It may seem that many people like to complain about work, but most do see having a job as a much better situation than the alternative—being unemployed. In fact, the unemployment rate is one of the most important pieces of economic data that economists study. In the 10th episode of the Economic Lowdown video series, economic education specialist Scott Wolla explains what unemployment is, how it is measured, and the different types of unemployment.
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Below is a full transcript of this video. It has not been edited or reviewed for accuracy or readability.
Edward Heath, former prime minister of the United Kingdom, once said, "Unemployment is of vital importance, particularly to the unemployed."
It may seem that most people like to complain about work, but most do see having a job as a much better situation than the alternative—being unemployed.
Unemployment doesn't just harm the people who are out of work. Economists warn that it is also harmful to society overall because it represents unused resources: The people who cannot find jobs represent goods and services that are not being produced.
To some people, an unemployed person is someone who doesn't have a job, but it's actually more complicated than this.
Each month the Bureau of Labor Statistics (BLS) polls people who are at least 16 years old about their employment status during that month. The BLS uses the respondents' answers to divide people into three categories:
To be more exact, the BLS classifies persons as unemployed if they are 16 years or older, do not have a job, have actively looked for work in the previous four weeks, and are currently available for work.
Here is an example: Kris lost his job due to the recession. He spends his mornings searching online for job openings and his afternoons filling out job applications. Because Kris does not have a job and is actively looking for one, he is considered unemployed.
On the other hand, Mark stays home to care for his children; even though Mark does not have a job, he is not unemployed because he is not actively looking for work. Instead, he is considered to be "out of the labor force."
Kris is a clear-cut example of someone who is unemployed, and Mark is an equally clear example of someone who is out of the labor force. However, some people's official employment status doesn't tell the whole story. Sometimes it's complicated. Consider the following examples.
Josh is a recent graduate looking for a job as an accountant, but he is currently working at Burger Bin to pay the bills until he finds the right job. Even though Josh is actively looking for work, he is not counted as unemployed because he has a job—he is counted as employed. In fact, Josh is considered underemployed—which includes workers who are working part-time but would like to work full-time or those working in jobs for which they are overqualified.
Mako has been unemployed for 6 months; she has given up looking for work until she hears the economy may be turning around. Because Mako is not actively looking for a job, she is considered to be out of the labor force. In fact, because she has given up looking for work, Mako is considered a discouraged worker.
You can see that while both Josh and Mako are not happy with their employment situations, neither is counted as unemployed. So calculating the unemployment rate is fairly complicated.
After categorizing people into groups based on employment status the BLS determines the unemployment rate, or the percentage of the nation's labor force that is unemployed.
The unemployment rate, considered one of the most important indicators of the health of the economy, is calculated by simply dividing the number of people who are unemployed by the number of people who are in the labor force and then multiplying by 100 to turn the decimal into a percentage.
The annual unemployment rate changes over time as the economy goes through its cycles. The rate has been as high as 25 percent in 1933 during the Great Depression and as low as 2.5 percent in 1953. You can find the current unemployment rate at the BLS website www.bls.gov and also at fred.stlouisfed.org.
Economists also divide unemployment into three categories. Let's watch Morgan experience all three types of unemployment.
The first type of unemployment is frictional unemployment, which occurs when people take time to find a job; it is the short-term unemployment associated with the process of matching workers with jobs. This might be due to workers quitting one job to find one that is a better fit for their skills or lifestyle or perhaps students who have just graduated from college and are looking for their first job. Frictional unemployment always exists because there are always some workers in transition. If you are 16 or older, you would be considered frictionally unemployed this summer when you start looking for a summer job. Morgan experienced frictional unemployment when she finished school and spent three weeks looking for a job driving a truck.
The second type of unemployment is cyclical unemployment, which is the type that rises during economic downturns and falls when the economy improves; it is the extra unemployment that occurs during recessions. During a recession firms can't sell as many goods and services as they had expected. As a result, they must reduce their workforce. Morgan lost her job as a truck driver when the economy went into recession—people bought fewer goods so the demand for shipping services and therefore truck drivers went down.
As the economy grows and adds jobs, cyclical unemployment is reduced. However, not everyone who loses a job during a recession finds the same type of job after the recession. In this case, cyclical unemployment can turn into structural unemployment.
Structural unemployment—the third type of unemployment—occurs because of a geographic or skill mismatch between workers and employers. This means workers must either learn new job skills, or they must move to a location where jobs that require their skills are more plentiful.
This might require an unemployed construction worker to retrain as a computer technician or an unemployed auto worker in Michigan to move to Tennessee. As the economy changes over time, some industries fade while others are born and grow rapidly, which means workers need different skills. Think of the entire "Internet economy" that didn't exist until the Internet went public in the early 1990s; now millions of people work in the Internet economy.
These structural changes in available employment mean that workers must be willing to acquire new knowledge and skills.
After looking for work as a truck driver for several months, Morgan realized that she was structurally unemployed and has decided to retrain as a web designer, a job with a promising future.
The unemployment rate is one of the most important pieces of economic data that economists study. Now that you know the “ins and outs” of unemployment, you might appreciate this bit of wisdom:
“The study of economics won’t necessarily keep you out of the unemployment line, but at least if you’re there, you’ll understand why.”