2.3 Unemployment

Understanding and Counting Labor

In macroeconomics, the labor force refers to the total number of people who are either employed or actively seeking employment. To be counted in the labor force, an individual must be at least 16 years old and not in the military, institutionalized, or otherwise unable to work. The labor force does not include individuals who are retired, in school, or not actively seeking employment. People who are able to work but choose not to look for work are called discouraged workers.

Discouraged workers are individuals who are not in the labor force because they have given up looking for work due to the perceived lack of job opportunities. Discouraged workers are not counted as part of the labor force because they are not actively seeking work.

The labor force participation rate is the percentage of the total population that is in the labor force. It is calculated by dividing the number of people in the labor force by the total population and multiplying by 100. The labor force participation rate is an important indicator of the health of the labor market and can be affected by a variety of factors, such as the overall level of economic activity, the availability of jobs, and demographic trends.

Economists use a variety of data sources to measure the size and composition of the labor force, including household surveys and employer surveys. Household surveys, such as the Current Population Survey in the United States, ask individuals about their employment status and job search activities. Employer surveys, such as the Establishment Survey in the United States, ask employers about the number of workers on their payrolls and the number of job openings.

Overall, the labor force is an important economic indicator that helps economists and policymakers understand the supply of labor in the economy and the health of the labor market. It provides insight into the employment opportunities available to individuals and can help inform policy decisions related to labor market regulation and job creation.

Calculating Unemployment

One of the key economic indicators used by economists to understand labor in the economy is the unemployment rate. The unemployment rate is defined as the percentage of the labor force that is not employed. This means that retired peoples, criminals, etc. are not included as unemployed. 

Calculating the Unemployment Rate

Example: 

Germany:

Germany's unemployment rate in 2017 would be 10%. That is determined by dividing the 5 million that are unemployed by the 50 million that are in the labor force. Germany's unemployment rate in 2018 is 15%. That is determined by dividing the 15 million that are unemployed by the 100 million that are in the labor force.

Italy:

Italy's unemployment rate in 2017 is 5%. That is determined by dividing the 8 million unemployed by the 160 million in the labor force. Italy's unemployment rate in 2018 is 7%. That is determined by dividing the 7 million unemployed by the 100 million in the labor force.

It is important to be careful not to include non-labor force members in the unemployment rate.

Types of Unemployment

Frictional Unemployment

Frictional unemployment is the type of unemployment that occurs when workers are in between jobs or are searching for their first job. It is a normal part of the labor market and is often referred to as "healthy" unemployment. Frictional unemployment reflects the time it takes for workers to search for and transition to new jobs, and it can also occur when workers leave one job to start their own business or go back to school.

For example, consider a recent college graduate who is actively searching for their first full-time job. While they are looking for work, they may be considered to be frictionally unemployed. They may also be considered frictional unemployed if they leave their current job to look for a new job with better pay or working conditions. In both cases, the individual is actively seeking employment and is available to work, but they are not currently employed. Frictional unemployment is typically short-term and does not have a negative impact on the overall economy.

Structural Unemployment

Structural unemployment is a type of unemployment that occurs when there is a mismatch between the skills and abilities of workers and the requirements of available jobs. This can happen when there are changes in the economy, such as technological advancements or shifts in the types of goods and services that are in demand. For example, if a factory that produces a certain type of product becomes obsolete due to technological changes, the workers at that factory may be considered structurally unemployed because their skills are no longer in demand. A common example is a typewriter repairman. While at one point they were probably in high demand, they're no longer needed because nobody uses typewriters anymore.

Structural unemployment can be difficult to address because it requires workers to acquire new skills or re-train for different types of jobs. This can take time and may require government intervention, such as training programs or education subsidies, to help workers transition to new employment opportunities. Structural unemployment can also occur at a regional level, when the industries that are prevalent in a particular area are in decline and there are few alternative job opportunities available.

Cyclical Unemployment

Cyclical unemployment is a type of unemployment that occurs during an economic recession or downturn, when there is a lack of demand for goods and services and firms cut back on production and hiring. During an economic recession, firms may reduce their production levels or go out of business altogether, leading to a decline in employment. Cyclical unemployment is typically considered to be "unhealthy" unemployment because it is a result of a decline in economic activity and can be difficult to reverse.

For example, consider a firm that produces a certain type of product that is no longer in high demand. During an economic recession, the firm may reduce its production levels or go out of business altogether, leading to layoffs for its workers. These workers may become cyclically unemployed as a result of the decline in economic activity and the lack of demand for the firm's products. To address cyclical unemployment, policymakers may implement expansionary fiscal or monetary policies to try to stimulate economic growth and increase demand for goods and services.

Below are some examples of different scenarios related to different types of unemployment:

Full Employment

You may think that the best thing for an economy is 0% unemployment, but in fact 0% unemployment is unhealthy for an economy. 0% unemployment usually means that an economy is over-heating or working too quickly, which would lead to prices rising quickly. Instead, the term full employment refers to a status where there is little or no cyclical unemployment. Frictional and structural unemployment will always exist because there will always be people between jobs or with "unnecessary" skills. The natural rate of unemployment is the rate at which there is only frictional and structural unemployment, and is usually argued to be around 4-6% unemployment.