Unemployment

The standard definition of unemployment, as used by the International Labour Organization (ILO), includes persons above a specified age who are without work, currently available for work, and actively seeking work.² The unemployment rate is calculated as the number of unemployed divided by the labor force (employed plus unemployed), expressed as a percentage. In the United States, the Bureau of Labor Statistics (BLS) conducts the Current Population Survey to produce official unemployment statistics, including alternative measures such as U-6, which includes discouraged workers and those employed part-time for economic reasons.¹

Economists distinguish several types of unemployment, each with distinct causes. Frictional unemployment arises from the time workers spend searching for new jobs or transitioning between jobs. Structural unemployment occurs when there is a mismatch between workers' skills and the demands of available jobs, often due to technological change or globalization. Cyclical unemployment results from downturns in the business cycle, as aggregate demand falls. Classical unemployment, also called real-wage unemployment, occurs when wages are kept above the market-clearing level, often due to minimum wage laws or union bargaining.³

Unemployment imposes significant costs on individuals and society. For individuals, job loss is associated with reduced income, lower psychological well-being, and long-term scarring effects on future earnings and employability. For society, high unemployment leads to lost output, reduced tax revenues, and increased government spending on social safety nets. The Okun's law relationship illustrates the negative correlation between unemployment and GDP growth. Long-term unemployment can erode skills and human capital, potentially increasing structural unemployment.⁴

Beyond the headline rate, several nuanced aspects of unemployment merit attention. Discouraged workers—those who have given up searching because they believe no jobs are available—are excluded from the official unemployment rate, making the true level of labor underutilization higher. Underemployment, where workers are employed but not to their full capacity or skill level, is also a significant issue. The natural rate of unemployment, which includes frictional and structural unemployment, is not zero and varies over time. Additionally, unemployment rates can differ markedly across demographic groups, regions, and education levels, with youth and minority groups often facing disproportionately higher rates.⁵

Labor force

The sum of employed and unemployed persons who are actively seeking work.

Discouraged workers

People who are not looking for work because they believe no jobs are available for them.

Underemployment

A situation where workers are employed but not to their full capacity or skill level.

Natural rate of unemployment

The rate of unemployment that exists when the economy is at full employment, comprising frictional and structural unemployment.