Here’s what unemployment rate actually means and why it’s important

Here's what unemployment rate actually means and why it's important

Members of the Long Beach, New York CSEA civil service union hold a drive-by protest in front of Long Beach City Hall to protest further union layoffs on May 26, 2020.

(Photo by Thomas A. Ferrara/Newsday RM via Getty Images)

The U.S. unemployment rate fell to 13.3% in May, defying expectations of a much bleaker figure near that of the Great Depression era.

The stock market rejoiced after the announcement on Friday. The S&P 500 was up about 2.4% as of 10:54 a.m. ET.

But what does the unemployment rate mean and why is it important?

Indicator of hardship

And the employment situation soured far more quickly than at any other point in history, doing so over the span of a few months. By comparison, it took more than a year for the Depression-era unemployment rate to witness an equivalent rise

But the situation appears to be trending more positively — around 2.5 million Americans got jobs in the month between mid-April and mid-May, a record.

The Bureau of Labor Statistics attributes that to a “limited resumption” in economic activity as states begin withdrawing from their self-induced hibernation to halt the coronavirus pandemic.

Unemployment rate conundrum

The unemployment rate may not be the most accurate indicator of financial stress at the moment, however, Woodbury said.

A recent federal financial-relief law greatly increased unemployment benefits for out-of-work Americans. It offers an additional $600 a week through July in addition to typical state benefits and expands the pool of workers eligible for benefits.  

“The unemployment rate right now is obviously bad,” Woodbury said. “[But] federal policy has acted very quickly to try to head off a lot of the hardship that would otherwise result.

“As a measure of hardship, it’s not as good as it usually is,” he added.

Of course, many Americans have struggled to access unemployment benefits amid record volume and administrative delays. And income may drop precipitously after July, barring an extension of $600-a-week stimulus from Congress.

In addition, the unemployment rate includes workers temporarily laid off (or furloughed). These workers are technically still attached to an employer and can return to work quickly if business rebounds.

Around 73% of the 21 million Americans out of work are furloughed — the second-largest share in history, behind April’s figure. That suggests the current unemployment picture could potentially reverse quickly if the job losses don’t become permanent.

The unemployment rate also doesn’t include the share of Americans who dropped out of the labor force because they were discouraged and decided not to look for work, for example.

A large share of people leaving the labor force would make the unemployment rate appear artificially low.

“That isn’t necessarily good, because these are maybe people who are discouraged and would like a job but concluded they can’t get one,” Woodbury said.

This doesn’t appear to be the case in May, however — the share of “discouraged workers” increased only marginally, by 88,000 people to a total 662,000.

Other measures

Other measures may be more useful than the unemployment rate in demonstrating the relative employment hardship of Americans, according to some experts.

The employment-population ratio, for example, measures the share of employment among the entire adult population — not just those looking for work. It therefore captures adults who were discouraged about the prospects of finding a job, for example.

The ratio is perhaps the best snapshot of labor demand, or the number of jobs available for people, Woodbury said.

That share recovered a bit in May compared with April — growing to 52.8% from 51.3%, which was a historic low in the post-World War II era.

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