Let's begin by revisiting the business cycle, shown below. As you may recall, it is common and natural for our economy to go through periods of growth and contraction.
Now, when most people consider the business cycle, they are concerned about things like the unemployment rate and inflation. Economists use all kinds of data to help us predict where the economy is headed, to explain what has just occurred in the economy, and to look at what is currently happening in the economy.
However, calculating and understanding unemployment is a huge part of this, which is what we will focus on today.
The Bureau of Labor Statistics (BLS) is the government agency that produces the Employment Situation report, of which the unemployment rate is one significant statistic.
So, how do they measure unemployment? Well, to be unemployed, you have to be a person 16 years of age or older who is not working, is available for work, and has made efforts to find work during the last four weeks.
Now, it is important to clarify a few terms before we continue our discussion on unemployment. Many people are just not in the labor force, a point that many people neglect to understand.
EXAMPLEFor example, a person who is not looking for work, either because they do not want a job or they have given up looking, is considered to be not in the labor force. Also, people not in the labor force would include anyone who is retired, anyone under age 16, and generally, any full-time student.
It is essential to understand that the labor force is not the total population. It is the number of people employed plus the number of people unemployed. The population is comprised of people in the labor force, as well as people not in the labor force.
Sometimes people think that unemployment is measured over the entire population, but it really is a measurement based on the people in the labor force.
It follows, then, that the unemployment rate is the number of people unemployed divided by the labor force, not the population.
Now, it is important to understand that there are different kinds of unemployment. The reason this is important is that depending on the cause of the unemployment rate at the time, the government may want to take action.
However, two of the three types of unemployment we will cover today are immune to government intervention, so if either of these types is making up the unemployment rate, then there is no cause for action.
They are unemployed because they are changing jobs, for instance:
This type of unemployment is typical, and it will always exist. It does not suggest that anything is wrong with the economy.
Our economy is constantly changing how we produce goods and services. We have a very dynamic economy, so people's skills do not match the skills necessary for jobs all of the time. This can be caused by a variety of reasons, such as:
EXAMPLEFor example, the invention of computers means that there is really no longer a need for typewriter repairers. These people would not have the skills necessary today to do the jobs that are available.
This type of unemployment can be painful and difficult for people, but it does not mean that we should necessarily revert to old and outdated methods of production. It also does not suggest that anything is wrong with the economy. It is a standard type of unemployment that results from a dynamic economy that is always changing.
This is the type of unemployment that we see whenever we are in a recession or depression. Cyclically unemployed people are typically people who do have the current skills for current jobs. They are not structurally unemployed, but they simply cannot find a job because of the slow economy.
Cyclical unemployment does move with the business cycle, but it generally lags, meaning that people do not tend to actually get their jobs back until after the economy has begun to recover.
Businesses are slow, waiting to see if the economy is actually entering a recovery before they start to hire people back. This is what we sometimes refer to as a "lagging indicator" in the economy.
This is the rate of unemployment when the economy is operating at full capacity.
As mentioned, some unemployment is inevitable. It is going to happen because of friction and structural unemployment. Therefore, full employment does not mean that 0% of the population or the labor force is unemployed.
The natural rate of unemployment, as noted, to be around 5%, is frictional plus structural unemployment. Another way of expressing this, then, is that full employment would be 100% minus that natural rate of unemployment.
The two terms essentially mean the same thing, though they may be stated differently in various economic textbooks, defined as the unemployment level consistent with full employment, typically considered to be about 5% and attributed to frictional and structural unemployment.
Source: Adapted from Sophia instructor Kate Eskra.