2.3 Unemployment

Measuring unemployment

The labor force = employed + unemployed people actively seeking work; it excludes discouraged workers, retirees, and students. The unemployment rate = (unemployed ÷ labor force) × 100. The labor force participation rate = (labor force ÷ working-age population) × 100. These stats undercount discouraged workers who stopped searching, understating true joblessness.

Types of unemployment

Frictional unemployment: short-term, from workers between jobs or entering the workforce — always exists. Structural unemployment: mismatch between workers' skills/location and available jobs, often from technology or industry shifts. Cyclical unemployment: caused by downturns in the business cycle; rises during recessions and falls during expansions.

Full employment & the natural rate

Full employment occurs when only frictional and structural unemployment exist (cyclical = 0); the economy is producing at potential GDP. This is the natural rate of unemployment (NRU). Actual unemployment can be above or below the NRU, signaling a recessionary or overheated economy.

Key terms

Unemployment rate formula

(Number unemployed ÷ labor force) × 100

Frictional unemployment

Short-term unemployment from workers transitioning between jobs or entering the workforce.

Structural unemployment

Unemployment from a mismatch between workers' skills/location and available jobs, often due to technology shifts.

Cyclical unemployment

Unemployment that rises and falls with the business cycle, especially during recessions and expansions.

Natural rate of unemployment (NRU)

The unemployment rate at full employment, equal to frictional + structural unemployment (cyclical = 0).

Try an AP-style question

What is the unemployment rate?

1. 10%
2. 6.25%
3. 6.67%
4. 4%