The Unemployment Rate

Two primary reasons that make unemployment a lagging economic indicator of the business cycle:

1 The unemployment rate tends to point to a past economic condition (lags the cycle) because the labor force expands and declines in response to the economic environment.

During prolonged recessions, discouraged workers cease searching for work, reducing the number typically counted as unemployed and making the jobs market look stronger than it really is.

To avoid this bias, measure the labor force in terms of the working-age population.

2 The typical reluctance of businesses to lay off people.

The reluctance may stem from a desire to retain good workers for the long run, or just reflect constraints written into labor contracts that make layoffs expensive.