ECON chapter 7

Unemployment

occurs when people who are willing and able to work cannot find jobs

Unemployment Rate

the main measure of unemployment in the economy

Unemployment Example

during COVID-19, many businesses closed, leading to high unemployment rates worldwide

Frictional Unemployment

short-term unemployment while people search for new jobs or transition between jobs

Frictional Example

a college graduate looking for their first job

Structural Unemployment

long-term mismatch between worker skills and employer needs, often due to technological changes or industry decline

Structural Example

factory workers replaced by automation in manufacturing

Cyclical Unemployment

caused by economic downturns or recessions, rises when demand for goods/services falls

Cyclical Example

job losses during the 2008 financial crisis

Seasonal Unemployment

occurs due to seasonal patterns in industries like agriculture or tourism

Seasonal Example

ski instructors in summer or retail workers post-holidays

Labor Force

the sum of employed + unemployed individuals actively seeking work

Not in Labor Force

retirees, students, homemakers not seeking work

Unemployment Rate Formula

(Unemployed / Labor Force) × 100

Participation Rate

(Labor Force / Working Age Population) × 100

Labor Force Example

U.S. labor force ~160 million; unemployed ~8 million

Natural Rate of Unemployment (NRU)

unemployment that exists even in a healthy economy, includes frictional + structural unemployment

Full Employment

economy operating at NRU (cyclical unemployment = 0)

NRU Example

even in strong economies like pre-2020 U.S., unemployment never hits 0% due to job turnover and skill mismatch

High Cyclical Unemployment

signals a recession

Low Unemployment

may indicate economic boom, can sometimes lead to inflation pressures

Okun’s Law

relationship between unemployment and GDP; if unemployment > NRU, GDP < potential

Uncounted Unemployed

not all unemployed are counted (e.g., discouraged workers)

Long-Term Unemployment

can reduce skills, affecting future employability

Policy Tools

job training, unemployment benefits, economic stimulus aim to reduce cyclical unemployment

Frictional Example 2

new grads searching for jobs

Structural Example 2

coal miners losing jobs as renewable energy grows

Cyclical Example 2

COVID-19 shutdowns → restaurants and hotels layoffs

Seasonal Example 2

holiday retail hiring spikes, then drops after New Year

Big Picture: Unemployment

natural in a healthy economy, but too high is an economic concern

Big Picture: Measurement

measure unemployment carefully using labor force data

Big Picture: Policy

policies can target cyclical vs. structural unemployment differently

Big Picture: Full Employment

does not mean zero unemployment; equals the natural rate