AP, IB, and College Microeconomic and Macroeconomic Principles 

6 questions about unemployment and the labor force

Unemployment

5/3/2018 Jacob Reed
1. What does it mean to be unemployed?

The unemployment rate is one of the most watched and publicized labor force statistics, but many people are confused about what it actually measures. The unemployment rate is the percentage of people in the labor force who are not working, but are actively looking for work.  As of the writing of this article, the official (U-3) unemployment rate was 4.7% (see the BLS for the current unemployment rate).

Unemployed

2. Who is not counted in the unemployment rate?

The official unemployment rate (U-3) does not count people who are not actively looking for work. As a result, there may be some workers who recently lost their jobs and want jobs, but aren’t actively looking. These people are considered out of the labor force. There are also some people who lost their jobs a long time ago but have given up looking for work within the last 12 months. These are called discouraged workers and they are also considered out of the labor force so they are not not reflected in the official unemployment rate.  Also, members of the labor force who have part-time jobs but are looking for full time jobs are counted as employed. For all of these reasons, the official unemployment rate may not always reflect an accurate picture of the overall labor market. The bureau of labor statistics does track all of these groups and includes them in the U-6 measure of unemployment. As of the writing of this article, the U-6 rate was 9.2% (see the BLS for the current rate).

3. Who is in the labor force?

The labor force includes civilian citizens who are at least 16 years of age and are either employed or actively looking for work. To be considered employed, a person must work for pay or profit for one or more hours in the given week,  work without pay in a family business for 15 or more hours, or have a job but didn’t work due to vacation, illness, labor dispute, etc.
After a recession, the unemployment rate may fall if unemployed workers leave the work force. This lowers the unemployment rate and can give false sense that then labor market has improved.

4. What is the labor force participation rate?

The labor force participation rate is the percentage the working age population that is either working or looking for work. The formula is:

(Working + Looking for Work)/Working Age Population = Labor Force Participation Rate

The labor force participation rate in the United States fell during the last recession as some citizens lost their jobs and gave up looking for work. As the economy has improved the labor force participation rate is rising again, but it has not recovered back to pre recession levels.  As of the writing of this article, the labor force participation rate in the US was 63% (see the BLS for current the rate). This statistic gives economist a sense of how many people are choosing to be part of an economies labor force. A higher participation rate will shift the production possibilities curve outward. A lower participation rate will shift it inward. 
5. What types of unemployment are there?

Seasonal Unemployment: This type of unemployment is often not discussed on many macroeconomics exams because the official unemployment rate is seasonally adjusted; meaning seasonal unemployment has been deleted out of the statistic. Seasonal unemployment occurs when workers lose their jobs due to the time of year. Life guards getting laid off in the winter and temporary store retail clerks getting laid off after the holiday shopping season are two examples. Seasonal unemployment is a natural part of a healthy economy.

Frictional Unemployment: This type of unemployment is characterized by movement between jobs. When a college graduate is looking for her first job, a cook quits his restaurant job, or a brick mason is fired from construction company, all three of these people are now frictionally unemployed. Frictional unemployment is a natural part of a healthy economy.

Structural Unemployment: This type of unemployment is most often characterized by a skills mismatch; meaning the skills unemployed workers have do not match the skills needed for the jobs available. These workers must go back to school or be retrained to get the skills they need. This type of unemployment can be caused by technological changes like ATM machines replacing banking tellers.  Structural unemployment is also a natural part of a healthy economy as well. As the economy changes, some structural unemployment is inevitable.

Cyclical Unemployment: This is unemployment caused by the business cycle. People unemployed as a result of the great depression of the 1930’s and the recent great recession were cyclically unemployed. Cyclical unemployment is characterized by an overall downturn in the economy. A recessionary gap in the AS/AD model is an indication of cyclical unemployment. 

6. What is full employment (or the natural rate of unemployment)?

Full employment is defined as zero cyclical unemployment; or when the unemployment rate equals frictional unemployment plus structural unemployment (seasonal unemployment is already deleted from official numbers). When economy is at full employment the unemployment rate will equal what is called the natural rate of unemployment (NRU). This occurs when an economy is at long-run equilibrium in the AS/AD model and there is no inflationary or recessionary gap. As of the writing of this article, the long run natural rate of unemployment, as estimated by the Congressional Budget Office, was 4.67% (see the St. Louis Fed for current estimates).

Up Next: 
Content Review Page: Production Possibilities Curve

 Outside Resources: mjmfoodie (definition of unemployment), mjmfoodie (types of unemployment)