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Unemployment

In economics, unemployment is the amount of labor that is available and seeking work that is not being used.

Expanded Definition

Just because a person does not work, it doesn't mean that the person is "unemployed." People 16 years and older but still in school and retirees are examples of people who are not unemployed.

People become unemployed because:

  • They lose their job and start looking for another one. This group usually makes up the largest component of the unemployed.
  • They leave their job and look for another one. This group usually makes up the smallest component.
  • They enter (for the first time) or reenter the labor force, looking for a job. This group is somewhere in the middle.

They end their unemployment by:

  • Finding a job, either a new one or being recalled to a previous one.
  • Leave the labor force.

In order to be unemployed from an economic (and government) point of view, you must be in the working-age population (16 years and older), in the labor force (e.g. not retired or simply given up looking for work), and satisfy one of the three following criteria.

  • Not working, but have made specific efforts to find work in the past four weeks.
  • Laid off and waiting to be called back.
  • Starting a new job within 30 days, but not working yet.

Types of Unemployment

There are three basic types of unemployment: frictional, structural, and cyclical.

Frictional

This is unemployment that comes about from the normal turnover in labor. People enter and leave the labor force, new jobs are created, old jobs are destroyed. This is a permanent component of unemployment and is considered healthy. People who are looking for a new job are part of this group.

The amount of frictional unemployment is partly determined by the amount of unemployment compensation. Generous benefits tend to keep people in this category longer because there is less incentive for them to look for a job.

Structural

This is unemployment that comes about from changes in technology or international competition. When robots entered the car construction business, not as many people were needed to put the cars together, so they became unemployed due to a technology change. When labor is cheaper overseas and companies move production over there to take advantage of that, the people at home domestically become structurally unemployed.

This type of unemployment usually lasts longer than frictional because the people affected need to learn a new set of skills and find a new job. It can be especially painful, as well, as all of sudden, people are not wanted any more. It can also cause political problems.

Cyclical

This is unemployment that comes about from the cycles of the economy. When the economy is in a recession, demand for goods goes down, so demand for labor to make those goods also goes down and people are laid off. When the economy improves and enters a growth phase, then demand for goods and labor picks up and people get rehired.

When there is no cyclical unemployment, then there is full employment.

Unemployment Rate

This is simply the number of people unemployed divided by the labor force, expressed as a percentage. Remember that the labor force are those people who are both employed and unemployed.

Labor force participation rate

This is the percentage of people in the labor force out of the total working-age population. In the U.S., this was on an upward trend from about 59% during the early 1960s to as high as 67% in 2000, but it has fallen some since then. This increase is primarily because of women entering the labor force during that time.

Employment-to-population ratio

This is the percentage of people employed out of the entire working-age population. This, also, has grown in the U.S. during the last 40 years of the 20th century, from about 55% in the early 1960s to about 64% in 2000. Again, this is primarily because of women entering the workforce.


Unemployment and GDP

The real GDP fluctuates about the potential GDP of an economy. The potential GDP is what the economy produces when there is full employment (i.e. no cyclical unemployment). The fluctuation of GDP about the potential GDP arises because of fluctuations around the natural rate of unemployment.

When real GDP = potential GDP, then the unemployment rate = the natural rate of unemployment.

When real GDP is greater than potential GPD, then the unemployment rate is less than the natural rate of unemployment.

Vice versa for when real GDP is less than potential GDP.

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