2.3 — Unemployment

The unemployment rate measures the percentage of people in the labour force who want a job but are not working.

$$\text{Unemployment Rate}=\frac{\text{\# Unemployed}}{\text{\# in Labor Force}}\times 100$$

Who Is in the Labor Force?

To be counted in the labor force, an individual must:

• Be above 16 years old.
• Be able and willing to work.
• Not be institutionalized (e.g., in jail or long-term care).
• Not be in the military, full-time education, or retired.

Types of Unemployment

1. Frictional Unemployment:
   • Temporary unemployment or being between jobs.
   • Example: A college graduate looking for their first job.
2. Structural Unemployment:
   • Occurs when workers’ skills become obsolete or no longer meet market demands.
   • Example: Automation replacing factory jobs.
   • Includes technological unemployment (caused by advancements in technology).
3. Cyclical Unemployment:
   • Unemployment caused by a downturn in the business cycle (recession).
   • Example: Layoffs during an economic contraction.
4. Seasonal Unemployment:
   • Occurs due to the time of year or nature of a job.
   • Example: Holiday retail workers or agricultural jobs.

Natural Rate of Unemployment (NRU)

The Natural Rate of Unemployment is the sum of frictional and structural unemployment, representing the “normal” level of unemployment in a healthy economy. Full Employment is when the economy is at NRU, cyclical unemployment is zero.

Labor Force Participation Rate

The percentage of the working-age population in the labor force:

$$\text{Labor Force Participation Rate}=\frac{\text{\# in Labor Force}}{\text{\# of Working-Age Population}}\times 100$$

Hidden Problems with Unemployment Rate

1. Discouraged Workers:
   • People who stop looking for work are no longer counted as unemployed, which can understate the unemployment rate.
2. Underemployment:
   • Workers employed part-time or below their skill level are considered employed, which can overstate economic health.
3. Inequality:
   • The unemployment rate does not show disparities by age, race, or region.

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Unemployment is essential to long run equilibrium in the economy and is heavily discussed in Unit 3 (3.3 — Short-Run Aggregate Supply (SRAS), 3.4 — Long-Run Aggregate Supply (LRAS), 3.5 — Equilibrium in Aggregate Supply and Demand, 3.9 — Automatic Stabilizers)