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

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

Related Articles
  1. Personal Finance

    What "Unemployment" Really Means

    Unemployment occurs when a person who is actively searching for employment is unable to find work. The most frequently cited measure of unemployment is the unemployment rate. This is the number ...
  2. Personal Finance

    Understanding the Unemployment Rate

    The unemployment rate is the percentage of people in the labor force who are unemployed but seeking a job.
  3. Personal Finance

    Understanding Natural Unemployment

    Natural unemployment is often defined as the lowest rate of unemployment an economy will reach.
  4. Financial Advisor

    How Labor Force Participation Rate Affects U.S. Unemployment

    While a falling unemployment rate sounds like a good thing, it can actually be indicative of people leaving the labor force because they can't find a job.
  5. Personal Finance

    What Qualifies as Full Employment?

    Full employment is an economic term describing a situation where all available labor resources are being utilized to their highest extent.
  6. Investing

    How Inflation and Unemployment Are Related

    How can inflation affect unemployment, and vice versa? Here we examine wage inflation, stagflation and the Phillips Curve.
  7. Personal Finance

    Understanding Frictional Unemployment

    Frictional unemployment is one aspect of natural unemployment, which is unemployment caused by things other than an underperforming economy.
  8. Insights

    How The Unemployment Rate Affects Everybody

    Depending on how it's measured, the unemployment rate is open to interpretation. Learn how to find the real rate.
  9. Insights

    Leading Economic Indicators: U.S. Bureau of Labor Monthly Stats

    The Bureau of Labor Statistics' monthly employment figures are a key economic indicator. Here's how they work.
  10. Insights

    Examining The Phillips Curve

    This model depicts an inverse relationship between unemployment and wage inflation, but is it accurate?
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center