An economic indicator that certainly gets a lot of attention in the media is the unemployment rate. Unlike other indicators such as the Gross Domestic Product or the Consumer Price Index that the average American may struggle with when trying to understand how the numbers translate into the health of the economy, the unemployment rate is relatively straightforward and helps to paint a picture of the overall state of joblessness in the US economy.
The unemployment rate is calculated by tallying up all the people who are currently unemployed and dividing that number by the total number of people in the labor force. The definition of “unemployed” is very specific and means that the person is actively seeking employment but has been unable to land a job. So, a stay-at-home mom who is not looking to work or a wealthy businessman who recently sold his business to retire at a young age would not be considered “unemployed” since they are not looking for work. The “labor force” consists of the number of Americans who are above the working age and below the retirement age and are employed or are seeking to be employed.
As an economic indicator, the unemployment rate is considered a “lagging indicator,” which means it measures the effects of economic events after they have already started. For example, when the economy starts to turn south, companies are typically reluctant to lay off workers initially, hoping that the slowdown is only temporary. Then, once a down economy shows signs of recovery and enters the growth phase, companies want to wait to make sure the economy is stable and doing well before they hire workers again and increase their costs.
During times of prosperity, the unemployment rate tends to be at around 5 percent or below, but the numbers obviously fluctuate month to month and the “5 percent” figure is just a crude benchmark. The most recent monthly figures available from the US Bureau of Labor Statistics are from December 2011 and show that the unemployment rate in December was 8.5%, which is over a half of a percent lower than it was in August 2011. The fact the unemployment is decreasing is a signal that the economy could be improving; however, the number is moving downward at a slow rate,and the decreases may be the result of people giving up looking for work, which decreases the number of “unemployed” people under the definition used to calculate the figure.
The Federal Reserve’s outlook for 2012 predicts that the unemployment rate will likely stay above 8% through the end of 2012, which shows that the economy is not fully recovered and it may take several more years for the rate to get to the 5 percent figure that typically signifies a thriving economy. As the European debt crisis, 2012 elections, and other events play out in the coming months, the unemployment rate will continue to be a key indicator of the state of the US economy.