Unemployment - people of working age who are actively looking for a job

but who are not employed.

Underemployment – people of working age with part-time jobs (jobs that
do not make full use of their skills and education) who’d rather work full
time.

Labor force - the number of people who are employed plus the number
of people of working age who are unemployed; it’s also a fraction of a
country’s population since excludes children, retired and disabled people,
and adult students.

number of unemployed
Unemployment rate - labor force
×100

Official statistics often underestimate true unemployment because of

hidden unemployment, arising from the following:
- Unemployment figures exclude discouraged workers who gave up
looking for a job because of unsuccessful attempts
- Unemployment figures don’t make a distinction between full-time
and part-time employment, counting underemployed people as
employed
- Unemployment figures make no distinction between the types of
work done
- Unemployment figures don’t include people on retraining programs
who previously lost their jobs and people who retired early
although would rather work

Official statistics may also overestimate true unemployment, because:

- Unemployment figures don’t include people working in the
underground economy
A further disadvantage of a national unemployment rate is that it’s an
average over the entire population, so doesn’t account for differences in
unemployment (arising from different population groups) which may
differ by:
- Region (regions with declining industries have higher
unemployment rate)
- Gender (women sometimes face higher unemployment rate)
- Ethnic group (some groups may be disadvantaged due to
discrimination or lack of training and education)
- Age (higher unemployment rate for youth due to lower skill levels
and for elderlies due to less willing employers)
- Occupation and educational attainment (less skilled people may
have higher unemployment rate)

Costs of unemployment
Economic costs:
- A loss of real output (real GDP): decrease in people available to
work => decrease in amount of output produced (less than
potential output)
- A loss of income for unemployed workers: people who don’t work
don’t have income
- A loss of tax revenue for the government: unemployed people don’t
pay income taxes, so less tax revenue
- Costs to the government of unemployment benefits: increase in
number of unemployed people => increase in number of
unemployment benefits => decrease in tax revenue available
- Costs to the government of dealing with social problems resulting
from unemployment: they often require government funds to be
dealt with
- Larger budget deficit or smaller budget surplus: unemployment
leads to a loss of tax revenue and an increase in unemployment
benefits
- More unequal distribution of income: certain population groups
tend to be more affected by unemployment than others, so
increasing unemployment may lead to rising income inequalities
and poverty
- Unemployed people may have difficulties finding job in the future:
people without work may not be employed in the future due to loss
 of some skills or firms finding the way to manage fewer workers
(called hysteresis)
Personal and social costs:
- Personal problems: being unemployed leads to loss of income and
increased indebtedness which can cause psychological stress, family
tensions, or even suicide
- Greater social problems: high unemployment rates, especially when
they’re unequally distributed, can lead to increasing crime, drug
use, and homelessness.

Types of unemployment
Structural unemployment – changes in demand for particular types of
labor skills (due to technological progress or change in the economy’s
structure) and changes in geographical location of jobs (due to a change
in demand for labor in different regions).

Although market forces can presumably prevent structural

unemployment from happening if there’s a fall in demand for labor from
D1 to D2, wages don’t fall easily over short periods of time, so they’ll stay
at W1, thereby creating an excess supply of labor.

Labor factor rigidities - factors preventing the forces of supply and

demand from operating in the labor market:
- Minimum wage legislation
- Labor union activities and wage bargaining with employees
- Employment protection laws
- Generous unemployment benefits

Structural unemployment can be shown indirectly through a product

supply and demand. Higher than equilibrium wages and employment
protection lead to higher costs of production, so firms start producing
less, thereby decreasing supply from S1 to S2 and decreasing quantity of
output produced from Q1 to Q2. As a result, they require less labor to
produce output, leading to structural unemployment.

Frictional unemployment – workers that are between jobs (may leave the
job if have been fired or because are in search for a better one or may be
waiting to start a new job); also tends to be short-term.
A certain amount of frictional unemployment is inevitable in any changing
economy as some industries expand while others contract, some firms
grow faster than others, and workers seek to advance their income and
professional positions.

The most common cause of frictional unemployment is incomplete

information between employers and workers, considering that it’ll take
time for the right applicants to get matched up with the right jobs.

Seasonal unemployment – changing demand for labor in certain

industries on a seasonal basis because of variations in needs (like workers
hired during peak harvesting seasons and laid off for the rest of the year).

Natural rate of unemployment equals to the sum of structural, frictional,

and seasonal unemployment. Therefore, when an economy has full
employment (Yp = Ye), it experiences each of the above.

Cyclical/Demand-deficient unemployment – unemployment during the

downturns of the business cycle (when an economy’s in a recessionary
gap).