While a low unemployment rate is almost always better than a high unemployment rate, a low unemployment rate does not necessarily mean that the labor market is in good shape. This is because of the way that unemployment is defined. Because of the way that we define unemployment, people can be in unfavorable economic situations without being unemployed. Let us look at two ways in which this could be so.
First, people could be working, but in situations where they are underemployed. Someone might wish to work full time, but only be able to get a part-time job. Someone might be working two low-wage jobs just to get by. A person with a college degree might be working in a job that requires no more than a high school diploma and for which they are overqualified. All of these people are in bad situations and yet they are simply counted as “employed.”
Second, it is possible to not be working and still not count as unemployed. One group of people like this is called discouraged workers. These people do not have jobs, but they have given up and have stopped trying to find jobs. They keep failing to find a job so they stop looking. You have to be looking for a job to count among the unemployed, so a discouraged worker is not unemployed. That person is simply not part of the labor force.
When there are large numbers of discouraged workers and/or people who are underemployed, the unemployment rate can be low even though the labor market really is not in good shape.
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