Unemployment is the working state of someone who is willing and able to work but not working currently. It is measured in several different ways by several different organizations, some private and some public. The most widely accepted and quoted measure, the unemployment rate, is the responsibility of the Bureau of Labor Statistics (BLS), an agency of the Department of Labor.
Economists study unemployment as one barometer to achieving a major economic goal—high employment. The BLS collects data on a variety of employment and unemployment conditions. The BLS also determines the size of the labor force, which is a variable in determining the unemployment rate. It establishes the definition of an unemployed worker. An individual is classified as unemployed if he or she is over 16 years of age and does not currently have a job, but is able to work and actively pursuing employment. No measure of unemployment is precise. All measures of unemployment and methods of collecting data have some flaws along with their benefits. Unemployment rates and other unemployment and employment metrics give economists portions of the labor picture. It is up to economists, policy makers, and the public to take these aggregate measures in total to create an accurate picture of an economy's capacity for labor.
There are four categories of unemployment recognized by economists: frictional, cyclical, structural, and seasonal.
Frictional unemployment is a type of unemployment that occurs when a person is between jobs. Frictional unemployment is considered only temporary, since typically, as soon as the unemployment occurs the person begins to search for employment almost immediately.
There are many causes of frictional unemployment. People may decide to leave their jobs on their own accord. Their reasons for leaving may include low pay, little or no opportunity for growth and furthering education, and a difficult work environment or undesired location. Another cause is the fact that some people may overlook certain jobs because they feel as if those jobs are below their skill level, or may simply believe that an available position is “below” them. Likewise, an employer may look at a pool of job candidates’ resumes and decide that none of the applicants have the skills necessary to do the job, when in fact they do. Finally, frictional unemployment may be temporary due to certain life events, such as a woman taking maternity leave from her job, or a teacher taking a sabbatical.
Another way to understand frictional unemployment is to think of it as a period in which a person is searching for employment opportunities, or simply the period in between jobs. Unemployment is always present in the economy, resulting from temporary transitions made by workers and employers, or from workers and employers having inconsistent or incomplete information.
Cyclical unemployment is job loss that occurs when the economy enters into a period of recession and there are more people seeking work than there are jobs available. In reaction to less consumer demand for goods and services, businesses lay off workers as production need decreases. These workers are then temporarily unemployed until the cycle changes and employers can rehire when the economy expands and consumer demand increases. Cyclical unemployment is a part of the business cycle. The most common method used by economists to calculate the cyclical unemployment rate is to use the unemployment rate at the peak of the business cycle and then subtract the unemployment rate at the bottom of the business cycle. The difference between these two numbers is what economists call the cyclical unemployment rate.
Structural unemployment is unemployment that occurs when an industry goes through a transformation in the way it produces the good or service of its industry, and the skills of the former employees do not match the new skills necessary in the new industry.
Seasonal unemployment occurs as a result of a job only being able to be performed during specific seasons of the year. Often the term “seasonal” conjures up visions of the summer jobs of high school and college students or the part-time jobs retail stores add during a holiday season. While those jobs are included in the Current Establishment Survey (see below), seasonal unemployment also includes jobs that are weather dependent. More specific to northern states, seasonal unemployment includes career jobs such as highway construction and housing construction.
Remember the definition of unemployed is someone who is both willing and able to work. Frictional unemployment includes those who are between jobs and new entrants into the work force. Between frictional unemployment and structural unemployment in some industries in the economy, it is virtually inconceivable to imagine that every person willing and able to work is working. The natural rate of unemployment refers to the lowest rate of unemployment that a society can reasonably achieve, knowing there will always be some frictional and structural unemployment in the economy. What then is the unemployment rate at which the economy can be considered to be at full employment? The natural rate of unemployment can also be viewed as the point at which the economy is operating at full employment, or the point at which unemployment has reached equilibrium. The natural rate of unemployment is an arguable point between economists. Whether that unemployment rate is 3, 4, or 5 percent, economists agree that there is a percentage window at which full employment is considered achieved, even without the percentage being zero. At that point, most adults who want to be working are in fact working.
Under the philosophy of John Maynard Keynes, an economy can reasonably continue to add jobs, i.e., lower unemployment, without creating demand-pull inflation as long as the economy is in an economic downturn or recession. However, when the economy recovers and economic growth is at the peak of the business cycle, a significantly low unemployment rate translates into a large increase of people and money demanding goods and services. This scenario poses the challenge of determining what low unemployment rate will translate in too much new demand such that prices are forced to rise—i.e., inflation. The lowest unemployment rate possible to achieve without translating into inflation is called the Non-Accelerating Inflation Rate of Unemployment, or NAIRU. This unemployment measure enters economists’ discussions when an economy is operating at close to or at full potential. At this point, economists become concerned about an overheating economy and inflationary prospects are high, often instigated by excessive consumer demand for goods and services.
Unemployment measures are arguably the most awaited economic metrics by economists, politicians, and investors. To get as clear a picture of the labor force as possible, unemployment has three key types of measures: household survey, establishment survey, and weekly unemployment claims. Each measure reveals a distinct aspect of the labor force. Unemployment data are collected and released by the Bureau of Labor Statistics (BLS), an agency of the Department of Labor. Unemployment data are released by the BLS on the first Friday of each month at precisely 8:30 a.m. The BLS makes revisions to its data as far back as two months. Sometimes these revisions can be quite significant and impact or alter the decisions of investors and politicians. Since consumer spending is approximately two-thirds of the U.S. economy, unemployment data become a portrait of the economic spending habits and income profile of consumers.
The current personal survey data are collected by the BLS through surveying 60,000 homes across the country. All sectors of the economy are surveyed, including farm and nonfarm workers, domestic helpers, and those who are self-employed. According to the BLS, they have a response rate to the survey of approximately 95 percent. The survey includes questions on whether the respondent is employed or not, and if so, if it is part- or full-time, and if the respondent is not employed, is the respondent looking for work. With the data collected from the current personal survey, the BLS determines the size of the civilian labor force, the number of people employed, and the unemployment rate. Every survey has its shortcomings, and the household survey is no exception. The current personal survey suffers the same deficiency as all surveys, which is the honesty of the respondents.
Also known as the payroll survey, the BLS surveys over 400,000 companies and government agencies in 500 different industries. The surveyed companies employ approximately 45 percent of the labor force, or 40 million workers. This survey is different from the current personal survey in a number of ways. One, it only looks at nonfarm workers and is not concerned with age. Two, the current establishment survey does not distinguish between full time or part time. The key focus of this survey is to determine the number of jobs created or eliminated. Third, since the current establishment survey gather data from only employers and workplaces, it does not count self-employed workers who work out of their homes. While both the current establishment and current personal surveys collect very different information, they tend to move in the same direction, showing similar unemployment pictures of the economy.
The third unemployment measure is the weekly claims for unemployment insurance. This leading indicator is based on the actual numbers of unemployment claims filed, as recorded by each state's unemployment agency. Since it is measured by actual claims numbers, its accuracy makes it a good indicator of future economic conditions. From the trend of these data, it is possible to gauge the number of unemployed who are no longer receiving payments, and potentially the number of discouraged workers.
A discouraged worker is an individual of working age who is unemployed and is not currently pursuing a job. Although they are usually willing and able to work, discouraged workers have given up finding gainful employment due to a variety of factors. Due to these real or perceived limitations in the job market, these individuals have become “discouraged.” Discouraged workers are not included in the unemployment rate and they are not considered to be in the labor force.
The level of employment can have a significant impact on the growth of an economy. An economy at less than full employment has underutilized resources, which translates into fewer people participating as both producers and consumers. Yet an economy at a level considered full employment is an economy with full, or close to full, utilization of the resources and capacity of consumers purchasing goods and services. There is often a fine line between the two scenarios.
David A. Dieterle
See Also Bureau of Labor Statistics; Cyclical Unemployment; Department of Labor; Gross Domestic Product (GDP); Keynes, John Maynard; Keynesian Economics
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