3.3 Unemployment

Unemployment

Situation where people are willing and able to work, and actively seeking employment but are unable to find work

Unemployment Rate Formula

Total Unemployed/Total Labor Force *100

Labor Force

People of working age who are seeking work or are currently working

Cyclical Unemployment

Unemployment due to a lack of demand for goods/services in the economy (demand deficient)

Unemployment due to the fluctuations in the business cycle

Structural Unemployment

Unemployment due to a mismatch of skills demanded and supplied

Frictional Unemployment

Unemployment due to workers in between jobs

Seasonal Unemployment

Unemployment due to the demand for labor in certain industries changing on a seasonal basis

Underemployment

Refers to people of working age who have part time jobs/jobs that don’t make full use of their skills

NRU

Natural Rate of Unemployment

• At Ypot, UR=NRU

• All unemployment except cyclical combined

Costs of Unemployment BIC(GDP)

• Crime

  • Social cost, quality of life of citizens ⬇

• Loss of GDP

  • Inefficient allocation of resources

  • Consumers spend less, C component of GDP ⬇

• Government Burdens

  • Less spending by consumers

  • Less income received by households

  • Therefore consumption tax + income tax revenue ⬇

  • Therefore government has to spend more budget on unemployment benefits

• Increase in Income Inequality

  • Typically low-income households are affected the greatest by unemployment

Limitations of UR Figure (UP)

1. Does not include Underemployment/Discouraged Workers/Underground Economy

   • Still an inefficient allocation of resources

   • Hence UR tends to be underreported

2. Doesn’t account for different population groups

   • Women UR > Men UR

   • UR differs for different races, genders, ages etc.

Minimum Wage Labor Market