Question

Explain how we measure unemployment in the U.S. Define the different components to the unemployment rate (cyclical, structural, and frictional). Critically analyze the tradeoffs economies face when they attempt to decrease the unemployment rate below the natural rate. Use graphs and or models in your analysis.

Answer 1

Solution

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Unemployment Rate

The unemployment rate measures the percentage of employable people in a country's workforce who are over the age of 16 and who have either lost their jobs or have unsuccessfully sought jobs in the last month and are still actively seeking work.

The formula for unemployment rate is:

Unemployment Rate = Number of Unemployed / Total Labor Force

There are three main types of unemployment: structural, frictional and cyclical. The first two make up the natural unemployment rate. The third rises when demand falls, usually during a recession. Some economists define as many as five additional types of unemployment, such as seasonal and classical.

This article summarizes the nine types of unemployment. Links to more detailed articles are included in case you would like to learn more. Also find out how unemployment is measured, and why some experts say it doesn't capture the real unemployment rate. Learn how U.S. unemployment has fluctuated over time

Frictional Unemployment

frictional unemployment is when workers leave their old jobs but haven't yet found new ones. Most of the time workers leave voluntarily, either because they need to move, or they've saved up enough money to allow them to look for a better job.

Structural Unemployment

Structural unemployment is when shifts occur in the economy that creates a mismatch between the skills workers have and the skills needed by employers.

An example is when an industry fires machinery workers and replaces them with robots. The workers need to learn how to manage the robots that replaced them. Those that don't need retraining for other jobs or will face long-term structural unemployment.

Cyclical Unemployment

Cyclical unemployment is not part of the natural unemployment rate. It's caused by the contraction phase of the business cycle. That's when demand for goods and services fall dramatically, forcing businesses to lay off large numbers of workers to cut costs.

Cyclical unemployment tends to create more unemployment. This is because the laid-off workers have less money to buy the things they need, further lowering demand.