Types of Unemployment
-We generally classify unemployment into one of three categories: frictional, structural, and cyclical.
–Frictional Unemployment: Works are “between jobs.” Might voluntarily be moving from one job to the next. Might have been fired. Might have been laid off due to seasonal demand, etc.
–Structural Unemployment: Caused by a change in demand for labor. Could be due to a change in demand for skills. Could be caused by a change in geography as firms move locations.
-The difference between frictional and structural unemployment isn’t always clear cut. The key difference is that frictionally unemployed workers have marketable skills and either live in areas where jobs exists or are able to move to areas where they do. Structurally unemployed workers find it hard to obtain new jobs without retraining, gaining additional education, or relocating.
–Cyclical Unemployment: Caused by a decline in total spending. Follows the business cycle.
-It is impossible to have zero frictional unemployment and structural unemployment because firms are always changing and people are always quitting their jobs or getting fired. So when we say that the economy is full employed, we don’t mean that the unemployment rate is at 0%, we mean that there is zero cyclical unemployment.
-Full employment does not equal 100% employment.
-When an economy is operating at its full employment rate (or natural rate of unemployment) it is producing its potential output. [break]
Calculating the Unemployment Rate
-Employment Rate =
-Unemployment Rate =
-Alternatively, Unemployment Rate = 1 – Employment Rate
-Labor Force = Unemployed + Employed
-According to the Bureau of Labor Statistics, you are not considered part of the labor force if you are not looking for work, if you’re under 16, or if you’re institutionalized.
-A discouraged worker is someone who used to be employed, became unemployed, and then became discouraged from looking for work after not being able to find a job for a while. Once they are no longer looking for work, they are no longer considered unemployed. [break]
Total Population: 250 million
Number of People Not in the Labor Force: 150 million
Number of People Employed: 130 million
Number of People Unemployed: 20 million
Using the above information, calculate the labor force and the unemployment rate.
Labor Force = Employed + Unemployed = 130 million + 20 million = 150 million
(Can also take Total Population – Number of people Not in the Labor Force)
Unemployment Rate = = 13.33% [break]
Problems with This Measure of Unemployment
-A few problems arise with the way the Bureau of Labor Statistics measures unemployment.
-It is potentially understated because the statistic excludes people who hold part time jobs.
-It is potentially understated because it excludes workers who are under 16 years of age.
-Changes in the unemployment rate can come about without any actual changes in the total number of jobs. For example, suppose that this month there is currently a labor force of 100,000, with 95,000 people employed (5% unemployment rate). 18,750 discouraged workers hear about this low unemployment rate and become inspired to look for work again. Suppose the total number of jobs in the economy stays fixed at 95,000. Then the next month, the reported unemployment rate will jump up to 20% . While the absolute number of jobs have not changed, this sudden increase in the unemployment rate makes the economy look worse than it really is, which can cause people to panic.
-It is also easy to imagine a scenario where the number the total number of jobs does not change, but the number of people who are actually looking for work, decrease, causing the unemployment rate to drop, making the economy look better than it really is.
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