Unemployment is a key indicator that economists use to gauge the health of an economy. It’s calculated by dividing the number of jobless people by the total labor force. The official unemployment rate—called the U-3 rate—is based on monthly surveys of households by the Bureau of Labor Statistics. The survey covers people who are either employed or actively looking for work, which excludes those who are incarcerated or on social welfare programs. It also doesn’t include retirees or those who are working part time for economic reasons.

A lower unemployment rate is generally considered to be a good thing, but there is a point at which it can have negative effects. For example, workers who are out of work for a long period of time can lose their purchasing power, which can cause other businesses to cut back on hiring. And if enough people stop looking for work, the economy can slip into a recession.

Other ways to measure unemployment exist, including the more comprehensive U-6 rate, which includes those who are jobless for 15 weeks or more and those who have given up searching because they think there are no jobs available. The JOLTS data, which is more up to date than the BLS estimates, provides an even more granular picture of the labor market.

Although the unemployment rate can give us a sense of how healthy the labor market is, it doesn’t fully capture the true picture of how much slack there is in the market. For example, people may be out of work for a variety of reasons, such as having to care for family members or being disabled. Studies have shown that long periods of unemployment can negatively affect an individual’s physical health, in part because they don’t have access to medical insurance.