Unemployment
Unemployment describes the situation, in which a part of the working age-population cannot find a job that they are able to do. Unemployment is an important indicator of economic health.
The unemployment rate is the main indicator of the labor market, which is defined as the number of unemployed individuals divided by the total number of people in the labor force.
There is also the federal-state unemployment insurance system that supports livelihoods while the unemployed are in search of better job opportunities.
Unemployment explained
Unemployment is considered to be the key macroeconomic indicator that can be used to analyze the current situation in the labor market. It demonstrates the ability of employees to receive steady work and contribute to economic growth. There is a correlation between the number of unemployed workers and economic production.
The official unemployment rate doesn’t count people who leave the labor force to receive some retirement benefits, who get higher education, and people with disabilities.
An economic distress. Unemployed persons are responsible for maintaining at least subsistence consumption. Countries with high unemployment rates are more likely to have lower output but it doesn’t mean that the need for basic consumption also decreases. A constantly high unemployment rate can be an indicator of financial distress in a country and may have social and political ramifications.
An overheated economy. Low unemployment is regarded as a positive sign as the economy reaches the limits of its capacity and of how much output it can produce. Besides, it is characterized by the earnings growth and high standard of living. Nevertheless, if the unemployment is lower than the natural rate of unemployment, the problem of an overheating economy may arise.
Categories of unemployment. Nowadays, economists primarily focus on two categories of unemployment, such as voluntary and involuntary. Voluntary unemployment is defined as a situation, in which a jobless person does not have the desire to work for a fixed wage, which is determined by the interaction of supply and demand in the market. By contrast, if a person becomes unemployed due to termination or redundancy, economists refer to the term “involuntary unemployment”.
Historical background
It was not until the 1940s that the U.S. government started to determine the unemployment rate. At the height of the Depression, 24.9% of the total workforce was unemployed, which is the highest rate estimated in U.S. history.
During the economic downturn from 2007 to 2009, the unemployment rate rose from 4.5 percent to 10 percent. In April 2020, when the nation battled the pandemic, the unemployment rate reached 14.8%. It was followed by a cumulative decline since June 2021.
Types of Unemployment
There are four main types of unemployment in an economy.
Frictional unemployment occurs naturally. Frictional unemployment is a short-term unemployment during a voluntary transition from one job to another. Examples of frictional unemployment include university graduates who are entering the workforce for the first time; people who go unemployed to find a better job. The average length of a job search is clocking in at 1-3 months.
This type of unemployment is the result of the information cost and changes in the labor market. Looking for a new job and matching vacancies to workers are not easy tasks to do and they are the real causes of frictional unemployment.
Cyclical unemployment occurs when there are periods of slow economic growth or economic contraction (for example, the mass plant closings lead to an increase in the number of unemployed). It is known that when there is a recession, cyclical unemployment increases. However, economists are studying and trying to explain this phenomenon to reduce the effects of cyclical unemployment and boost the economy during the downs of economic growth.
Structural unemployment is caused by changes in the structure of labor demand, when a structural discrepancy between the skills of the unemployed population and the jobs available on the market occurs. It comes about due to a large-scale restructuring of the economy, changes in the structure of demand for consumer goods and in production, and the elimination of obsolete industries and professions.
For instance, it can happen when switching from manual labor to automated or transferring manufacturing to another location. It can be too costly, challenging and time-intensive to retrain such displaced employees. Some of them even give up their search by dropping out of the workforce altogether.
Institutional unemployment results from changes in labor market institutions and factors affecting the supply and demand of labor.
Factors related to institutional unemployment are:
- Government attempts to influence the economy, such as high minimum wage laws, significant social welfare programs, etc.
- Phenomena in the labor market, such as discrimination in recruitment.
- Labor market institutions, such as high unionization rates.
Calculation of Unemployment rate
In the United States, the Bureau of Labor Statistics (BLS), a unit of the United States Department of Labor, provides a broad range of statistics to measure the unemployment rate. Every month, the BLS is tasked with collecting data on the unemployment rate and other parameters of the labor market, such as employment in industries, the average time worked by full-time employees and the average time it takes for an unemployed to find a job. The calculation of these indicators are based on the Current Population Survey (survey of about 60,000 households in the U.S.), conducted monthly by the unit.
Measuring the unemployment rate requires identifying who is jobless and who is in the labor force. The standard unemployment rate, known as U-3, is the one most often cited. But it should be mentioned that the U-3 measure does not include people who dropped out of the workforce altogether.
