Question

Ques_1 Explain briefly two reasons that the unemployment rate might under estimate the weakness in the labour market?

Ques_2 Should the target for the unemployment rate be 0% ? why or why not?

Answer 1

Ans 1

The unemployment rate is hugely underestimating the amount of labor market slack.

Now the reasons behind why unemployment rate underestimate the weakness in the labor market.

There are two factors or reasons for this

Consider the understated items, discouraged workers and part-time workers.
Discouraged workers might "want" to work, but they have demonstrated no effort to obtain employment, so they are placed in the "not in labor force" category. Part-time workers might "want" to work full time, but they are in fact working, and are thus placed completely in the "employed persons" category. Correctly categorizing unemployed labor resources is likely to increase the unemployment rate above the official level.

Discouraged Workers: Discouraged workers are people who are willing and able to work, and would gladly accept work, but because they have had no success finding a job they have given up actively seeking employment.
To be officially counted as unemployed, a person must be actively seeking work. When the Bureau of Labor Statistics (BLS) tabulates the official unemployment rate, discouraged workers are placed in the "not in labor force" category. Because they are NOT officially considered to be unemployed and are they NOT considered part of the labor force, then they are NOT included in the official unemployment rate calculation. However, these discouraged workers do, in fact, represent unemployed labor resources. They should be included in the unemployment rate. Doing so would boost the unemployment rate.

Part-time Workers: Part-time workers are people who are willing and able to work full-time (35 to 40 hours per week), but are forced to work less because employers do not need their productive efforts. While they have jobs, and are officially included in the "employed" category when the official unemployment rate is calculated, their labor resources are really only partially unemployed. For example, a person working 20 hours a week, who is willing and able to work 40 hours a week, should be considered as "half employed," but is officially consider only as "employed."
This problem results because the official unemployment rate "counts heads" to measure of labor resources, rather than something like "hours." While, ten people working 20 hours a week are the productive equivalent of five people working 40 hours a week and five people working 0 hours per week, they are not equivalent for the unemployment rate. Ten part-time workers generates a lower unemployment rate, than five full-time workers combined with five unemployed workers. Part-time workers should be included in the unemployment rate. Doing so would raise the unemployment rate.

The reason is why unemployment rate under estimate the weakness in the labour market is because of these above factors.

Ans 2

It depends on how exactly unemployment is measured, but with standard measures 0% is definitely not good. It might sound catchy as a political slogan but is actually an unhealthy sign for the economy. (A bit like 0% body fat is a cause for concern, not celebration.)

Economics has a notion of "full employment" which, paradoxically, is not 0% unemployment. This is due mostly to frictional unemployment which is unemployment caused by people changing between jobs. Unemployment actually being 0%—or even too close to 0%—would mean something odd with the dynamic of people moving between jobs.

After all, to completely avoid a job search, new openings would have to show up perfectly for every person leaving their job, however niche their professional role. The only way It can be imagined this happening is if there are far more open roles than people to fill them. While great for the workers in the market, being unable to fill positions is not healthy for companies and, transitively, unhealthy for the economy as a whole.

Although it's not possible. It would mean that no one was seeking to gain or change employment and no one was seeking to hire or fire.