11.2 Types and measurement of unemployment
5 min read•july 30, 2024
Unemployment comes in various forms, each with unique causes and implications. From short-term to long-lasting structural issues, understanding these types helps gauge labor market health. Measuring unemployment isn't just about one number—it involves multiple metrics and calculations.
The , while widely used, has limitations. It doesn't capture or distinguish between part-time and full-time jobs. Alternative measures like the U-6 rate provide a more comprehensive view of labor underutilization, painting a fuller picture of the job market's true state.
Types of unemployment
Frictional unemployment
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- Occurs when workers are in between jobs or are searching for new jobs that better match their skills and preferences
- Short-term and considered a normal part of a dynamic labor market
- Examples include workers who quit their jobs to look for better opportunities or those who are entering the labor force for the first time (recent graduates)
Structural unemployment
- Happens when there is a mismatch between the skills and location of the unemployed and the requirements and location of available jobs
- Longer-term and often results from changes in technology or the structure of the economy
- Examples include workers in the manufacturing sector who lose their jobs due to automation or those in rural areas where job opportunities are limited
Cyclical unemployment
- Caused by a decline in aggregate demand during the contractionary phase of the business cycle
- Leads to a general decline in hiring across industries
- Examples include layoffs in the construction and automotive industries during a recession
Seasonal unemployment
- Results from regular and predictable changes in labor demand across the year in specific industries
- Occurs in sectors such as agriculture (harvesting seasons), tourism (peak travel periods), and retail (holiday shopping)
- Examples include ski resort employees who are laid off during the summer months or holiday retail workers who are let go after the busy shopping season
Calculating the unemployment rate
Unemployment rate formula
- The unemployment rate is the percentage of the labor force that is unemployed
- Calculated by dividing the number of unemployed individuals by the total labor force and multiplying by 100
- Formula:
Labor force participation rate
- The percentage of the working-age population that is either employed or actively seeking employment
- Calculated by dividing the labor force by the total working-age population and multiplying by 100
- Formula: \text{[Labor Force Participation Rate](https://www.fiveableKeyTerm:Labor_Force_Participation_Rate)} = \frac{\text{Labor Force}}{\text{Working-Age Population}} \times 100
- Example: If a country has a working-age population of 200 million and a labor force of 150 million, the labor force participation rate would be 75%
Employment-to-population ratio
- The percentage of the working-age population that is employed
- Calculated by dividing the number of employed individuals by the total working-age population and multiplying by 100
- Formula: \text{[Employment-to-Population Ratio](https://www.fiveableKeyTerm:employment-to-population_ratio)} = \frac{\text{Number of Employed}}{\text{Working-Age Population}} \times 100
- Example: If a country has a working-age population of 200 million and 140 million employed individuals, the employment-to-population ratio would be 70%
Limitations of the unemployment rate
Discouraged workers
- The unemployment rate does not account for discouraged workers who have given up looking for work and are no longer considered part of the labor force
- This can underestimate the true level of joblessness
- Example: If a significant number of people become discouraged and stop seeking employment, the unemployment rate may decrease even though the labor market has not improved
Part-time and full-time employment
- The unemployment rate does not distinguish between part-time and full-time employment
- A high proportion of part-time workers may indicate underemployment
- Example: If many workers are involuntarily working part-time due to a lack of full-time opportunities, the unemployment rate may not fully capture the extent of labor market weakness
Changes in labor force participation
- The unemployment rate can be influenced by changes in the labor force participation rate
- A decrease in the participation rate can lower the unemployment rate even if job growth is weak
- Example: If a large number of people retire or leave the labor force for other reasons (returning to school), the unemployment rate may fall without an actual improvement in labor market conditions
Strengths of the unemployment rate
- Provides a clear and widely understood indicator of labor market conditions that can be compared over time and across countries
- A timely measure, as it is updated monthly, allowing for tracking of labor market trends
- Example: Policymakers and economists use the unemployment rate to gauge the health of the economy and make decisions about monetary and fiscal policy
Alternative measures of underutilization
U-6 unemployment rate
- A broader measure of labor underutilization that includes the officially unemployed, discouraged workers, , and those working part-time for economic reasons
- Provides a more comprehensive picture of the underutilization of labor resources and the potential slack in the labor market
- Example: During a recession, the U-6 rate may be significantly higher than the official unemployment rate (U-3), indicating a greater degree of labor market distress
Discouraged workers
- Those who have given up looking for work because they believe no jobs are available for them
- Not included in the official unemployment rate calculation
- Example: Workers in industries that have experienced significant job losses (manufacturing) may become discouraged and stop actively seeking employment
Marginally attached workers
- Those who are not in the labor force but have looked for work in the past 12 months and are available for work
- Not included in the official unemployment rate calculation
- Example: Stay-at-home parents who have recently started looking for work but have not yet found a job
Involuntary part-time workers
- Also known as part-time workers for economic reasons
- Those who would prefer full-time employment but are working part-time because their hours have been reduced or they cannot find full-time jobs
- Example: During an economic downturn, companies may reduce the hours of their employees to cut costs, leading to an increase in involuntary part-time work
Gap between U-3 and U-6 rates
- The difference between the official unemployment rate (U-3) and the U-6 rate can indicate the extent of labor market weakness not captured by the standard unemployment measure
- A larger gap suggests a greater degree of underutilization and slack in the labor market
- Example: If the U-3 rate is 5% and the U-6 rate is 12%, it indicates that a significant portion of the labor force is experiencing some form of underemployment or marginalization
Key Terms to Review (24)
Claimant Count: Claimant count refers to the number of individuals who are actively receiving unemployment benefits, often used as a key indicator of the level of unemployment in an economy. This measure is essential for understanding the labor market's health, as it reflects not just joblessness but also the effectiveness of governmental support systems for those without work. By monitoring the claimant count, economists and policymakers can assess trends in unemployment and implement strategies to address joblessness.
Cyclical Unemployment: Cyclical unemployment refers to the type of unemployment that occurs when there is a downturn in economic activity, typically during periods of recession or economic slowdown. It is closely tied to the phases of business cycles, where demand for goods and services decreases, leading to reduced production and job losses. Understanding cyclical unemployment helps analyze the broader economic context, its measurement, and its relationship with full employment and the natural rate of unemployment.
Discouraged Workers: Discouraged workers are individuals who are capable of working but have given up looking for a job due to the belief that no jobs are available for them. This phenomenon reflects the impact of long-term unemployment and the challenges faced in the labor market, often highlighting a mismatch between job seekers' skills and the jobs that are currently available.
Employment-to-population ratio: The employment-to-population ratio is a key indicator that measures the proportion of a country's working-age population that is currently employed. This ratio provides insight into the ability of an economy to create jobs and engage its workforce, reflecting overall labor market conditions and economic health. A higher ratio indicates that a larger share of the population is actively participating in the labor market, while a lower ratio may signal issues such as high unemployment or underemployment.
Establishment Survey: The establishment survey, also known as the payroll survey, is a method used to gather data on employment, specifically by collecting information from businesses about their number of employees. This survey is crucial for measuring non-farm payroll employment and helps to identify trends in job creation and layoffs across various industries, providing insights into the overall health of the labor market.
Frictional unemployment: Frictional unemployment refers to the short-term unemployment that occurs when individuals are in between jobs or are entering the workforce for the first time. This type of unemployment is typically voluntary and can result from workers taking time to find a position that matches their skills, preferences, or desired salary. It plays a significant role in the overall dynamics of the labor market and is an essential component when considering types of unemployment, the natural rate of unemployment, and the effectiveness of labor market policies.
Gap between U-3 and U-6 Rates: The gap between U-3 and U-6 rates refers to the difference in measurement between two key unemployment metrics, where U-3 represents the official unemployment rate and U-6 includes a broader definition of unemployment. The U-3 rate counts only those who are actively looking for work, while U-6 encompasses those who are unemployed, underemployed, and discouraged workers who have stopped looking for a job. Understanding this gap is essential for grasping the full scope of labor market conditions and the economic realities faced by different segments of the population.
Household survey: A household survey is a method used to gather information about the labor force and unemployment in a specific area by interviewing members of selected households. This survey captures vital data that helps in measuring employment status, job-seeking behavior, and demographic characteristics of the population, which are essential for understanding the overall economic situation and labor market conditions.
Involuntary Part-Time Workers: Involuntary part-time workers are individuals who work fewer hours than they would prefer, often due to economic conditions that limit their ability to find full-time employment. These workers are considered underemployed because they are available and willing to work more hours but cannot secure a job that meets their desired number of hours, highlighting the challenges faced in the labor market.
Job training programs: Job training programs are structured initiatives designed to equip individuals with specific skills and knowledge required for particular jobs or industries. These programs can help reduce unemployment by improving the employability of participants, particularly those who lack relevant experience or education. They can also serve as an effective labor market policy, aiming to bridge the gap between job seekers and available positions, thus impacting overall economic performance.
John Maynard Keynes: John Maynard Keynes was a British economist whose ideas fundamentally changed the theory and practice of macroeconomics and economic policy. He is best known for advocating for government intervention to stabilize economic cycles and stimulate demand, especially during recessions, which connects directly to concepts such as GDP, fiscal policy, and inflation.
Labor Force Participation Rate: The labor force participation rate is the percentage of the working-age population that is either employed or actively seeking employment. This metric provides insight into the active segment of the population that contributes to the economy and is crucial for understanding overall economic health and workforce dynamics.
Long-term unemployment: Long-term unemployment refers to the situation where individuals remain unemployed for an extended period, typically defined as longer than 27 weeks. This type of unemployment can have significant implications for the economy and the individuals affected, as it often leads to skill degradation and increased difficulties in finding new employment opportunities.
Marginally attached workers: Marginally attached workers are individuals who are not currently in the labor force but have shown interest in working and are available for work. These individuals have looked for a job at some point in the past year but are not actively seeking employment at the moment. This group is significant in understanding the overall labor market and assessing the true level of unemployment, as they indicate additional unused labor potential.
Milton Friedman: Milton Friedman was a renowned American economist known for his strong belief in free-market capitalism and minimal government intervention in the economy. His theories and writings have greatly influenced modern economic policies, particularly in the areas of monetary policy and fiscal policy.
Natural Rate of Unemployment: The natural rate of unemployment is the level of unemployment that exists when the economy is operating at full capacity, reflecting the normal turnover in the labor market. It includes frictional and structural unemployment but excludes cyclical unemployment caused by economic downturns. This concept helps policymakers gauge whether current unemployment rates are sustainable or indicative of broader economic issues.
Non-farm payroll: Non-farm payroll refers to a key economic indicator that represents the total number of paid workers in the U.S. economy, excluding farm employees, government workers, and a few other categories. It is closely monitored because it provides insight into employment trends and overall economic health, as changes in payroll numbers can indicate whether the economy is expanding or contracting.
Okun's Law: Okun's Law is an empirically observed relationship that suggests a negative correlation between unemployment and economic output, indicating that for every 1% increase in the unemployment rate, a country's GDP will be roughly an additional 2% lower than its potential output. This principle highlights how fluctuations in unemployment can impact overall economic performance and is crucial for understanding various aspects of economic policy and labor market dynamics.
Seasonal unemployment: Seasonal unemployment refers to the temporary job loss that occurs when individuals are out of work during certain times of the year when demand for labor decreases. This type of unemployment is often seen in industries that are highly dependent on specific seasons, such as agriculture, tourism, and construction. Understanding seasonal unemployment is crucial as it helps to differentiate between different types of joblessness and informs economic policies aimed at addressing employment fluctuations throughout the year.
Seasonally adjusted data: Seasonally adjusted data refers to statistical data that has been modified to eliminate the effects of seasonal variations, allowing for a clearer comparison of trends over time. This adjustment is crucial for accurately measuring economic indicators, such as inflation rates and unemployment levels, as it helps isolate true changes in the economy from regular seasonal fluctuations. By presenting a more consistent picture, seasonally adjusted data enhances our understanding of underlying economic trends and informs better decision-making.
Structural unemployment: Structural unemployment occurs when there is a mismatch between the skills of the workforce and the needs of employers in the labor market. This type of unemployment can arise due to technological advancements, changes in consumer demand, or other economic shifts that alter the job landscape. Understanding structural unemployment is crucial for analyzing different types of unemployment, recognizing the natural rate of unemployment, and evaluating the effectiveness of labor market policies.
U-6 unemployment rate: The u-6 unemployment rate is a comprehensive measure of unemployment that includes not only the unemployed but also those who are underemployed and those who have stopped looking for work. It provides a broader picture of labor market conditions by capturing individuals who are part-time workers seeking full-time employment and discouraged workers who have left the labor force. This metric reflects the true extent of labor market slack and the challenges faced by those seeking work.
Unemployment insurance: Unemployment insurance is a government program that provides financial assistance to individuals who have lost their jobs through no fault of their own. This program aims to help unemployed workers maintain their purchasing power and meet basic living expenses while they seek new employment. It plays a vital role in stabilizing the economy during downturns by supporting consumer spending, which is crucial for overall economic health.
Unemployment rate: The unemployment rate is the percentage of the labor force that is jobless and actively seeking employment. This metric provides insights into the health of the economy, influencing business decisions and government policies.