MACROECONOMICS BBA ECO 103

UNEMPLOYMENT: CAUSES, TYPES & MEASUREMENT

FACULTY: Dr. Firdaus Khan, SP Jain School of Global Management, Mumbai Campus

INSTRUCTION:

Watch the video on the link: https://www.youtube.com/watch?v=IOoV1Q_VGFA.

UNEMPLOYMENT IN A NUTSHELL:

Unemployment is when an individual who is not employed and is seeking employment, cannot find
work. Unemployment is a key indicator of the health of an economy. A low unemployment rate
represents a strong economy while a high unemployment rate represents a weak economy.

What Is Unemployment?

The term unemployment refers to a situation where a person actively searches for employment but
is unable to find work. Unemployment is considered to be a key measure of the health of the economy.
Most frequently used measure of unemployment is the unemployment rate. It's calculated by dividing
the number of unemployed people by the number of people in the labor force. Many governments
offer unemployment insurance to unemployed individuals who meet eligibility requirements.

How Unemployment Works

Unemployment is a key economic indicator because it signals the ability (or inability) of workers to
obtain gainful work and contribute to the productive output of the economy. More unemployed
workers mean less total economic production. The unemployment definition doesn't include people
who leave the workforce for reasons such as retirement, higher education, and disability.

Sign of Economic Distress

Unemployed workers must maintain at least subsistence consumption during their period of
unemployment. This means that an economy with high unemployment has lower output without a
proportional decline in need for basic consumption. High, persistent unemployment can signal serious
economic distress; even lead to social, political upheaval.

Sign of an Overheating Economy

A low unemployment rate, on the other hand, means that the economy is more likely to be producing
near its full capacity, maximizing output, driving wage growth, and raising living standards over time.
However, extremely low unemployment can also be a cautionary sign of an overheating economy,
inflationary pressures, and tight conditions for businesses in need of additional workers.

Categories of Unemployment

While the definition of unemployment is clear, economists divide unemployment into many different
categories. The two broadest categories are voluntary and involuntary unemployment. Voluntary
unemployment means that a person left their job willingly in search of other employment. Involuntary
unemployment means that a person was fired or laid off and must now look for another job. Both
voluntary and involuntary unemployment can be broken down into four types:

1. Frictional Unemployment

This type of unemployment is usually short-lived. It is also the least problematic from an economic
standpoint. It occurs when people voluntarily change jobs. After a person leaves a company, it
naturally takes time to find another job. Similarly, graduates just starting to look for jobs to enter the
workforce add to frictional unemployment. Frictional unemployment is a natural result of the fact that
market processes take time and information can be costly. Searching for a new job, recruiting new
workers, and matching the right workers to the right jobs all take time and effort. This results in
frictional unemployment.

2. Cyclical Unemployment

Cyclical unemployment is the variation in the number of unemployed workers over the course of
economic upturns and downturns. Unemployment rises during recessionary periods and declines
during periods of economic growth. Preventing and alleviating cyclical unemployment during
recessions is one of the key reasons for the study of economics and the various policy tools that
governments employ to stimulate the economy on the downside of business cycles.

3. Structural Unemployment

Structural unemployment comes about through a technological change in the structure of the
economy in which labor markets operate. Technological changes can lead to unemployment among
workers displaced from jobs that are no longer needed. Examples of such changes include the
replacement of horse-drawn transport with automobiles and the automation of manufacturing.
Retraining these workers can be difficult, costly, and time-consuming. Displaced workers often end up
either unemployed for extended periods or leaving the labor force entirely.

4. Institutional Unemployment
Institutional unemployment results from long-term or permanent institutional factors and incentives
in the economy. The following can all contribute to institutional unemployment:

• Government policies, such as high minimum wage floors, generous social benefits programs,
and restrictive occupational licensing laws
• Labor market phenomena, such as efficiency wages and discriminatory hiring
• Labor market institutions, such as high rates of unionization

How to Measure Unemployment

In the United States, the government uses surveys, census counts, and the number of unemployment
insurance claims to track unemployment. The U.S. Census conducts a monthly survey called
the Current Population Survey (CPS) on behalf of the Bureau of Labor Statistics (BLS) to produce the
primary estimate of the nation’s unemployment rate. This survey has been done every month since
1940. The sample consists of about 60,000 eligible households. That translates to about 110,000
people each month. The Census changes a quarter of the sampled households each month so that no
household is represented for more than four consecutive months. This is meant to strengthen the
reliability of the estimates.

Many variations of the unemployment rate exist, with different definitions of who is an unemployed
person and who is in the labor force. The BLS commonly cites the U-3 unemployment rate (defined as
the total unemployed as a percentage of the civilian labor force) as the official unemployment rate;
however, this definition does not include discouraged unemployed workers who are no longer looking
for work. Other categories of unemployment include discouraged workers and part-time or
underemployed workers who want to work full-time but, for economic reasons, are unable to do so.

State of Unemployment

Although the U.S. government began tracking unemployment in the 1940s, the highest rate of
unemployment to date occurred during the Great Depression, when unemployment rose to 24.9% in
1933. Between 1931 and 1940, it remained above 14% then dropped to single digits. It remained there
until 1982 when it became 10+%. During the Great Recession (2009), unemployment again rose to
10%. In April 2020, amid the COVID-19 pandemic, it hit 14.8%. Currently, it stands at 3.8%. As of Aug.
2023, the unemployment rate across the world’s top 10 economies (by GDP) stands at:

Country & its Unemployment Rate (Aug 2023)

1. United States: 3.8% 6. United Kingdom: 3.6%
2. China: 4.9% 7. France: 7.4%
3. Japan: 2.6% 8. Russian Federation: 4.7%
4. Germany: 3.0% 9. Canada: 5.2%
5. India: 7.3% 10. Italy: 8.1%
 Source: https://www.investopedia.com/articles/personal-finance/062315/unemployment-rates-country.asp

What Are the Main Causes of Unemployment?

There are a number of reasons for unemployment, such as recessions, depressions, technological
improvements, job outsourcing, and voluntarily leaving one job to find another.

Can there be Zero Unemployment?

In an ideal world, every person seeking a job would find one. Practically, employment level is
essentially the matching of supply of labour and demand for labour. Most economists believe that a
natural rate of unemployment exists in every economy (about 4% to 6%). Economists also describe an
economy at this natural rate as the full employment level of output.

KEY TAKEAWAYS

1. Unemployment occurs when workers who want to work are unable to find jobs.
2. High rates of unemployment signal economic distress while extremely low rates of
unemployment may signal an overheated economy.
3. There are three main types of unemployment:
- Frictional unemployment is the result of voluntary employment transitions within an
economy; naturally occuring, even in a growing, stable economy as workers change
jobs.
- Structural unemployment can produce permanent disruptions due to fundamental
and permanent changes that occur in the structure of the economy due to include
technological changes, a lack of relevant skills, and jobs moving overseas to another
country. These changes can marginalize a group of workers.
- Cyclical unemployment relates to the loss of jobs that occurs during changes in
business cycles.
4. Unemployment data is collected and published by government agencies in a variety of ways.
5. Unemployment is strictly defined by each Govt. The U.S. Bureau of Labor Statistics states
"people are classified as unemployed if they do not have a job, have actively looked for work
in the prior four weeks, and are currently available for work."
6. Many governments offer unemployed individuals a small amount of income through
unemployment insurance, as long as they meet certain requirements.

SOURCES:
• Federal Reserve Bank of St. Louis (4 May 2018). Unemployment - Economic Lowdown [video].
You Tube. hmps://www.youtube.com/watch?v=IOoV1Q_VGF
• Hayes, A. (2023). What is Unmeployment? Understanding Causes, Types and Measurement.
Investopedia.com. hmps://www.investopedia.com/terms/u/unemployment.asp.