 KEY TAKEAWAYS

 Unemployment occurs when workers who

want to work are unable to find jobs, which
means lower economic output.
 High rates of unemployment are a signal of
economic distress.
 Unemployment can be classified as frictional,
cyclical, structural, seasonal or hidden
unemployment.
 Unemployment data are collected and
published by government agencies in a
variety of ways.
 Frictional Unemployment
 Cyclical Unemployment
 Structural Unemployment
 Seasonal Unemployment
 Hidden Unemployment
 Frictional unemployment is when workers are
jobless and looking for work in a healthy
economy. It doesn't matter if they leave voluntarily
or are fired. Others may be returning to the labor
force. It's differentiated from other types of
unemployment because it's part of normal labor
turnover.
 Frictional unemployment is unavoidable. The good
news is that it's usually short-term. It's one of the
components of natural unemployment. It is the
lowest rate of unemployment in a growing
economy. Unemployment below that level means
employers can't find enough workers to keep
producing all they can. It slows economic growth.
Why does frictional employment exist?

It would be more logical for workers to hold on to their

existing jobs until they find new ones. But often
workers must move for unrelated reasons before they
can look for new jobs. Some marry and must move to
be near their spouse's job. Many take time off to care
for relatives. Some have saved enough money so they
can quit unfulfilling jobs. They have the luxury to
search until they find just the right opportunities.
 During a recession, frictional unemployment drops.
Why?

Workers are afraid to quit their jobs even if they don't

like them. They know it will be difficult to find better
ones.
 Frictional unemployment isn't harmful to an
economy. It's not like cyclical unemployment that
results from a recession. That's when businesses
lay off employees whether they like their jobs or
not. An increase in frictional unemployment means
more workers are moving toward better positions.
 In fact, frictional unemployment benefits the
economy. It allows companies more opportunities
to find qualified workers. If everyone stayed in
their jobs until they found new ones, it would be
harder for companies to bring on good workers.
 Cyclical unemployment is when workers lose
their jobs because of downturns in
the business cycle. You can tell when
the economy contracts by measuring gross
domestic product. If the economy contracts
for two quarters or more, it's in a recession.
 Cyclical unemployment is usually the main
cause of high unemployment. Unemployment
is considered high at 8% of the labor force.
It's known as “cyclical” because it’s tied to the
business cycle. When the economy re-enters
the expansion phase of the business cycle,
the unemployed will get rehired. Cyclical
unemployment is temporary. It depends on
the length of the contraction. A typical
recession lasts around 18 months.
A depression can last ten years
Cyclical unemployment results from a large
drop-off of demand. It usually starts with
decreased personal consumption. When
consumer demand for goods and services
drops, business revenues decline. Eventually,
companies have to lay off workers to
maintain profit margins. Often there isn't
enough production to keep the workers busy
 The last thing a business wants to do is lay
off workers. It's a traumatic event. A company
could lose valuable employees that it's
invested a lot in. That's why by the time
cyclical unemployment starts, the economy is
usually already in a recession.
 Unfortunately, cyclical unemployment can
become a self-fulfilling downward spiral. That's
because the newly unemployed now have less
disposable income. This further lowers demand
and business revenue, leading to even more
layoffs.
 Without intervention, this spiral will continue
until supply has dropped to meet the lowered
demand. Unfortunately, this may not happen
until unemployment reaches 25 percent. This is
what happened during the Great Depression,
which lasted a decade.
 Cyclical unemployment is when workers lose their
jobs because of downturns in the business cycle. You
can tell when the economy contracts by
measuring gross domestic product. If the economy
contracts for two quarters or more, it's in a recession.
 Cyclical unemployment is usually the main cause of
high unemployment. Unemployment is considered
high at 8% of the labor force. It's known as “cyclical”
because it’s tied to the business cycle. When the
economy re-enters the expansion phase of the
business cycle, the unemployed will get rehired.
Cyclical unemployment is temporary. It depends on
the length of the contraction. A typical recession lasts
around 18 months. A depression can last ten years.
 Structural unemployment refers to a mismatch
between the jobs available and the skill levels of
the unemployed. Unlike cyclical unemployment,
it’s caused by forces other than the business
cycle. It occurs when an underlying shift in the
economy makes it difficult for some groups to
find jobs. It is harder to correct than other types
of unemployment.
 Structural unemployment can keep
the unemployment rate high long after
a recession is over. If ignored by policy makers,
it creates a higher natural unemployment rate.
 One cause of structural unemployment
is technological advances in an industry. That often
happens in manufacturing. Robots have been
replacing unskilled workers. These workers must get
training in computer operations if they want to keep
working in the same industry. They learn how to
manage the robots doing the work they used to do.
 A second cause is trade agreements, such as
the North American Free Trade Agreement. When
NAFTA first lifted trade restrictions, many factories
relocated to Mexico. They left their former employees
without a place to work. The agreement proved to be
one of the nation’s underlying causes of
unemployment.
 increases income inequality. That's
because the older long-term
unemployed worker doesn't have the
necessary technical skills. While they were
unemployed, their industry moved on without
them. That created a mismatch between them
and the jobs being created.
 Seasonal unemployment occurs when people are
unemployed at certain times of the year, because they
work in industries where they are not needed all year
round. Examples of industries where demand, production
and employment are seasonal include tourism and leisure,
farming, construction and retailing.
 The seasonal unemployment is prevalent in those
industries which are engaged in seasonal production
activities. Such as agricultural industry wherein the
demand for workers is more during harvesting than is
required in other months in a year. Similarly, in the case of
a hotel industry, the demand for the catering staff as well
as the housekeeping staff is more during the peak season
as compared to the demand in the off-season
 The seasonal unemployment is more or less
predictable as it is known with certainty the time
period during which the demand for the
commodity changes. It is a form of structural
unemployment wherein the economy structure
changes in accordance with the change in the
season, and hence the demand for the manpower
varies accordingly.
 The seasonal unemployment means not only the
under-utilization of manpower but also the
resources used in the production. Such as the
demand for woolen clothes will be more in winters
than the other seasons and hence the need for the
capital resources and the manpower in the textile
industry will be more during this period
 Hidden unemployment refers to people who are
jobless, but official unemployment figures do not
include them. The term also includes people who
are underemployed. Official unemployment
figures often only include people with no job but
who are actively seeking work.
 We often use the term ‘disguised unemployment‘
with the same meaning as hidden
unemployment.
 Underemployment includes highly-skilled people
who are working in low-paying jobs. Part-time
workers who would like to work full-time also
form part of the underemployment total.
 People who are doing part-time work are
underemployed if they want to and can do
full-time work.
 Underemployment also includes individuals
who are significantly overqualified for their
current job. For example, a doctor who works
as a taxi driver forms part of the
underemployment total.
 Hidden unemployment includes, among
others, people who are underemployed
 LABOR MARKET

Employed: Currently working for pay

Unemployed: Out of who work, but

actively looking for work

Labor Force: Employed + Unemployed

Out of Labor Force: Out of who work, but

not looking for work
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 UNEMPLOYMENT

An unemployed person is any one who is:

• Sixteen years old or older

• Out of who work

• Actively searching for work: he/she has

made specific efforts to find work during
the previous four weeks
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 population = labor force + not in labor force

labor force = employed + unemployed

unemployed
unemployment rate =
employed + unemployed
labor force
labor force participation rate =
population