What is unemployment?
Unemployment occurs when someone who is actively looking for a job cannot find one. The unemployment rate is often used as an indicator of economic health. The most common measure of unemployment is the unemployment rate. This is the number of unemployed divided by the number of workers.
Key Point
- When workers who want to work cannot find a job, they lose their jobs, thereby reducing their economic production, but they still have to survive.
- High unemployment is a sign of financial hardship, while extremely low unemployment can be a sign of financial overheating.
- Unemployment can be divided into frictional, cyclical, structural, or institutional unemployment.
- Unemployment data is collected and published by government agencies in a variety of ways.
Understand unemployment
Unemployment is an important economic indicator because it shows that workers have the ability (or helplessness) to easily get paid jobs to promote productive economic production. More unemployment means less total economic production is done than it would otherwise be.
Unlike idle capital, the unemployed must at least maintain a livelihood during the period of unemployment. This means that an economy with a high unemployment rate has low production and basic consumer demand has not declined proportionally. High and sustained unemployment can foretell serious financial difficulties and even lead to social and political instability.
Conversely, low unemployment means that the economy is likely to approach full production, maximize production, drive wage growth and improve living standards over time. However, extremely low unemployment can also be a sign of economic overheating, inflationary pressure, and austerity for companies that need additional workers.
Although the definition of unemployment is clear, economists classify unemployment into many different categories. The two main categories of unemployment are voluntary unemployment and involuntary unemployment. If unemployment is voluntary, it means that one person voluntarily quits the job to find another.
If it is involuntary, it means that the person has been dismissed or dismissed and now has to find another job. For example, the 2020 coronavirus pandemic affecting the United States and the world has led to massive involuntary unemployment.
Types of unemployment
If you dig deeper, you can divide unemployment (voluntary and involuntary) into four types.
Unemployment due to friction
Friction unemployment occurs because people voluntarily change jobs in the economy. After a person leaves the company, he naturally needs time to find another job. Similarly, graduates who have just entered the labor market will exacerbate unemployment due to friction.
This type of unemployment is usually short-lived. From an economic point of view, this is the least problematic. Friction unemployment is a natural consequence of the fact that market processes are time-consuming and information costs are high.
Finding new jobs, recruiting new workers, and matching the right workers with the right jobs all take time and effort and lead to frictional unemployment.
Cyclic unemployment
Circular unemployment is a change in the number of unemployed people in the process of economic improvement and recession, such as the number of unemployed people due to fluctuations in crude oil prices. The unemployment rate rises during a recession and falls during a period of economic growth.
Preventing and mitigating cyclical unemployment during a recession is one of the main reasons for economic research, and it is also the purpose of the government to use various policy tools to stimulate the economy when the business cycle is depressed.
Structural unemployment
Structural unemployment is created by technological changes in the economic structure of the labor market. Technological changes such as the replacement of carriages with automobiles and automation of manufacturing have resulted in the unemployment of workers who have lost their jobs from unnecessary jobs.
Retraining these workers can be difficult, costly, and time-consuming, and dismissed workers often lose their jobs for extended periods or leave the workforce altogether.
Institutional unemployment
Institutional unemployment is unemployment caused by long-term or permanent institutional factors and incentives in the economy. High minimum wages, generous social welfare programs, government policies such as restrictive vocational license laws, labor market phenomena such as efficient wages and discriminatory recruitment, labor market systems such as high union rates, all can lead to institutional unemployment.
How to measure the unemployment rate
How is unemployment defined?
In the United States, the government uses several surveys, censuses, and unemployment insurance claims to track unemployment.
The US Census Bureau, on behalf of the Bureau of Labor Statistics (BLS), is conducting a monthly survey called the current Census (CPS) to reach preliminary estimates of the US unemployment rate. The survey has been conducted monthly since 1940. The sample contains approximately 60,000 eligible households.
That’s about 110,000 people a month. In the survey, a quarter of the sample households change each month, so there are no household representatives for more than four consecutive months to enhance the reliability of the estimates.
There are many changes in the unemployment rate, and there are different definitions of who is “unemployed” and who is “labor.” BLS usually cites the “U-3” unemployment rate (defined as the percentage of total unemployed in the private workforce) as the official unemployment rate.
However, this definition of unemployment does not include unemployed people who are discouraged by the difficult labor market and are no longer looking for a job. Other types of unemployment include discouraged workers and part-time or underemployed workers who want to work full-time but cannot do so for financial reasons.
History of unemployment
The US government has been tracking unemployment since the 1940s, but the highest unemployment rate to date occurred during the Great Depression of 1933 when unemployment rose to 24.9%. From 1931 to 1940, the unemployment rate remained above 14%, then dropped to single digits and continued until it exceeded 10% in 1982.
During the Great Depression, the unemployment rate rose to 10% again in 2009. The impact of the 2020 coronavirus pandemic on unemployment is still unknown.
In March, the Federal Reserve Bank of St. Louis predicted that unemployment could rise to 32.1%, seven points higher than its peak during the Great Depression.
FAQ
What is the reason for unemployment?
There are many reasons for unemployment. Karl Marx initially saw unemployment as the internet symptomatology of the capitalist system. He believed that after being notified, the employer needed a large number of unemployed people (“labor reserves”) to work hard for a small wage.
What is the type of unemployment?
Today’s economists point to two main types of unemployment: frictional unemployment and structural unemployment. Friction unemployment is the result of changes in voluntary employment within the economy.
Friction unemployment occurs naturally, even in an economy that grows and stabilizes as workers change jobs. This type of unemployment is usually temporary and can be periodic.
Structural unemployment can cause permanent damage as fundamental and permanent changes in the economic structure alienate groups of workers. Structural unemployment can be caused by technological changes, lack of related skills, or job changes in other countries.
What can you do to mitigate unemployment?
High levels of frictional or cyclical unemployment can be ameliorated by fiscal or financial stimulus measures that encourage employers to hire more workers and promote growth. However, structural unemployment requires longer-term solutions than simply increasing cash in the economy, such as skill training and education, and strengthening welfare measures to provide social safety nets.
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