The term unemployment refers to a situation where a person is actively searching for employment but is unable to find work. Unemployment is considered a key measure of the health of an economy. The most frequently used measure of unemployment is the unemployment rate, calculated by dividing the number of unemployed people by the number of people in the labor force.
Key Takeaways
- Unemployment occurs when workers who want to work are unable to find jobs.
- High rates of unemployment signal economic distress, while extremely low rates may indicate an overheated economy.
- Unemployment can be classified as frictional, cyclical, structural, or institutional.
- Unemployment data is collected and published by government agencies in various ways.
- Many governments offer unemployed individuals support through unemployment insurance, provided they meet certain requirements.
Defining Unemployment
Unemployment is a key economic indicator because it signals the ability (or inability) of workers to obtain gainful work and contribute to the productive output of the economy. More unemployed workers mean less total economic production.
The definition of unemployment excludes those who leave the workforce for reasons such as retirement, higher education, and disability.
A Sign of Economic Distress
Unemployed workers must maintain at least subsistence consumption during their period of unemployment. Therefore, an economy with high unemployment has lower output without a proportional decline in the need for basic consumption. High, persistent unemployment can signal serious economic distress and can even lead to social and political upheaval.
A Sign of an Overheating Economy
A low unemployment rate indicates that the economy is likely producing near its full capacity, maximizing output, driving wage growth, and raising living standards over time. However, extremely low unemployment can also signal an overheating economy, inflationary pressures, and tight conditions for businesses needing additional workers.
Categories of Unemployment
Economists divide unemployment into different categories, with two broad classifications being voluntary and involuntary unemployment. Voluntary unemployment occurs when a person leaves their job willingly in search of other employment. Involuntary unemployment occurs when a person is fired or laid off and must look for another job.
Types of Unemployment
Voluntary and involuntary unemployment can be broken down into four types:
Frictional Unemployment
Frictional unemployment is typically short-lived and occurs when people voluntarily change jobs. It results from the time and effort taken to match the right workers to the right jobs, including activities such as job searching and recruitment.
Cyclical Unemployment
Cyclical unemployment varies with economic upturns and downturns. It increases during recessions and decreases during periods of economic growth. Alleviating cyclical unemployment during recessions is crucial for economic policy.
Structural Unemployment
Structural unemployment results from technological changes that reshape the economy and displace workers from jobs that are no longer needed. This can result in extended unemployment or even workers leaving the labor force entirely.
Institutional Unemployment
Institutional unemployment stems from long-term or permanent institutional factors such as government policies, labor market phenomena, and labor market institutions. This can include high minimum wage laws, generous social benefits, and high unionization rates.
Measuring Unemployment
The U.S. government uses surveys, census counts, and the number of unemployment insurance claims to track unemployment. For example, the Current Population Survey (CPS), conducted on behalf of the Bureau of Labor Statistics (BLS), is the primary method used. This survey has been conducted monthly since 1940.
The BLS commonly cites the U-3 unemployment rate as the official unemployment rate, which does not include discouraged unemployed workers who have stopped looking for work. Other categories of unemployment include discouragement workers and part-time or underemployed workers seeking full-time employment but unable to obtain it.
Unemployment Throughout History
The U.S. began systematically tracking unemployment in the 1940s. The highest rate of unemployment to date occurred during the Great Depression, reaching 24.9% in 1933. Other significant peaks occurred in 1982 and 2009 during the Great Recession. Amid the COVID-19 pandemic, unemployment again surged, reaching 14.8% in April 2020.
Causes of Unemployment
Reasons for unemployment include economic recessions, technological improvements, job outsourcing, and voluntary job transitions.
Main Types of Unemployment
Economists classify unemployment into three main types: frictional, structural, and cyclical. Frictional unemployment occurs naturally with voluntary job transitions. Structural unemployment arises from permanent changes in the economy impacting job availability. Cyclical unemployment results from business cycle changes.
Strict Definition of Unemployment
According to the U.S. Bureau of Labor Statistics, unemployed people do not have jobs, have actively looked for work in the past four weeks, and are currently available for work.
The Bottom Line
Unemployment occurs when individuals who are actively seeking employment cannot find work. It is a crucial indicator of economic health. A low unemployment rate indicates a strong economy, whereas a high unemployment rate suggests economic weakness.
Related Terms: frictional unemployment, cyclical unemployment, structural unemployment, institutional unemployment.
References
- U.S. Bureau of Labor Statistics. “How the Government Measures Unemployment”.
- U.S. Bureau of Labor Statistics. “Concepts and Definitions (CPS)”.
- U.S. Bureau of Labor Statistics. “Alternative Measures of Labor Underutilization for States, 2023 Annual Averages”.
- U.S. Bureau of Labor Statistics. “Table A-15. Alternative Measures of Labor Underutilization”.
- U.S. Census Bureau. “Chapter D, Labor: Labor Force (Series D 1-682)”. Page 135.
- Federal Reserve Bank of St. Louis, FRED. “Unemployment Rate”.
