The unemployment rate is a key measure of the health of an economy. It shows how many people are able to find gainful employment in the labor market, and it is a factor in setting monetary policy and making strategic economic decisions.
The official unemployment rate, known as the U-3 rate, is calculated by the Bureau of Labor Statistics using a monthly survey that includes everyone in the civilian labor force. This includes those who are employed, those who have dropped out of the labor force (including those who have retired or are incarcerated) and those who are unemployed. It also includes those who are marginally attached to the workforce (who want a job but have not searched for work in the past four weeks) and involuntary part-time workers who would prefer full-time jobs.
High unemployment is bad for the economy because it reduces consumer spending, which in turn cuts back on business production. This cycle is hard to break unless there is outside intervention, such as government programs that help unemployed workers get back on their feet.
There are several ways to measure unemployment, but economists tend to agree that the U-3 rate is the best way to capture trends in the job market and economy. Other measures, like the U-6 and the U-5 rates, are more granular, but they also suffer from a certain degree of bias due to the definitions and methodologies used for collecting the data.