The unemployment figure is typically calculated by dividing the number of out of work individuals in the labor force, by the total labor force.
Components and Calculations
Technically, Unemployment Rate =
In the US, persons are considered unemployed if they are able and willing to work, but who do not have a job - and have actively sought employment within the last 4 weeks. (The unemployment rate does not include part time or 'underemployed' individuals who actively seek full time work)
The labor force includes all employed and unemployed individuals 16 years and older.
Importance of Unemployment
The Unemployment Rate figure is the single most popularly used figure to give a snapshot of labor market conditions. In the US, it is also released with the widely followed and market moving US Employment Situation report, which includes change in non-farm payrolls as well as other key indicators of the US labor market.
Because central banks act under strict pressure to keep unemployment under control (as well as mind inflationary pressures), high unemployment often puts downward pressure on interest rates affecting the rest of the economy - as the central bank will look to bolster the economy to remedy the employment situation.
More generally, unemployment is indicative of the economy's production, private consumption, workers' earnings, and consumer sentiment. A lower unemployment rate translates into more employed individuals with paychecks, which leads to higher consumer spending, economic growth and potential inflationary pressures. Conversely, high levels of unemployment are connected with lower incomes, lower spending, and economic stagnation.
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