Unemployment Rate

Under-employment

The unemployment rate might seem like it encompasses many different scenarios of a person's work status, but it has its shortcomings. Two things that the unemployment rate omits are:

• Underemployment
• Discouraged Workers

Currently, the BLS does not distinguish between part-time and full-time employment when calculating the unemployment rate. Both are counted as full-time even if the part-time worker wants to work full-time or could not find full-time employment. These workers are underemployed. By not factoring in underemployment the unemployment rate is often criticized for seeming lower than it truly is.

Then there is the problem of discouraged workers. These are people who were seeking jobs but eventually gave up because they were unsuccessful. Since they are no longer actively seeking work they fall out of the labor force and into the second population group. This further contributes to the underestimation of the unemployment rate.

Unemployment Rate Formula

Now that we have a solid understanding of the unemployment rate, let's look at the unemployment rate formula. The two values required to calculate the unemployment rate are the number of people who are unemployed and those in the labor force. To calculate the unemployment rate you have to divide the number of unemployed by the total labor force and multiply it by 100 to receive a percentage:

\[ \frac {Number \ of \ Unemployed} {Labor \ Force} \times 100 = Unemployment \ Rate \]

Now let's calculate the unemployment rate of the US in 2021. The labor force in August 2021 was 161,788,000 people. The number of people unemployed was 8,556,000 people.

\( \frac {8,556,000} {161,788,000} \times 100= Unemployment \ Rate \)

\( 0.53 \times 100=5.3 \% \)

The US unemployment rate for August 2021 was 5.3%²

Significance of the Unemployment Rate

So we have learned to calculate the unemployment rate, but what do those numbers mean? The unemployment rate is a statistical way of indicating how difficult it is to find a job in the current economy. If a nation has a high unemployment rate, there are a lot of people who are out looking for work but are unsuccessful. If the unemployment rate is low, then it is relatively easy to find a job.

There is no solid guideline for what a high or low unemployment rate is. Using the natural rate of unemployment as a benchmark for what a normal unemployment rate is, we can estimate if the unemployment rate is considered low and the economy is very close to full capacity. An unemployment rate above the natural rate is an indicator that people are having a difficult time finding work. In the US, in 2019, the natural rate of unemployment was 4.6%.³

Unemployment Rate US

The unemployment rate in the US typically floats between 4-5%.³ At any given time there are people who are just entering the labor force, are laid off, or quit one job to find a new one.

Figure 2 shows the average annual unemployment rate for the US since 1948. The highest average annual rate was 9.6% unemployment in 2010, two years after the Great Recession when the economy was still trying to recover from the housing bubble crash. The highest monthly unemployment rate was recorded in April of 2020 during the COVID19 pandemic, at 14.7%.⁴

The 1980s also saw an elevated unemployment rate from 1981 to 1983 at close to 11% unemployment.⁴ This recession was caused by the Federal Reserve's (the Fed) tight contractionary monetary policy that had been instated to combat rising inflation.⁵ The high inflation was said to be caused by the government's increased deficit spending of the 1970s.⁶ Eventually, the Fed was able to lower inflation to 5% by maintaining a higher interest rate and the unemployment rate started to decrease.⁵

Unemployment Rate in The Great Depression

We cannot learn about the unemployment rate without mentioning the unemployment rate in the Great Depression. Although the US has gone through multiple severe recessions none has surpassed the massive loss of Gross Domestic Product (GDP) and levels of unemployment seen during the Great Depression of 1929. Unemployment rate in the Great Depression was as high as 24.5% at the height of the depression in 1933.⁷ It was caused by a combination of factors. The collapse of the stock market in 1929 and the overproduction of goods caused prices and therefore wages and employment to drop.⁷ US production fell by one-third and prices plummeted, leaving workers either unemployed or having to accept much lower wages.⁷ Fear and a lack of confidence caused people to save whatever wealth they had, further stalling the economy until the election of a new president in 1933 brought new economic policies.

The high unemployment and depressed wages started to improve after President Franklin D. Roosevelt instated his New Deal policy that created jobs for the unemployed, helped stabilize farming prices, provided unemployment support, and introduced the Social Security Insurance program.⁷ People were put to work building roads, dams, and other infrastructure for the country that connected the country and stimulated manufacturing again.

Lowest Unemployment Rate

The lowest unemployment rate came for the US during the post-war boom.⁴ The unemployment rate fell to 2.5% in May and June of 1953. It came in the wake of World War II when people were hopeful for the future. It was in the middle of the Baby Boom generation when GDP was growing rapidly, and the consumer culture took off.⁸ Where the rest of the world was still building back from the wreckage of World War II, the US had a head start to ramp up production of goods. This created jobs, making it possible for nearly anyone to find work.⁸

Unemployment Rate UK

The unemployment rate for the United Kingdom follows a very similar trend to the unemployment rate in the US. This is because they are both powerful nations whose economies are closely linked by both politics and trade. Just like the US, the UK experienced a period of high unemployment in the early 1980s reaching 11.8% due to high levels of inflation and harsh economic policies that drove the UK economy into a recession.^{9, 10} Some argue that the strict monetary policies were necessary to curb long run issues like high inflation, poor industrial relations, and economic decline.¹⁰

Fig. 3 - Average UK unemployment rate from 1971-2021, Source: Office for National Statistics

Figure 3 shows the average annual unemployment rate for the UK from 1971 to 2021. If we compare it to figure 2, we can see how both unemployment rates follow a similar pattern. In 2008, the UK also suffered from the 2008 financial crisis. Many of its banks had also participated in the practice of handing out sub-prime mortgages to those who could not afford them in the name of making money and retaining market shares.¹¹ This practice became an issue for banks globally in 2007, when the price of oil began to rise along with fear of recession and unemployment. The rising unemployment caused people to default on their loans, causing a global snowball effect.¹¹

The current unemployment rate for the UK for June 2022 is at 3.6%, which is 0.9% less than the 2021 annual average.⁹ This is the lowest rate the UK has seen since 1974 when it was 3.7%.⁹