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Intro to Unemployment

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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 jobless claims, it is important to understand how the economy operates around you. In this article, I will explain what it means to be unemployed, the different types of unemployment, and the labor force.

Unemployment

To be unemployed means to be actively searching for work. Most believe that being unemployed is means that one is 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. The labor force is comprised of two groups: those who are working and those who are seeking employment. 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. Look here for the latest unemployment rate.

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. The Civilian Non-Institutionalized population refers to those over the age of 16 and who are not convicted felons. 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.

Types of Unemployment

There are many types of unemployment, but I will cover the main three: Frictional, Structural, and Cyclical.

Frictional Unemployment

Frictional unemployment will always occur in an economy, regardless of the economic conditions at the time. It refers to the unemployment that is a result of people looking for a new job and transitioning from one to another.

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.

Structural Unemployment

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.

Cyclical Unemployment

Cyclical unemployment changes inversely with regard to the strength of the economy. In strong economic and business conditions, cyclical unemployment will be low. But, 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.

Importance of Unemployment

Unemployment is important to all members of the economy as its a good indicator of 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 said seen on 60 Minutes 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, understanding unemployment will give you an informed perspective of the economy as a whole.

About the author

Co-founder, Managing Editor and Contributor at StreetFins | + posts

I'm an incoming Stanford student passionate about financial literacy. I cover topics from personal finance to global economic news.