Home > CFA Level 1 > Economics > Measures of unemployment

Measures of unemployment

When unemployment is low, the economy overheats and prices rise. Due to a shortage in the labor market and the rising prices, workers negotiate their wages up which increases prices further. Central bankers act drastically to prevent this price-wage inflationary spiral from getting out of hand.

Unemployment rate

The unemployment rate is the most widely used measure of unemployment. It is the ratio of unemployed workers to the labor force. It is often estimated using surveys, but there have been attempts to deduce the data from unemployment benefits claims.


Employed workers are those who currently have a job (excluding people in the undocumented economy).


Unemployed workers are those who are actively looking for a job but do not have a job yet. These exclude discouraged workers, workers who have given up searching for a job. Categories of unemployed include long-term unemployed, who have been unemployed for a long time but still looking for a job, and frictionally unemployed, people, who are new to the job market or are between jobs.

Labor force and activity ratio

The labor force is the sum of employed and unemployed workers. It excludes retirees, children, etc.

\[ Labor\ Force = Employed + Unemployed \]

The activity ratio (also called participation ratio) is the ratio of the labor force to the population.

\[ Activity\ Ratio = \frac{Labor\ Force}{Population} \]


Underemployed people are workers who are doing jobs below their qualifications are far better. The unemployment rate does not factor in any underemployment but data about part-time jobs may offer some insight. Discouraged workers are workers who have given up hope of finding a job. Since these are excluded from the labor force, the unemployment rate may offer misleading information. For example, during a deep recession when discouraged workers rise, the unemployment rate may improve on paper.

Unemployment rate as an economic indicator

The unemployment rate is a lagged indicator of an economy because of (a) fluctuations in the number of discouraged workers, and (b) reluctance on the part of firms to fire/hire workers i.e. they first change overtime, working hours, etc. before adjusting the number of workers. One alternative is to focus on payroll growth, but data about small businesses may not be available. Others include overtime, the number of temporary workers, and productivity parameters. Overtime and temporary workers are most sensitive to economic ebb and flow and are a precursor to changes in the unemployment rate. Productivity drops when an economy enters recession because sales drop but the number of workers does not, and it picks up when the economy improves.

Leave a Reply

Your email address will not be published. Required fields are marked *