Unemployment Rate: 6 Economic Indicators Small Businesses NEED to Watch, Part 2

Unemployment Rate: 6 Economic Indicators Small Businesses NEED to Watch, Part 2

ATTENTION SMALL BUSINESS OWNERS! 

Welcome back to our discussion of economic trends you NEED (yes, seriously) to be watching as a small business owner.

We’ve hit the second installment of this series: Unemployment rate!

Let’s go over what this economic factor means for your business and how to anticipate this labor market change.

(P.S. If you haven’t yet read the first of this series about Gross Domestic Product (GDP), I suggest starting there and coming back to this one.)

2. Unemployment Rate

As you probably know, the unemployment rate is the percentage of the population that is jobless, available for work, and actively seeking employment. 

This indicator is measured in numbers of unemployed people as a percentage of the labor force, which is the total number of unemployed people + those in employment.

The formula used to calculate the current unemployment rate is this: (Unemployed ÷ Labor Force) x 100, adjusted seasonally.

EMPLOYED

In the Current Population Survey (CPS), people are classified as employed if they meet ANY of the following criteria:

1. Worked at least 1 hour as a paid employee
2. Worked at least 1 hour in their own business or profession
3. Were temporarily absent from their job, whether or not it was PTO
4. Worked without pay for a minimum of 15 hours in a family-owned business

UNEMPLOYED

Conversely, people are classified as unemployed if they meet ALL of the following criteria during the employment survey reference week:

1. Were available during the survey reference week (excluding temporary illness)
2. Were not employed (see above)
3. Made at least one active effort to find a job during the 4-week period before OR were temporarily laid off and expecting to be recalled to their job

(For detailed specifics on the qualifications of unemployment, click here.)

So why does this matter to you, a small business owner?

It’s a key indicator of the labor market’s health and, by extension, the overall economy’s condition; it also impacts consumer confidence and spending.

High unemployment can reduce demand for products or services, while low unemployment suggests a stronger economy and potentially greater consumer spending.

EXAMPLES

Consumer-Focused Businesses might see a direct impact from changes in the unemployment rate. High unemployment can lead to decreased consumer spending, affecting sales and potentially prompting these businesses to adjust inventory and marketing strategies. 

Those offering business-to-business services (B2B) might experience some delayed impacts from changing unemployment rates. For instance, if rising unemployment rates lead to budget cuts in certain businesses sectors, the demand for B2B services could definitely decrease in those markets. 

Seasonal businesses need to be particularly attentive to these trends, as higher unemployment can severely curtail consumers’ discretionary spending and affect businesses that thrive on ‘non-essential’ goods and services.

So with all of this in mind, how do you adapt to these fluctuations?

Here are my suggestions: 

• Market Research: Stay on top of market research to understand how broader economic trends like changes in the unemployment rate affect your industry and customer base. 
• Diversify Offerings: Consider diversifying your products or services to cater to different market segments or to create more stable revenue streams.
• Cost Management: Be proactive in managing costs, particularly during times of rising unemployment, to maintain financial health. Forecasting is your best friend.
• Employee Engagement: Engage with your employees to boost morale. This is especially important during economic downturns (or pandemics!) when teams might be doing more with less. 

Governments may implement policies and programs to address unemployment and support job creation, such as workforce development initiatives, tax incentives for businesses, and unemployment insurance benefits for workers.

These policies can (and should) influence your hiring decisions and labor costs, so keep an eye out in the news for any updates on unemployment rates.

In conclusion, monitoring unemployment rates goes beyond simply tracking economic data—it involves understanding the broader implications for policy, business planning, and strategic decision-making.

By recognizing the interconnectedness between unemployment trends, policy responses, and business outcomes, small business owners can adapt to changing circumstances, capitalize on opportunities, and navigate challenges more effectively.

Ultimately, staying informed and proactive will empower YOU, the small business owner, to thrive in dynamic and evolving economic landscapes.

Author, Virtual CFO, and Finance Coach
“Your First CFO: The Accounting Cure for Small Business Owners” on AMAZON