Unemployment is the percentage of workers who are without jobs and actively seeking work. It is one of the most widely monitored economic indicators and is used to measure the health of the labor market.
Many governments offer unemployment benefits to those who lose their jobs through no fault of their own. This helps to keep people from depleting their savings and other assets in order to meet basic consumption needs during a period of joblessness. Unemployment benefits also help to stabilize economies during economic contractions. In the long run, however, unemployment can lead to a loss of skills and discourage saving by individuals who are worried about being able to find another job when the economy turns around.
To calculate unemployment, the government uses a monthly survey called the Current Population Survey (CPS) to determine how many individuals fall into each of the different categories of unemployment. The official unemployment rate is a weighted sum of the various classes: U-1, U-2, U-3, U-4, U-5, and U-6. The higher the number, the more severe the unemployment situation.
In some cases, unemployment is a structural problem that stems from inflexible wages that prevent prices from falling to the market clearing level. This type of unemployment is sometimes referred to as frictional unemployment and can occur in both healthy and weak economies. Unemployment also can be caused by inflexible wage structures that dissuade workers from accepting jobs with low salaries. This is known as reservation wages and is common in developing countries where labor laws may be less strict than in developed countries.