Unemployment can be devastating for individuals, families and communities. It can destroy financial stability, lower life expectations and cause long-lasting psychological scars. It also reduces consumer spending, which accounts for around 70% of economic activity. This creates a cycle of decreased production, more layoffs and economic stagnation. It can also increase the burden on government resources and tax revenue. In addition, high unemployment rates lead to reduced community cohesion and higher crime levels.
The official unemployment rate is the percentage of the working-age population without a job, which includes those who are neither employed nor actively looking for work (U-3). It is typically used as an indicator of labor market health. However, it does not fully reflect the complexity of labor market problems and may be misleading. For this reason, economists and policy makers use a variety of indicators to measure underutilization in the labor market. These include cyclical and structural unemployment, as well as frictional unemployment.
A number of different factors can affect the unemployment rate, including the rate of new hires, the rehiring of previously laid off workers, and changes in the size of the labor force. During an economic downturn, it is common for the labor force to shrink as people become discouraged and give up searching for employment. This decrease in the size of the labor force usually causes the unemployment rate to rise.
The unemployment rate can also be affected by a change in the job-finding and job-separation rates, which are typically smaller during recessions than they are during expansions. These changes can drag the unemployment rate up or down, and this has been especially true during recent recessions.