The unemployment rate published monthly by the Bureau of Labor Statistics is one of the most widely watched of all economic indicators. But why? What does it really measure?
The news media,
politicians, and voters tend to see the unemployment rate as an index of
the social stress of joblessness. There is ample evidence to support
that view. Researchers have linked high unemployment rates to increased mortality and impaired mental health. A recent cross-sectional analysis shows a strong relationship between unemployment and suicide. There is evidence that unemployment undermines personal relationships,
although the impact on divorce rates is ambiguous: A weak job market
can break up some couples while leaving others stuck in bad marriages
because they can’t afford divorce. Rising unemployment is also
associated with higher crime rates, for both violent and property crimes. There is even something called the misery index, which is the sum of the unemployment rate and the inflation rate.
on the other hand, more often view the unemployment rate as an
indicator of economic slack. People who want to work but are not working
are a wasted resource. Finding jobs for them would add to GDP. Monetary
and fiscal policymakers watch employment indicators closely because the
more slack there is in the labor market, the more room there is for
economic stimulus without risk of inflation.
The questions we need
to address, then, are, first, can the standard unemployment rate do
double duty as an indicator of both macroeconomic slack and social
stress? And if not, what might be better?