Economists are always mentioning it, so it must be important. Right? Sure…
The unemployment rate is basically the ratio between the number of unemployed persons and the labour force.
It’s common sense that if the economy is growing the number of unemployed people must be diminishing and so should the unemployment rate (although it isn’t true in all the cases). But..the reduction of the unemployment rate may not be necessarily a sign of a prosperous economy, it could be also a sign of mass emigration.
But then…economists will start to talk about some new concepts: the natural rate of unemployment, the NAIRU, the full employment level…
The natural rate is simply the equilibrium level that a market supposedly should generate by the “invisible hand” if there were no interventions from the government, like minimum wages and other “socialist” distortions. (and forgetting about the importance of the labour market in the economy..)
The NAIRU (non-accelerating inflation rate of unemployment) is just a fancy new name for the natural rate, being the minimum rate that doesn’t cause pressure for wages to rise (and therefore prices). Although the logic is sound, when unemployment declines the negotiation power of the workers will rise and so must the wages, it abstracts from the fact that the Economy is composed by thousands(millions?) of different types of jobs/sectors and so to assume that a certain level of the unemployment ratio is the God-chosen NAIRU is very narrow-minded (as some sectors may be facing slack while others are overheating..).
Finally, the Full employment level. Something that politicians and investors like to talk about, whether to win elections or to make money (or both..) The most common error is to state e.g. the full employment level is of the economy when the unemployment rate is 5%, what is also something wonderful to say as this level can be reached with 5 unemployed persons, 500, 5000, 5 million (whatever…depending on the participation level).
I guess that if half the unemployed were arrested and sent to jail, the unemployment rate would decrease a lot. But that doesn’t sound very sensible, right?
Long story short, the unemployment rate is only a number. Although important, it’s not THAT IMPORTANT, so conclusions should not be taken about one economy focusing only in this rate..