Unemployment

What is the unemployment rate?

The formal definition of unemployment starts with estimating the labor force, people working or looking for work. This definition excludes people who are too young to work or have retired, people who are unable to work, and people who are not actively looking for a job, like those who choose to stay home to care for children. The number of unemployed includes only those who currently do not have a job, have actively looked for a job in the last four weeks, and can work.

To determine the unemployment rate, the number of unemployed individuals is divided by the number of people in the labor force. As of April 2024, the unemployment rate was 3.9%, or 6.5 million persons. The Bureau of Labor Statistics reported that teenagers currently have the highest unemployment rates among demographic groups, at 11.7% in April 2024.

What about under-employed people?

A low unemployment rate indicates good economic conditions, but it does not necessarily mean everyone is happy with their current job. An unemployment rate can be low, but only because of underemployment: people who are employed but are overqualified for their jobs or people who are employed in a part-time job but wish to be employed full-time. Including underemployed and part-time workers in the calculation increased the rate from 3.9% to 6.9% as of April 2024.

How has the unemployment rate varied over time?

The unemployment rate tends to follow the economy’s ups and downs. The economy has its cycles of expansion and contraction, and employment tends to follow this cycle. Unemployment rises with negative economic conditions as firms hire fewer workers or lay off current employees. Similarly, firms hire and recall workers when the economy grows and unemployment drops.

The figure below shows the yearly average unemployment rate since 1948. The plot shows that the U.S. has seen major spikes in unemployment during economic recessions, such as in the early 1980s and the Financial Crisis of 2008-2010. (See our Policy Brief on Inflation, linked in Further Reading, for more details.) The U.S. also saw a dramatic spike in unemployment during the early months of the COVID  pandemic. However, the unemployment rate rapidly declined as the economy reopened and workers were called back to their jobs. Current unemployment rates are near all-time lows.

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As shown in the figure below, the unemployment rate for Blacks and Latinos is generally higher than that of White Americans (the figure shows the same annual average as the earlier plot, but for a shorter time frame). The causes of these racial differences are debated. Part of the answer lies in different levels of education, differences in where people live, and differences in the sectors they work in. For example, unemployment levels for Blacks in the Upper Midwest are about 3-5 times higher than for Whites. However, unemployment levels are very similar in states like West Virginia and Kentucky.  

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Do some states have higher unemployment rates than others?

The economies of American states vary significantly – they have different kinds of industries and businesses. As a result, unemployment levels can vary across states. One state may have industries growing strongly, while another may be dominated by industries with low growth or even declining. For example, during COVID, hospitality industries were particularly hard hit, so states like Nevada, whose economies depended on tourism, had much higher unemployment than others.

In the post-pandemic era, unemployment levels have been similar across states, as shown in the figure below for June 2023. Overall, there is only a 3.3 percentage point difference between the state with the highest unemployment rate (California, 5.3%) and the state with the lowest (North Dakota, 2.0%).

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The Federal Reserve, tasked by Congress with maintaining a healthy economy, defines ‘Maximum Employment’ as an unemployment rate low enough that almost anyone wanting a job can find one and in which the inflation rate is relatively low and stabilized. While they do not make their precise targets public, most analysts believe that the Fed aims for 2% inflation and an unemployment rate of 4%.

It is important to remember that a low unemployment rate is not necessarily good economic news. Particularly after an economic downturn, many individuals may be underemployed. For example, while the overall unemployment rate in the 1990s was near historic lows as the economy surged, many of those in the industrial sector permanently lost their jobs as manufacturing was relocated abroad to take advantage of fewer regulations and lower wages. These individuals remained in the labor force but moved to lower-paying jobs. For more details see our Policy Brief on Offshoring.