Chapter Six: Module Summary -- Unemployment

  • Unemployment is a lagging indicator, lagging behind the business cycle. Unemployment generally rises when the economy's GDP is declining, and falls when the economy recovers.

  • Each month the Bureau of Labor Statistics polls over 50,000 households in order to measure the nation's unemployment rate. The respondents of the survey are classified into one of three categories: unemployed, employed, or not in the labor force.

  • The unemployment rate is the percentage of the labor force that is unemployed.

  • There are three common criticisms of the unemployment rate. First, the survey does not count discouraged workers. Discouraged workers are individuals who have given up looking for a job due to an inability to find one. Second, the survey does not account for hidden unemployment. Third, the survey does not check the accuracy of survey responses to job search. To be unemployed, a person must only "say" he has actively sought work.

  • There are three types of unemployment. Frictional unemployment is unemployment due to the natural movements in and out of labor force. It is short term and voluntary. Structural unemployment is unemployment due to changing technology, shifting comparative advantage, and international competitiveness. Cyclical unemployment is unemployment due to the downturn in the business cycle. Macroeconomics is concerned with reducing cyclical unemployment.

  • Frictional and structural unemployment are unavoidable in a dynamic economy. These two combined are called the Natural Rate of Unemployment, or the Full-employment rate of unemployment. We currently believe this rate to be between 5 and 5.5 percent.

  • The economic cost of unemployment is potential output minus actual output, where potential output is the level of GDP the economy would attain if all resources were fully employed.

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