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High unemployment rate is one of the results of an economic downturn. It is defined as the percentage of the labor force which is not employed. Population is divided into 3 groups: 1) those under age 16 or institutionalized, 2) those not in the labor force, 3) the labor force which includes those age 16 and over who are willing and able to work. Part-time workers and discouraged workers who want a job, but are not actively seeking one, are not in the labor force. So they are not included in the unemployment rate.

Unemployment rate (U) = (unemployed workers of the labor force / labor force) X 100%

The economic cost of unemployment can be calculated by using Okunís law:

GDP Gap ( %)= ( U Ė Un ) X 2  where Un = natural rate of unemployment

As we can see that the size of the labor force is crucial in determining the unemployment rate. Therefore, the Labor Force Participation rate is often calculated to see the percentage of the civilian noninstitutional population that is in the labor force. Group 2 (those not in the labor force) and Group 3 (the labor force which includes those age 16 and over who are willing and able to work) form the noninstitutional population.

Labor Force Participation rate (%) = (Labor force / noninstitutional population) X 100%

Three types of unemployment:

1. Frictional unemployment includes those looking for jobs or waiting to take jobs soon. It indicates the mobility in the labor market.

2. Structural unemployment is due to changes in the structure of demand for labor, such as geographic distribution of job changes or obsolescence of certain skills.

3. Cyclical unemployment is caused by the recession phases of the business cycle.

Full employment does not mean zero unemployment, it means cyclical unemployment rate is zero. At this rate, job seekers are equal to job openings. This is also called the natural rate of unemployment (Un) where real GDP is at its potential GDP. Un does not stay the same but depends on the demographics of the labor force.

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