Personal Finance

The unemployment rate fell in July. Here's why that's important

Key Points
  • The unemployment rate has been steadily improving. It fell to 10.2% in July, down from its 14.7% peak in April. 
  • The metric indicates that about 1 in 10 Americans in the labor force can't find work. 
  • The unemployment rate is a measure of financial hardship, especially since recipients of jobless benefits are no longer getting an extra $600 a week.
A Jos. A. Bank store location in San Francisco announces its permanent closure on Aug. 6.
David Paul Morris/Bloomberg via Getty Images

The unemployment rate fell for the third straight month, to 10.2% in July. That exceeded expectations, as employers added about 1.8 million jobs to their payrolls.

That adds up to good news for the U.S. economy.

But some may wonder what the unemployment rate actually means — and why it's important.

How the July jobs report could inform what's in the next round of stimulus
How the July jobs report could inform what's in the next round of stimulus

Financial hardship

The unemployment rate measures how many people who want a job (and are available for work) can find one.

July's unemployment rate indicates that roughly 1 in every 10 people in the labor force can't find work.

The unemployment rate is typically an indicator of hardship for American families, Stephen Woodbury, a labor economist and professor at Michigan State University, has told CNBC.

More from Personal Finance:
You might not see cash from a payroll tax cut
How much your next stimulus check could be
5 ways to create your own stimulus check

That's because an unemployed person's income drops after losing a job.  

Unemployment insurance generally provides a temporary stopgap, but these state-administered benefits usually replace less than half of prior wages. And in some states, the average worker gets far less, around 30% of former wages. Many workers also aren't eligible for jobless pay at all.  

April's unemployment rate of 14.7% was higher than any other period since the Great Depression, when economists predicted it peaked around 25%.

And the employment situation soured far more quickly than at any other point in history. It took just a few months for unemployment to rise to April's peak; by comparison, it took more than a year for the Depression-era unemployment rate to witness an equivalent increase.

But it steadily improved over the past three months as states gradually reopened their economies. Some experts expected renewed shutdown measures in some states, an effort to contain spiking coronavirus infections, to potentially cause the unemployment rate to worsen.

In July, the unemployment rate was 10.2% and 16.3 million people were unemployed, the Bureau of Labor Statistics reported Friday.

To put that in perspective, those figures are respectively 6.7 percentage points and 10.6 million people higher than in February, before the U.S. pandemic.

$600 a week

Up until recently, the unemployment rate wasn't as accurate an indicator of financial stress as in the past.

A federal financial-relief law, the CARES Act, increased unemployment benefits for out-of-work Americans by $600 a week starting in April. That supplement was in addition to typical state benefits. The CARES Act also expanded the pool of workers eligible for benefits.  

The extra $600 made unemployment benefits more generous than any other time in the program's history, according to economists. But that aid lapsed at the end of July, and many are having trouble finding jobs.

Workers in some states are now getting as little as $5 or $10 a week.

Furloughed workers

The unemployment rate may also mask other important labor dynamics at play.  

For example, the unemployment rate includes furloughed workers, who were temporarily laid off from a job. They are technically still attached to an employer and can return to work quickly if business rebounds.

Around 56% of unemployed Americans — or about 9.2 million people — are actually furloughed. While historically elevated, that share fell from a peak of about 78% in April. That suggests the unemployment rate could potentially reverse quickly if the job losses don't become permanent. 

The unemployment rate also doesn't include the share of Americans who dropped out of the labor force because they were discouraged and decided not to look for work, for example.

A large share of people leaving the labor force would make the unemployment rate appear artificially low.

"That isn't necessarily good, because these are maybe people who are discouraged and would like a job but concluded they can't get one," Woodbury said.

The share of "discouraged workers" is up from February, rising to 665,000 people from 405,000. 

Other measures

Other measures may be more useful than the unemployment rate in demonstrating the relative employment hardship of Americans, according to some experts.

The employment-population ratio, for example, measures the share of employment among the entire adult population — not just those looking for work. It therefore captures adults who were discouraged about the prospects of finding a job, for example.

The ratio is perhaps the best snapshot of labor demand, or the number of jobs available for people, Woodbury said.

That share recovered a bit in July compared with April — growing to 55.1% from 51.3%, which was a historic low in the post-World War II era.

This 90-year-old company embraced the coronavirus economy. Now it needs to hire employees
This company embraced the coronavirus economy and now it is hiring workers