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What Is Unemployment?
The definition of an unemployed person is someone of working age (16 and up), jobless, able and available to work, and actively looking for a job. This means anyone without a job who is reaching out to contacts about jobs or applying to positions.
- This definition of unemployment is specific and rigid—it doesn’t just include “anyone who doesn’t have a job.”
- On the other hand, an employed person is very simply defined as someone with a job. A job can include anything from doing full-time work to doing part-time work to being self-employed.
- Both unemployed and employed people make up the “labor force,” or the subset of the population that is both able and interested in working. Not included in the labor force are citizens not looking for jobs—for example, a stay-at-home mom, a college student, or a “discouraged worker” (someone who has stopped looking for work because they believe no work is available).
How Is Unemployment Measured?
In the United States, the unemployment rate is determined monthly by the Bureau of Labor Statistics using two separate surveys:
- The Establishment Report. For this survey, a random sample of employers is asked how many people are on their payrolls.
- The Current Population Survey. For this survey, the BLS conducts a household survey of 60,000 households (ranging in location, geography, and economic makeup) and asks about the employment status of each eligible person in the home.
After the data is collected with the Establishment Report and the Current Population Survey, the Bureau of Labor Statistics publishes the Employment Report, which includes the unemployment statistics for that month.
How Is the Rate of Unemployment Calculated?
The level of unemployment in a country is measured as a percentage of the labor force. By using a percentage, called the unemployment rate, analysts and economists can automatically account for natural increases in population that would otherwise skew unemployment and employment numbers.
The formula for finding the unemployment rate is:
Unemployment rate = (Unemployed workers / Total labor force) x 100
4 Types of Unemployment and Their Causes
There are four main types of unemployment in an economy—frictional, structural, cyclical, and seasonal—and each has a different cause.
- Frictional unemployment. Frictional unemployment is caused by temporary transitions in workers’ lives, such as when a worker moves to a new city and has to find a new job. Frictional unemployment also includes people just entering the labor force, such as freshly graduated college students. It is the most common cause of unemployment, and it is always in effect in an economy.
- Structural unemployment. Structural unemployment is caused by a mismatch in the demographics of workers and the types of jobs available, either when there are jobs available that workers don’t have the skills for, or when there are workers available but no jobs to fill. Structural unemployment is most obvious in industries undergoing technological advancements. For example, in the farming industry, much of the work is becoming mechanized, which means that fewer farmers are needed and many are let go. When these farmers go to cities to find work, they may find no other similar jobs in which to apply their skills.
- Cyclical unemployment. Cyclical unemployment is caused by declining demand: when there is not enough demand in an economy for goods and services, businesses cannot offer jobs. According to Keynesian economics, cyclical unemployment is a natural result of the business cycle in times of recession: if all consumers become fearful at once, consumers will attempt to increase their savings at the same time, which means there will be a decrease in spending, and businesses will not be able to employ all employable workers.
- Seasonal unemployment. Seasonal unemployment is caused by different industries or parts of the labor market being available during different seasons. For instance, unemployment goes up in the winter months, because many agricultural jobs end once crops are harvested in the fall, and those workers are left to find new jobs.
What Are the Consequences of Unemployment in an Economy?
Low unemployment is key to economic stability. High and long-term unemployment can cause significant stress on a nation in three key areas:
- Individuals. Unemployed people have no ability to fulfill their financial obligations and can become mentally stressed, ill, and even homeless.
- Economic efficiency. During times of high unemployment, many job seekers will accept new jobs below their skill level, a situation called “underemployment,” which translates to a loss of human capital for an economy’s labor market. Unemployed workers will also significantly decrease their consumer spending, which is one of the driving forces of economic growth. Without consumer spending, the economy will slow dramatically.
- Socio-political stability. If unemployment remains high, citizen dissatisfaction can rise to the point of widespread civil unrest.
2 Possible Solutions for Unemployment
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Solving unemployment is a hotly debated topic, and no economists agree on one simple way to do it. However, in the U.S., if unemployment rises noticeably, the government usually steps in with specific policies designed to lower the total number of unemployed people.
- Monetary policy. Monetary policy is financial influence implemented by a central bank (in the U.S., this is the Federal Reserve Bank or the Fed). Monetary policies usually come in the form of lower interest rates, which increase the total money supply within an economy by allowing banks and businesses more access to loans—and therefore, more accessible spending power.
- Fiscal policy. If expansionary monetary policy doesn’t adequately lower the unemployment rate, government agencies will turn to fiscal policy. Fiscal policy is fiscal stimulus implemented by the national government, and fiscal policies include spending on infrastructure, proposing tax cuts, increasing the minimum wage, or implementing unemployment benefits (for instance, unemployment insurance). These methods are designed to inject more demand into the private economy and strengthen economic activity.
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