The following is a selection from a new book I’m working on called: Super Simple Economics. The goal of the book is to explain everyday economic phenomena. Here I’m presenting the section on unemployment data.

Unemployment data is most useful for determining the health of an economy. Employed people are actively engaged in the economy. They receive wages which are spent on commodities and services, which in turn stimulate new demand. This new demand becomes the catalyst for capitalists to hire more workers. The more people employed in an economy, the more wealth is being created. As employment grows, so does the economy. As employment shrinks, so the economy follows.

Data on unemployment is collected by the Bureau of Labor Statistics (BLS). The unemployment rate is determined by a taking a survey containing representative samples of the U.S. population. To be counted in the official data a person must be 16 years of age or older. A collection of questions is asked of each person. Primarily, they are classified as “in the labour force” or “not in the labour force.” To be in the labour force, a person can be either employed or unemployed. To be classified as employed, a person must hold a job regardless of hours or pay. There is a third classification called discouraged workers. These workers are not considered to be in the labour force because they are not seeking work due to conditions of the economy.

To measure unemployment, the BLS divides the number of people who are unemployed by the total number of people contained in the labour force, the result is then multiplied by 100. An unemployment rate of 15 percent means that 85 percent of the working population is employed.

There are also alternative methods used by the BLS in order to make more specific determinations in data. Six unemployment measures are used in total to gauge the health of the labour market. In the following chart, the U-3 is the most common unemployment rate that is reported to the media. Each month other measures are reported alongside the U-3 that gives more specific information on the current unemployment situation.

There are three kinds of unemployment that economists use to classify unemployed workers.

Frictional Unemployment – People who are temporarily unemployed, either because they are new to the job market or are searching for a better job.

Structural Unemployment – Unemployment caused by a mismatch in the skills held by those looking for work and the skills demanded by those seeking workers.

Cyclical Unemployment  – Unemployment associated with jobs lost due to recession; it is the deviation from the natural rate of unemployment.

To create a metric by which to judge the unemployment rate, economists create a measure which they call – the natural rate of unemployment. By definition, this measure is considered to be “full employment.” This full employment is the unemployment benchmark. It is the rate of employment that is used to create a point of reference to assist in judging the level of similar things. Generally, this data is used to measure unemployment that is caused by a recession.