Low Unemployment

To be unemployed, one must be actively seeking, but unable to find employment.

The unemployment rate is the number of people who are unemployed over the total labor force. The labor force is those who are employed and unemployed. If someone is choosing not to work or outside the age range, they are not a part of the labor force.

Hidden Unemployment

Discouraged workers - those who have been unemployed for a long time and have given up the search for work.

Those who are working part-time or temporary contracts, although they would like to be working full-time or on a permanent contract

Those who are working in jobs for which they are overqualified

These people are not actually considered unemployed, because they are either not looking for a job or they already have a job.

Problems with Measuring Unemployment

Unemployment accounts for an average of a country, although this might not tell the whole story. For example:

  • Geographic disparities
  • Age disparities
    • Unemployment rates are higher in the under 25 group than the national average
  • Ethnic disparities
  • Gender disparities

Consequences of Unemployment

  • Individual
    • Decreased household income and purchasing power
    • Increased stress and illness
  • Social
    • Pressure on wages to increase at a slower rate than the increase in productivity
    • Increased poverty, crime, homelessness, gang activity
  • Economic
    • Lower level of aggregate demand
    • Under-utilization of the nation’s resources
    • Brain-drain (smart people go to other countries to find better opportunities)
    • A turn towards protectionism and isolationist policies
    • Increased budget deficits (less taxes coming in, more money spent on social welfare programs, money spent solving problems created by unemployment)
    • Opportunity cost of increased spending on welfare programs

AD curve

The AD curve plots the demand for workers against the average wage rate. At a lower real wage level, producers are more willing to take on more labor. At a higher wage level, more people are willing to work.

Frictional Unemployment

Short-term unemployment experienced by people moving between jobs or into the labor market. This is not necessarily a bad thing because the assumption is that people will find another job. The government thinks that this can be reduced by reducing unemployment benefits, as it will motivate people to find a job. Additionally, improving the flow of information from potential employers to people looking for jobs can reduce frictional unemployment.

Seasonal Unemployment

Unemployment due to seasonal changes in employment or labor supply - construction, tourism

This can be reduced by encouraging people to take a different job in the off-season - additionally reduced unemployment benefits and better flow of information

Structural Unemployment

This is the worst type of unemployment, as it results in long-term unemployment. It occurs from a permanent fall in the demand for a particular type of labor, or a change in the institutional framework of the economy.

  • Lack in skills as a result of a job loss (GM workers can’t work at Taco Bell)
  • Technological changes
  • Globalization
  • Changes in consumer tastes
  • Laws governing the labor market (minimum wage legislation)
  • Laws governing trade unions (if it is illegal for firms to hire non-union workers, the union is contributing to unemployment)

This is best dealt with by supply-side policies - education, job training, apprenticeships

Cyclical Unemployment

This is unemployment associated with the downturns (recessions) of an economy. As the economy slows, AD falls, and therefore demand for labor falls. This can be solved by increasing aggregate demand.

Natural Rate of Unemployment

This is the combination of frictional, structural, and seasonal unemployment, since they will always exist. Cyclical unemployment is the real problem.