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Unemployment Rate Over Time

Unemployment is part of the IB syllabus for macroeconomics . It is also part of the AP Macroeconomics syllabus for Economic Basics, Measurement of Economic Performance, and Inflation, Unemployment, and Stabilization Policies

Unemployment occurs when a person is seeking work but currently without work.

Full employment and underemploymentEdit

When a business or country is underemployed it means that the workers who have a high level of training are employed at jobs which they are overqualified for, wasting their skills on that rather then doing something they specialize in. This practice is inefficient. For example: a Dean of Medicine is working as a "nurses aid". His or her training allows him or her to work as the Dean of Medicine, but instead is employed with the job of a nurses aid. A common thing that happens is that foreigners enter a country that doesn't see their great skills or their license to practice isn't recognized by the country they entered. Most of the time the underemployed are often competing for available jobs. Underemployment can become a problem when the unemployment rate drops below 4 or 4.5 % (full employment); this shows that people are not moving from jobs. Some short term unemployment is good because it means people are searching for a job or their skill is set.

Full employment is when all or nearly all people who are able to work and willing to work can work at a certain or minimum wage. Also full employment is when all available labor resources are being used in an economically efficient way. Full employment doesn't mean that there is zero unemployment. Full employment only means that the economy is operating at full employment because there is only structural unemployment, frictional unemployment, and seasonal unemployment. The remaining unemployment is cyclical. Full employment has been used with long-run aggregate supply curve. Full employment is the quantity of labor that is used when the labor market is in equilibrium. Also, Full employment can be attainable within an economy but overcompensation for a recession will result in an inflationary gap. The inflationary gap would probably result from the workers having more disposable income, which drives the prices upward.

Also, it means that when unemployment rate = natural unemployment rate which comes from frictional and structural factors.

-Full employment doesn't mean that the actual or reported unemployment rate is zero, it only means that cyclical (Keynesian) unemployment is 0.


Full Employment

-On a graph of AS/AD, full employment is anywhere on the LRAS curve.fuck you and who with you

Unemployment rateEdit

Unemployment is the percentage of the civilian labor force shown that is currently unemployed. It is the percentage of people who want to work and are actively seeking employment. Unemployment is equal to the number of unemployed persons divided by the civilian labor force. The civilian labor force is made up of anyone able to work (children, institutionalized people, the elderly, discouraged workers, etc. are not included in this category).

Unemployment rate (U)=

(Number of unemployed persons) X100
(Civilian labor force)

-There are 5 different types of unemployment: frictional unemployment, structural unemployment, natural unemployment, seasonal unemployment and cyclical unemployment.

Note: A discouraged worker is someone who is unemployed and wants a job but has given up looking for work.

Costs of UnemploymentEdit

There are three main costs of unemployment. The first cost is the government has to increase social benefits. The result of this is a raise in taxes (which is unlikely because hardly anyone could afford to pay them), create a higher deficit -- spend money that they don't have (this is the most common action the government takes) -- or cut infrastructure building programs, which would ultimately hurt the economy in the long run.

The second economic cost of unemployment is a decrease in aggregate demand. Consumption would decrease because all of the people who have been laid off or fired will have less money to spend. C+I+G+(X-M)=AD, so the aggregate demand would decrease. Finally, Gross Domestic Product would go down because there would be a decrease in aggregate demand.

The Gross Domestic Product would also decrease because of the waste of resources and because of the deskilling (decrease in quality of workers) of the previous labor force. Since there are so many unemployed people, there are less people working. Since there are less people working, there are less resources being used up. So there would be a excess of resources left that will not be used. That is wasteful and the resources could be used more efficiently. Deskilling is what happens when someone has not worked in a while and becomes unable to perform the task they were able to before. If a person does not work on a skill that they have, they will either lose it or become less efficient in it. This puts them at a disadvantage to a person who is still in work and is practicing their skills, that means that they are less likely to be hired and more likely to stay unemployed.

The final cost of unemployment is the social cost. The social cost of unemployment is the decrease of the unemployed person’s self-esteem. For most people their job is a part of their identity. If they lose their job they lose a part of themselves and who they are. When one's self esteem goes down they tend to become depressed. When they become depressed many bad things happen such as they could start abusing drug and alcohol substances, or even start abusing their spouse, family and friends. A lot of people when they become depressed may commit suicide because they cannot cope with their situation. There are also costs associated with the unemployed individuals. Without work people will be unable to pay their mortgages or rents, and that would lead to foreclosure and homelessness. This relates to the social costs. This can have a negative effect on the individual's mindset, decreasing the possibility they re-enter the work force. once they reenter the workforce, it can take time for the social costs to be canceled out again, so this is a big problem.

Types of unemploymentEdit

There are four types of Structural Unemployment: Regional, Sectoral, Technological and Discriminatory.

Structural Unemployment

Structural unemployment: Unemployment resulting from people having skills and training that do not have jobs available in that field, or live in an area where those skills are not required.

Example: If there are 40 open jobs for barrel makers and 50 barrel makers, 10 people will be unable to get a job. Even if there are 10 open jobs at a computing firm, these barrel makers will be unable to get jobs because they do not have the trade skills to get a job at the computing firm. Structural unemployment also refers to people that are unable to get jobs because their location does not allow it. An example of this is a person who knows how to work with oil, but lives in a place that has none. Many technological advancements like robotics have resulted in structural unemployment.

Frictional Unemployment

A type of unemployment that occurs because people do not always take their first job offer and businesses do not always hire the first person that applies. Example: Ryan works at the University of Minnesota library. After graduation, it takes him six months to find a new job. He is no longer unemployed, but had six months of frictional unemployment

Frictional unemployment means that there is a job out there, in the city where the person lives, for that person to have. That person just needs to go out and get the job.

This is the most common type on unemployment because it is caused by changing market conditions such as time and lack of coordination.

Frictional Unemployment is healthy because it forces people to look for other jobs. It causes changes in jobs for people which prevents workers from having the same job their entire lives. This fluidity of employment causes innovation, due to the fact that people who are moving from job to job are potentially being put in positions where they are better fit than before.

Seasonal Unemployment

A type of unemployment that occurs when a worker can only work during a specific season, and when those seasons are over, they no longer employed due to lack of need, and are thus seasonally unemployed. An example of seasonal unemployment would be workers hired by farmers during the spring to help plant crops, and again during the fall harvest, ceterus paribus. These workers are employed during two seasons, but during the winter and summer, they have no jobs. Another example of seasonal unemployment would be exterior house painters. They can paint only during the summer, and during the other three seasons, they are unemployed (at least in cold climates where there is a severe winter such as in Minnesota). Another example is the ski instructors. They can only teach when there is snow on the ground. This means they are not employed throughout the rest of the year. Another example would be in resort areas in their off seasons they can experience unemployment.

Sometimes seasonal unemployment is optional. For example, young adults and teens in school often look for some extra cash during holiday seasons. So, what they do is apply for a job at a department store or shopping center where they can get discounts for gifts.

Cyclical/Demand-Deficient Unemployment

Cyclical unemployment (also known as Keynesian unemployment) is a type of unemployment that occurs when there is not enough aggregate demand in the economy. Cyclical Unemployment gets its name because it interacts with the business cycle. Demand for most goods and services falls, less production and consequently fewer workers are needed, wages do not fall to meet the equilibrium level, and mass unemployment results. Basically this type of unemployment means that there are too many unemployed workers and too few jobs needed to be filled.

Cyclical unemployment rate(Uc) = Unemployment rate(U) - Natural unemployment rate (Un)

Also known as Keynesian unemployment.

Measures to deal with unemploymentEdit

Costs of unemployment:

  • Transfers increase
  • Production is down
  • Government spending increases, they must spend money to support the unemployed now.
  • Taxes increase
  • Deflation
  • De-skilling: When technology advances past the knowledge of the worker while they are unemployed, decreasing the quality of the worker.
  • GDP decreases
  • Self esteem decrease, a lot of people try to find their identity through their work.
  • Causes Anomie (general feelings of disconnection from society)

Demand Side Policies (reduce cyclical unemployment):

  • Lower interest rates (monetary policy)
  • Lower exchange rate by increasing the money supply
  • Employment subsidies (like the New Deal program)

Supply Side Policies (reduce frictional and structural unemployment):

  • Change on taxes
  • Decrease social benefits (welfare, unemployment are two examples)
  • Increase spending on education and job training
  • Job Creation

Natural Rate of UnemploymentEdit

NAIRU: Non-Accelerating Inflation Rate of Unemployment is another name for the natural rate of unemployment. The reason it is given this other name is because the economist Milton Friedman argued that any and all market economies must involve some unemployment (see above). This natural level of unemployment was titled just that. Unexpected inflation might allow unemployment to fall below the natural rate by temporarily depressing real wages, but this effect would dissipate once expectations about inflation were corrected. Only with continuously accelerating inflation could rates of unemployment below the natural rate be maintained. At the natural rate of unemployment, inflation was not continuously accelerating, as it was below this level.

To put it simply, the natural rate of unemployment occurs at equilibrium when the long run and short run phillips curve intersect on the unemployment vs. inflation graph. This can be seen in the diagram below. The vertical line is the long run phillips curve (LRPC). The downward sloping line is the short run phillips curve (SRPC).


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