Unemployment Rate

Unemployment Rate Defined

There are a certain number of people in the United States who have jobs (known as the employed) at any particular time. There are also a certain number of people who are actively seeking jobs (known as the unemployed. Together, the number of people employed and the number of people unemployed make up the labor force or workforce.

These numbers change from time to time, but in 2015 the number of the U.S civilian labor force was approximately 157,130,000. The unemployment rate is the percentage of the labor force that is out of work. In 2015, about 8,296,000 people were out of work, yielding an unemployment rate of about 5.3%. Based on data from the U.S. Bureau of Labor Statistics, the highest and lowest unemployment rates since 1947 were 9.7% in 1982 and 2.9% in 1953.

People who are not employed and are not seeking employment are not counted as part of the workforce. Usually, rising employment and declining unemployment are signs of an improving economy.

Very Low Unemployment Is Not Always Good

Most beginning Teenvestors think that a low unemployment rate is good for the stock market. In their minds, it is wonderful when everyone has a job. They are shocked to discover that when an Employment Report shows that the unemployment rate is lower than expected, the stock market actually goes down under normal circumstances. In other words, the Dow, the S&P 500, and the NASDAQ Composite Index generally decline in value. Likewise, when an Employment Report shows the unemployment rate is higher than expected, the stock market generally improves.

The explanation for the stock market’s reaction to the Employment Report is that when the unemployment rate is lower than expected, it means more people are working. If more people are working, it also means that more people are going to be spending money, and contributing to the GDP. When more people are spending money, the stock market is scared of that dreaded “I” word – inflation. Fear of inflation usually causes the stock market to go down. 

For young investors, this is hard to accept, because while they want the stock market to do well, they also don’t want to rejoice when more people are out of work. The only way Teenvestors can feel better about this is to realize that high inflation can decrease the quality of life for tens of millions of Americans in ways that are not always obvious.

For example, an increase in mortgage rates (the interest rates that people pay on money they have borrowed to buy their houses), which is caused by inflation, could cost homeowners a few hundred dollars more a month, could discourage people from buying homes in the first place, or could disqualify people who want to borrow money to buy a home. Skyrocketing heating oil prices could mean that some people may not be able to afford oil to keep warm in their homes during the winter.