There are a lot of misconceptions about unemployment, the unemployment rate, and the labor force. The term “unemployment” seems to imply that it represents all members of a country’s population that are not working — intuitively, this makes sense. However, the term is more nuanced, and there is a reason for that. With various macroeconomic indicators, such as the recent report on jobless claims, it is difficult, yet important to understand how the economy operates around you. In this lesson, I will explain what it means to be unemployed, the different types of unemployment, and the labor force.

What does it mean to be unemployed?

To be unemployed means to be actively searching for work. Simple, yet often confused with other definitions. Most believe that to be unemployed is to be not working. However, this definition would mean that a full-time homemaker is unemployed. This definition would not be accurate, as this individual is not actually seeking employment opportunities in the labor force.

To be either employed or unemployed means that you are a member of the labor force, which is comprised of those who are working, and those who are seeking employment opportunities. The unemployment rate is calculated by dividing the number of those seeking employment in the labor force by the number of people in the labor force. The unemployment rate in the United States was 3.8% as of February 2019.

One of the most commonly analyzed indicators regarding employment is the “labor force participation rate,” or how much of the American population is actually in the labor force, divided by the “Civilian Non-Institutionalized Population” (more about this here). For example, a child is not legally allowed to work, and would likely not be working anyway as they would be a full-time student. Thus, the child, under 16, would not be part of the “Civilian Non-Institutionalized Population.” The labor force participation rate in the United States is 63.20% as of February 2019.

Types of Unemployment

There are many types of unemployment, but I will cover the main three.

1. Cyclical Unemployment

Cyclical unemployment changes inversely with regards to the strength of the economy. In strong economic and business conditions, cyclical unemployment will be low. In recessions, cyclical unemployment will be high. In such poor economic conditions, firms will not be able to afford to pay as many wages, so workers will be laid off. The economy is said to operate on a “business cycle” of various fluctuations between various conditions.

2. Frictional Unemployment

Frictional unemployment will always occur in an economy, regardless of the economic conditions at the time. For example, suppose John is working at Walmart. Then, suppose the wages at Target increase. John has the same skills to work at Target, and there is a higher wage that is being offered. Thus, John will quit his job and try to find employment at Target. During the time that John is unemployed, he is said to be frictionally unemployed. He is looking for a new job, and transitioning from one to another.

3. Structural Unemployment

Structural unemployment is the most commonly discussed today. Structural unemployment occurs when technologies are able to do certain tasks more efficiently than humans. Thus, the humans, which cost more, and are often less efficient, are laid off and replaced with the new technology. Structural unemployment especially affects individuals with lower education levels, in industries such as manufacturing. It is more difficult for technology to replace workers in industries that require higher levels of education, such as law or medicine.

Why does unemployment matter?

Unemployment is important to all members of a society. The unemployment rate is a good indicator for economic conditions. Additionally, unemployment is something that many are going to be faced with in the future, especially structural unemployment. Recently, Chinese venture capitalist Kai-Fu Lee could be seen on 60 Minutes saying that the world could lose 40% of jobs within just 15 years. Thus, it is something that the world must face in the near future. Most importantly, however, is that understanding concepts such as unemployment will give you an informed perspective of the economy as a whole.

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