The overall unemployment rate for a country is a widely used measure of its unutilized labour supply. If employment is taken as the desired situation for people in the the labour force, unemployment is clearly an undesirable situation. Still, some short-term unemployment can be necessary for ensuring adjustment to economic fluctuations. Unemployment rates by specific groups, defined by age, sex, occupation or industry, are also useful in identifying groups of workers and sectors most vulnerable to joblessness.
While the unemployment rate may be considered the most informative labour market indicator, reflecting the general performance of the labour market and the economy as a whole, it should not be interpreted as a measure of economic hardship or of well-being. When based on the internationally-recommended standards, the unemployment rate simply reflects the proportion of the labour force that does not have a job but is available and actively looking for work. It says nothing about the economic resources of unemployed workers or their family members. Its use should, therefore, be limited to serving as a measurement of the utilization of labour and an indication of the failure to find work. Other measures, including income-related indicators, would be needed to evaluate economic hardship. An additional criticism of the aggregate unemployment measure is that it masks information on the composition of the jobless population and therefore misses out on the particularities of the education level, ethnic origin, socio-economic background, work experience, etc. of the unemployed. Moreover, the unemployment rate says nothing about the type of unemployment – whether it is cyclical and short-term or structural and long-term – which is a critical issue for policy makers in the development of their policy responses, especially given that structural unemployment cannot be addressed by boosting market demand only.
Paradoxically, low unemployment rates may well disguise substantial poverty, as high unemployment rates can occur in countries with significant economic development and low incidence of poverty. In countries without a safety net of unemployment insurance and welfare benefits, many individuals, despite strong family solidarity, simply cannot afford to be unemployed. Instead, they must eke out a living as best they can, often in the informal economy or in informal work arrangements. In countries with well-developed social protection schemes or when savings or other means of support are available, workers can better afford to take the time to find more desirable jobs. Therefore, the problem in many developing countries is not so much unemployment but rather the lack of decent and productive work, which results in various forms of labour underutilization (i.e. underemployment, low income, and low productivity).
A useful purpose served by the unemployment rate in a country, when available on at least an annual basis, is the tracking of business cycles. When the rate is high, the country is unable to provide sufficient numbers of jobs for the available workers and it could be a sign of economic recession. The goal, then, is to introduce policies and measures to bring the incidence of unemployment down to a more acceptable level. What that level is, or should be, has often been the source of considerable discussion, as many consider that there is a point below which an unemployment rate cannot fall without the occurrence of inflationary pressures. Because of this supposed trade-off, the unemployment rate is closely tracked over time.
The usual policy goal of governments, employers and trade unions is to have a rate that is as low as possible, yet also consistent with other economic and social policy objectives, such as low inflation and a sustainable balance-of-payments situation. When using the unemployment rate as a gauge for tracking cyclical developments, we are interested in looking at changes in the measure over time. In that context, the precise definition of unemployment used (whether a country-specific definition or one based on the internationally-recommended standards) does not matter nearly as much – so long as it remains unchanged – as the fact that the statistics are collected and disseminated with regularity, so that measures of change are available for study.
Internationally, the unemployment rate is frequently used to compare how labour markets in specific countries differ from one another or how different regions of the world contrast in this regard. Unemployment rates may also be used to address issues of gender differences in labour force behaviour and outcomes. The unemployment rate has often been higher for women than for men. Possible explanations are numerous but difficult to quantify; women are more likely than men to exit and reenter the labour force for family-related reasons; and there is a general “crowding” of women into fewer occupations than men so that women may find fewer opportunities for employment. Other gender inequalities outside the labour market, for example in access to education and training, also negatively affect how women fare in finding jobs.