Introduction
In the previous article, we talked about GDP as a measure for economic health. Unemployment is another way of doing it.
Unemployment Rate
Unemployment rate is not the percent of unemployed people in the United States. It’s the percent of unemployed people in the labor force.
Labor Force
The labor force is composed of everyone with jobs and everyone who is looking for a job. That is to say, the labor force is composed of all willing workers. Right now, the labor force of the United states is approximately 160 million. The rest are retired, kids, or just not looking for jobs for some other reason (e.g. illness).
What Causes Unemployment?
When real GDP grows slower than the labor force, the unemployment rate increases.
Damage of Unemployment
When unemployment is higher than the natural rate (around 4%), this means the economy isn’t producing at its potential. This means the production possibility frontier goes in.
Types of Unemployment
Cyclical Unemployment
The economy moves in cycles. Spending increases, then unemployment falls, then wages increase, then unemployment rises again, …. . Therefore, naturally there will be a change in unemployment.
Seasonal Unemployment
This refers to seasonal jobs. For example, during the springtime, a lot of ski resort workers will go out of work. The next winter, they will get rehired.
Frictional Unemployment
This refers to the time people are in between jobs, switching careers or going back to school.
Structural Unemployment
This is the most difficult to fix. This means when people’s skills do not match the requires of the economy. For example, the advent of driverless car will potentially make truck drivers obsolete.