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What is 'Unemployment'

Unemployment occurs when a person who is actively searching for employment is unable to find work. Unemployment is often used as a measure of the health of the economy. The most frequent measure of unemployment is the unemployment rate, which is the number of unemployed people divided by the number of people in the labor force.

BREAKING DOWN 'Unemployment'

While the definition of unemployment is clear, economists divide unemployment into many different categories. The two broadest categories of unemployment are voluntary and involuntary unemployment. When unemployment is voluntary, it means that a person has left his job willingly in search of other employment. When it is involuntary, it means that a person has been fired or laid off and must now look for another job. Digging deeper, unemployment — both voluntary and involuntary — is broken down into three types.

Frictional Unemployment

Frictional unemployment arises when a person is in between jobs. After a person leaves a company, it naturally takes time to find another job, making this type of unemployment short-lived. It is also the least problematic from an economic standpoint. Arizona, for example, has faced rising frictional unemployment in May 2016, due to the fact that unemployment has been historically low for the state. Arizona citizens feel confident leaving their jobs with no safety net in search of better employment.

Cyclical Unemployment

Cyclical unemployment comes around due to the business cycle itself. Cyclical unemployment rises during recessionary periods and declines during periods of economic growth. For example, the number of weekly jobless claims in the United States has slowed in the month of June, as oil prices begin to rise and the economy starts to stabilize, adding jobs to the market.

Structural Unemployment

Structural unemployment comes about through technological advances, when people lose their jobs because their skills are outdated. Illinois, for example, after seeing increased unemployment rates in May 2016, sought to implement "structural reforms" that will give people new skills and therefore more job opportunities.

Differences in Theories of Unemployment

Many variations of the unemployment rate exist with different definitions concerning who is an "unemployed person" and who is in the "labor force." For example, the Bureau of Labor Statistics (BLS) commonly cites the "U-3" unemployment rate as the official unemployment rate, but this definition of unemployment does not include unemployed workers who have become discouraged by a tough labor market and are no longer looking for work.

Additionally, various schools of economic thought differ on the cause of unemployment. Keynesian economics, for example, proposes that there is a "natural rate" of unemployment even under the best economic conditions. Neoclassical economics, on the other hand, postulates that the labor market is efficient if left alone but that various interventions, such a minimum wage laws and unionization, put supply and demand out of balance.

Calculating Unemployment

In the United States, the government relies on a survey to track unemployment data. Many people believe that the government uses unemployment insurance to weigh the numbers, which isn’t always accurate or complete, since people may still be unemployed after their EI benefits run out. 

The BLS conducts a monthly survey called the Current Population Survey (CPS) in order to measure the nation’s unemployment rate. This survey has been done every month since 1940. The sample consists of about 60,000 eligible households, translating to about 110,000 people each month. The survey changes one-fourth of the households in the sample so that no household is represented for more than four consecutive months in order to strengthen the reliability of the estimates.

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