Macroeconomics: Unemployment
  1. Macroeconomics: Introduction and History
  2. Macroeconomics: Schools Of Thought
  3. Macroeconomics: Microeconomics Foundation
  4. Macroeconomics: Supply, Demand and Elasticity
  5. Macroeconomics: Money And Banking
  6. Macroeconomics: Economic Systems
  7. Macroeconomics: Inflation
  8. Macroeconomics: The Business Cycle
  9. Macroeconomics: Unemployment
  10. Macroeconomics: Economic Performance and Growth
  11. Macroeconomics: Government - Expenditures, Taxes and Debt
  12. Macroeconomics: International Trade
  13. Macroeconomics: Currency
  14. Macroeconomics: Conclusion

Macroeconomics: Unemployment

By Stephen Simpson Labor is a driving force in every economy – wages paid for labor fuel consumer spending, and the output of labor is essential for companies. Likewise, unemployed workers represent wasted potential production within an economy. Consequently, unemployment is a significant concern within macroeconomics.

"Official" unemployment refers to the number of civilian workers who are actively looking for work and not currently receiving wages. Given that official unemployment statistics specifically exclude those who would like to work but have become discouraged and ceased looking for employment, the true unemployment rate is always higher than the official rate.

Within the unemployment number are several sub-types of unemployment.

  • Frictional unemployment results from imperfect information and the difficulties in matching qualified workers with jobs. A college graduate who is actively looking for work is one example. Frictional unemployment is almost impossible to avoid, as neither job-seekers nor employers can have perfect information or act instantaneously, and it is generally not seen as problematic to an economy.
  • Cyclical unemployment refers to unemployment that is a product of the business cycle. During recessions, for instance, there is often inadequate demand for labor and wages are typically slow to fall to a point where the demand and supply of labor are back in balance.
  • Structural employment refers to unemployment that occurs when workers are not qualified for the jobs that are available. Workers in this case are often out of work for much longer periods of time and often require retraining. Structural unemployment can be a serious problem within an economy, particularly in cases where entire sectors (manufacturing, for instance) become obsolete. (For more on unemployment, read The Unemployment Rate: Get Real.)
While high unemployment is undesirable, full employment (meaning zero unemployment) is neither practical nor desirable. When economists talk about full employment, frictional unemployment and some small percentage of structural unemployment are excluded. Economists do not generally believe it is practical or desirable to have 100% employment in an economy.

In particular, the Phillips curve highlights why this is so. Generally there is a relationship between inflation and unemployment – the lower the rate of unemployment, the higher the rate of inflation. While a variety of factors can alter the curve (including productivity gains), the essential take-away is that neither a zero-unemployment or zero-inflation scenario is viable on a long-term basis.

There is also a tradeoff between employment and efficiency. Businesses maximize their profits when they produce the largest number of goods possible at the lowest price possible. In some cases, though, labor is more expensive (less efficient) than capital equipment. Consequently, there is always a trade-off between the cost and productivity of labor and that of labor-substituting capital equipment and that effectively reduces the number of jobs available. Likewise, structural employment is a recurrent problem as technology progresses – workers find their skills no longer match the needs of the employers and must update their training as industries adopt new technologies. (To learn more about the Phillips curve, check out Examining The Phillips Curve.)

Macroeconomics: Economic Performance and Growth

  1. Macroeconomics: Introduction and History
  2. Macroeconomics: Schools Of Thought
  3. Macroeconomics: Microeconomics Foundation
  4. Macroeconomics: Supply, Demand and Elasticity
  5. Macroeconomics: Money And Banking
  6. Macroeconomics: Economic Systems
  7. Macroeconomics: Inflation
  8. Macroeconomics: The Business Cycle
  9. Macroeconomics: Unemployment
  10. Macroeconomics: Economic Performance and Growth
  11. Macroeconomics: Government - Expenditures, Taxes and Debt
  12. Macroeconomics: International Trade
  13. Macroeconomics: Currency
  14. Macroeconomics: Conclusion
RELATED TERMS
  1. Unemployment Rate

    The percentage of the total labor force that is unemployed but ...
  2. Unemployment

    Unemployment occurs when a person who is actively searching for ...
  3. Structural Unemployment

    A longer-lasting form of unemployment caused by fundamental shifts ...
  4. Cyclical Unemployment

    A factor of overall unemployment that relates to the cyclical ...
  5. Phillips Curve

    An economic concept developed by A. W. Phillips stating that ...
  6. Frictional Unemployment

    Unemployment that is always present in the economy, resulting ...
RELATED FAQS
  1. Is there a natural rate of cyclical unemployment?

    Learn more about cyclical unemployment and find out about the relationship of cyclical unemployment to the natural unemployment ... Read Answer >>
  2. Do rising unemployment rates tend to increase or decrease investor sentiment and ...

    Discover whether rising unemployment rates tend to increase or decrease consumer confidence and investor sentiment. Unemployment ... Read Answer >>
  3. When does cyclical unemployment become structural unemployment?

    Learn about the conditions under which cyclical unemployment becomes structural unemployment. Find out more about the relationship ... Read Answer >>
  4. What's the difference between cyclical unemployment and seasonal unemployment?

    Learn about the key differences between cyclical and seasonal unemployment. Read about distinguishing features of each of ... Read Answer >>
  5. How does the Bureau of Labor Statistics determine the unemployment rate?

    Learn how estimates of the unemployment rate are made based on monthly surveys of American households that are conducted ... Read Answer >>
  6. What are some causes of structural unemployment?

    Find out more about structural unemployment, what it is and examples of causes that can lead to structural unemployment in ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center