What Is Unemployment?
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. The 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.
Key Takeaways
- Unemployment occurs when workers who want to work are unable to find jobs.
- High rates of unemployment signal economic distress while extremely low rates of unemployment may signal an overheated economy.
- Unemployment can be classified as frictional, cyclical, structural, or institutional.
- Unemployment data is collected and published by government agencies in a variety of ways.
- Many governments offer unemployed individuals a small amount of income through unemployment insurance, as long as they meet certain requirements.
How is Unemployment Defined?
Understanding Unemployment
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 the need for basic consumption.
High, persistent unemployment can signal serious distress in an economy and even lead to social and 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. When unemployment is voluntary, it means that a person left their job willingly in search of other employment. When it is involuntary, it means that a person was fired or laid off andmust now look for another job.
Types of Unemployment
Voluntary and involuntary unemployment can be broken down into four types. We highlight them below.
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.
Cyclical Unemployment
Cyclical unemployment is the variation in the number of unemployed workers over the course of economic upturns and downturns, such as those related to changes in oil prices. 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.
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.
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, including efficiency wages and discriminatory hiring
- Labor market institutions, such as high rates of unionization
Many governments offer unemployment insurance to certain unemployed individuals who meet eligibility requirements.
How to Measure Unemployment
The U.S. 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 BLScommonly 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.
History 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, the unemployment rate remained above 14% but subsequently dropped down to the single digits. It remained there until 1982 when it climbed above 10%.
In 2009, during the Great Recession, unemployment again rose to 10%. In April 2020, amid the COVID-19 pandemic, unemployment hit 14.8%. As of August 2024, the unemployment rate was 4.2%.
What Are the Main Causes of Unemployment?
There are many reasons for unemployment. These include recessions, depressions, technological improvements, job outsourcing, and voluntarily leaving one job to find another.
What Are the 3 Types of Unemployment?
Today's economists point to three main types of unemployment: frictional, structural, and cyclical. Frictional unemployment is the result of voluntary employment transitions within an economy. Frictional unemployment naturally occurs, 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. These changes can marginalize a group of workers. They include technological changes, a lack of relevant skills, and jobs moving overseas to another country. Cyclical unemployment relates to the loss of jobs that occurs during changes in business cycles.
What Is the Strict Definition of Unemployment?
The official unemployment definition comes from the Bureau of Labor Statistics, which states that "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."
The Bottom Line
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.
