Types and Impacts of Unemployment in the Economy

Frictional Unemployment

Occurs when someone new enters the labor market or is "in between jobs" but has employable skills and will likely gain employment in a short period of time.

Structural Unemployment

Caused by fundamental, underlying changes in the economy that can create job loss for skills that are no longer in demand (improvements in technology; globalization of industry).

Seasonal Unemployment

Emerges as a periodic and predictable job loss that follows the character.

Cyclical Unemployment

Jobs that are gained and lost as the business cycle improves and worsens when the economy is expanding or contracting.

Unemployment Rate

Ratio of unemployed to the total labor force.

Unemployment Rate Formula

Unemployment Rate = (Unemployment population/Labor force) x 100.

Shortcomings of Unemployment Rate

Data does not include discouraged workers, a worker who has been unemployed for a period of time and has given up the search for a new job. They are NOT in labor force.

Underemployment

UR counts a person working part-time as employed, even if that person is seeking full-time work.

Multiple Jobs in Unemployment Data

UR counts a person who has multiple jobs (maybe because they need additional money) the same as someone with one job.

Incarcerated Workers

Incarcerated workers are not included in employment statistics, even though prison labor is a multi-billion dollar industry.

Labor Force Participation Rate

Measures the percentage of the adult population in a country that is either employed or unemployed.

Labor Force Participation Rate Formula

LFPR = ((# of people employed and unemployed) / (Population)) x 100.

Natural Rate of Unemployment

Level of unemployment that prevails when an economy is producing at full-employment level.

Components of Natural Rate of Unemployment

NRU includes only frictional and structural unemployment.

True Full Employment

True full employment (unemployment = 0%) is undesirable because it requires a completely inflexible labor market in the long run.

NRU in the United States

The NRU in the United States is thought to be between 4 and 6%.

Circular Flow

Keeps track of the spending of consumers, sales of producers, business investment spending, government purchases, and a variety of other flows of money among different sectors of the economy.

Product Market

Where goods and services are bought and sold.

Factor Market

Where resources, especially capital and labor are bought and sold.

Simple Circular Flow

In a simple circular flow diagram we assume an economy only contains two groups: households and firms.

Business Cycle

Alteration between economic downturns and upturns in the macro economy.

Recession

The economy experiences occasional economic downturns known as recessions, periods in which output and employment are falling.

Trough

The lowest point of a recession is called a trough of a business cycle.

Expansion

The trough is followed by an economic upturn- a period in which output and employment are rising.

Peak

The highest point of an expansion, just before the economy turns down again.

Actual Output vs. Potential Output

The full-employment level of output represents an economy's potential output, the maximum level of output that could be produced using all available resources.

Output Gap

The difference between actual and potential output.

Market Economy

Actors of production are privately owned and the decisions of individual producers and consumers largely determine what, how, and for whom we produce.

Command Economy

The factors of production are publicly owned and a central authority makes production and consumption decisions.

Mixed Economy

Combines elements of market and command economies.

Production Possibilities Curve

Linear production possibilities curve (PPC) is a straight line that occurs when opportunity costs are constant.

Absolute Advantage

A country has an absolute advantage in producing a good/service if the country can produce more output per worker than other countries.

Comparative Advantage

A country has a comparative advantage in producing a good/service if its opportunity cost of producing the good/service is lower than other countries.

Terms of Trade

The rate at which one's products exchange for those of another.

Supply and Demand

Markets are where buyers and sellers interact.

Demand Curve

Shows relationship between quantity demanded (QD) and price.

Law of Demand

Ceteris paribus, a higher price for a good or service decreases the quantity demanded of that good or service.

Equilibrium Price

Price that balances supply and demand.

Equilibrium Quantity

The quantity that balances supply and demand.

Nominal GDP

Measures the value of a nation's output expressed in the value of the prices charged for that year.

Real GDP

Measures actual value of nation's output expressed in the value of prices charged at base year.

GDP Deflator

GDP Deflator = (Nominal GDP/Real GDP) x 100.