The unemployment rate is one of the most widely watched economic indicators and plays a major role in monetary policy and political decision making. It peaks during recessions and dips during expansions.
The government measures unemployment by conducting a monthly survey of a random sample of households and then dividing the number of unemployed people by the total population of working-age adults. Only those who are jobless and actively looking for work are considered part of the labor force. In addition to those who are out of work, those who are incarcerated, on welfare, or otherwise ineligible for a job may not be counted as part of the labor force. Tracking every individual who is out of a job would be expensive, time-consuming, and impractical. That is why the government relies on a survey of a representative sample instead.
There are many reasons why the unemployment rate rises or falls. A common cause is a change in the size of the labor force. If workers become discouraged and stop actively looking for jobs, they leave the labor force. This is more likely to happen in times of economic distress when the prospects for finding employment are poor.
Other reasons include changes in the availability of jobs. For example, when a particular industry begins to shrink, companies lay off employees. This may result in a high unemployment rate. However, when a particular industry becomes more profitable, businesses hire more employees and the unemployment rate decreases. There are also other factors that can impact the unemployment rate such as aggregate demand, global competition, education, automation, and demographics. Economists, academics and politicians have long debated the causes of unemployment and what can be done to improve it.