There were also 8 million disabled U.S. workers receiving benefits because they were unable to work. Again, although they weren’t working, we wouldn’t normally consider them to be unemployed.

The U.S. Census Bureau, the federal agency that collects data on unemployment, considers the unemployed to be those who are “jobless, looking for jobs, and available for work.” Retired people don’t count because they aren’t looking for jobs; the disabled don’t count because they aren’t available for work. More specifically, an individual is considered unemployed if he or she doesn’t currently have a job and has been actively seeking a job during the past four weeks. So the unemployed are people who are actively looking for work but aren’t currently employed.

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A country’s labor force is the sum of the employed and the unemployed—that is, the people who are currently working and the people who are currently looking for work. The labor force participation rate, defined as the share of the working-age population that is in the labor force, is calculated as follows:

The unemployment rate, defined as the percentage of the total number of people in the labor force who are unemployed, is calculated as follows:

To estimate the numbers that go into calculating the unemployment rate, the U.S. Census Bureau carries out a monthly survey called the Current Population Survey, which involves interviewing a random sample of 60,000 American families. People are asked whether they are currently employed. If they are not employed, they are asked whether they have been looking for a job during the past four weeks. The results are then scaled up, using estimates of the total population, to estimate the total number of employed and unemployed Americans.

In general, the unemployment rate is a good indicator of how easy or difficult it is to find a job given the current state of the economy. When the unemployment rate is low, nearly everyone who wants a job can find one. In 2000, when the unemployment rate averaged 4%, jobs were so abundant that employers spoke of a “mirror test” for getting a job: if you were breathing (therefore, your breath would fog a mirror), you could find work. By contrast, in 2009, the unemployment rate in 17 states rose to over 10% (over 15% in Michigan), with many highly qualified workers having lost their jobs and having a hard time finding new ones. Although the unemployment rate is a good indicator of current labor market conditions, it is not a perfect measure.

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How the Unemployment Rate Can Overstate the True Level of Unemployment If you are searching for work, it’s normal to take at least a few weeks to find a suitable job. Yet a worker who is quite confident of finding a job, but has not yet accepted a position, is counted as unemployed. As a consequence, the unemployment rate never falls to zero, even in boom times when jobs are plentiful. Even in the buoyant labor market of 2000, when it was easy to find work, the unemployment rate was still 4%. Later, we’ll discuss in greater depth the reasons that measured unemployment persists even when jobs are abundant.

How the Unemployment Rate Can Understate the True Level of Unemployment Frequently, some of the people who would like to work but aren’t working still don’t get counted as unemployed. In particular, an individual who has given up looking for a job for the time being because there are no jobs available isn’t counted as unemployed because he or she has not been searching for a job during the previous four weeks. Individuals who want to work but aren’t currently searching because they see little prospect of finding a job given the state of the job market are known as discouraged workers. Because it does not count discouraged workers, the measured unemployment rate may understate the percentage of people who want to work but are unable to find jobs.

Discouraged workers are part of a larger group known as marginally attached workers. These are people who say they would like to have a job and have looked for work in the recent past but are not currently looking for work. The difference between discouraged workers and other marginally attached workers is that the other marginally attached workers ended their job search for a reason other than a belief that no job was available for them. For example, they may have gone back to school or become disabled. Marginally attached workers are also not included when calculating the unemployment rate.

Finally, another category of workers who are frustrated in their ability to find work but aren’t counted as unemployed are the underemployed: workers who would like to work more hours or who are overqualified for their jobs. For example, some part-time workers would like to work full time, and some college graduates work as fast-food clerks. Again, they aren’t counted in the unemployment rate.

The Bureau of Labor Statistics is the federal agency that calculates the official unemployment rate. It also calculates broader “measures of labor underutilization” that include the three categories of frustrated workers. Figure 12.2 shows what happens to the measured unemployment rate once marginally attached workers (including discouraged workers) and the underemployed are counted. The broadest measure of unemployment and underemployment, known as U6, is the sum of these three measures plus the unemployed; it is substantially higher than the rate usually quoted by the news media. But U6 and the unemployment rate move very much in parallel, so changes in the unemployment rate remain a good guide to what’s happening in the overall labor market.

Finally, it’s important to realize that the unemployment rate varies greatly among demographic groups. Other things equal, jobs are generally easier to find for more experienced workers and for workers during their “prime” working years, from ages 25 to 54. For younger workers, as well as workers nearing retirement age, jobs are typically harder to find. Figure 12.3 shows unemployment rates for different groups in December 2013, when the overall unemployment rate of 6.7% was low by historical standards. As you can see, in December 2013 the unemployment rate for African-American workers was much higher than the national average; the unemployment rate for White teenagers (ages 16–19) was almost three times the national average; and the unemployment rate for African-American teenagers, at more than 35%, was over five times the national average. (Bear in mind that a teenager isn’t considered unemployed, even if he or she isn’t working, unless that teenager is looking for work but can’t find it.) So even at a time when the overall unemployment rate was relatively low, jobs were hard to find for some groups.

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Although the unemployment rate is not an exact, literal measure of the percentage of people unable to find jobs, it is a good indicator of overall labor market conditions. The ups and downs of the unemployment rate closely reflect economic changes that have a significant impact on people’s lives. Let’s turn now to the causes of these fluctuations.

Compared to Figure 12.1, Figure 12.4 shows the U.S. unemployment rate over a somewhat shorter period, the 33 years from 1980 to 2013. The shaded bars represent periods of recession. As you can see, during every recession, without exception, the unemployment rate rose. The recession of 1981–1982, the most severe one shown, pushed the unemployment rate into double digits: unemployment peaked in November 1982 at 10.8%. And during the most recent recession shown, in late 2009 the unemployment rate rose to above 10%.

Correspondingly, during periods of economic expansion the unemployment rate usually falls. The long economic expansion of the 1990s eventually brought the unemployment rate below 4%. However, it’s important to recognize that economic expansions aren’t always periods of falling unemployment. Look at the periods immediately following two recent recessions, those of 1990–1991 and 2001. In each case the unemployment rate continued to rise for more than a year after the recession was officially over. The explanation in both cases is that, although the economy was growing, it was not growing fast enough to reduce the unemployment rate.

Figure 12.5 is a scatter diagram showing U.S. data for the period from 1949 to 2013.The horizontal axis measures the annual rate of growth in real GDP—the percent by which each year’s real GDP changed compared to the previous year’s real GDP. (Notice that there were nine years in which growth was negative—that is, real GDP shrank.) The vertical axis measures the change in the unemployment rate over the previous year in percentage points. Each dot represents the observed growth rate of real GDP and change in the unemployment rate for a given year. For example, in 2000 the average unemployment rate fell to 4.0% from 4.2% in 1999; this is shown as a value of -0.2 along the vertical axis for the year 2000. Over the same period, real GDP grew by 4.1%; this is the value shown along the horizontal axis for the year 2000.

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The downward trend of the scatter points in Figure 12.5 shows that there is a generally strong negative relationship between growth in the economy and the rate of unemployment. Years of high growth in real GDP were also years in which the unemployment rate fell, and years of low or negative growth in real GDP were years in which the unemployment rate rose. The green vertical line in Figure 12.5 at the value of 3.3% indicates the average growth rate of real GDP over the period from 1949 to 2013. Points lying to the right of the vertical line are years of above-average growth. In these years, the value on the vertical axis is usually negative, meaning that the unemployment rate fell. That is, years of above-average growth were usually years in which the unemployment rate was falling. Conversely, points lying to the left of the vertical line were years of below-average growth. In these years, the value on the vertical axis is usually positive, meaning that the unemployment rate rose. That is, years of below-average growth were usually years in which the unemployment rate was rising. There are periods in which GDP is growing, but at a below-average rate; these are periods in which the economy isn’t in a recession but unemployment is still rising—sometimes called a “growth recession.” But true recessions, periods when real GDP falls, are especially painful for workers. As illustrated by the points to the left of the vertical axis in Figure 12.5, falling real GDP is always associated with a rising rate of unemployment, causing a great deal of hardship to families.

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