Unemployment is measured as the percentage of the labor force that is unemployed. The labor force consists of those employed and unemployed but seeking work between ages 16-64. Unemployment can be frictional (short term between jobs), structural (due to industry changes requiring retraining), or cyclical (caused by economic downturns). Full employment occurs around the natural rate of unemployment of about 4-6% in developed nations. Higher unemployment leads to lower GDP and costs including increased poverty, health issues, and social problems. Unemployment rates differ between countries depending on their economies and stages of business cycles.

1. Unemployment
Measurement of unemployment
Unemployment rate = (unemployed / labor force) × 100
Part-time employment:
o Part-time workers counted as fully employed
o Understateunemploymentrate
Discouragedworkers:
o Labor force who give up employment after continuous unsuccessful
job search
 Counted as “not in labor force”
 Understateunemploymentrate
Population:
o 1) Under 16 or institutionalized (not considered potential members
of the labor force)
o 2) Those not in labor force (adults who are potential workers but are
not employed and are not seeking work)
o 3) Labor force (consists of people who are able and willing to work.
Both those who are employed and those who are unemployed but
actively seeking work are counted as being in the labor force)
Types of unemployment
Frictional - Occurs when unemployed workers and firms are searching
for the best available job-match (including new labor force entrants
looking for first jobs and workers who are temporarily between jobs
because of moving to new location or occupation to be more productive).
The term 'frictional' is appropriate for the type of unemployment at hand
as it shows that there is no system that is smooth in all aspects.
Structural - Changes in technology that alter the "structure" of the
demand for labor cause structural unemployment- the skills of a worker is
no longer demanded. eg. blacksmiths making horseshoes were no
longer demanded as much after automobiles were invented because it
made horses, as transportation, obsolete.
o **The key difference between frictional and Structural
unemployment

2.  Frictional unemployed workers have salable skills, while
structurally unemployed workers find it hard to obtain new jobs
without retraining
 Frictional unemployment is short-term, structural
unemployment is more likely to be long-term and consequently
more serious.
Cyclical - Caused by a decline in total spending.
o This begins during the recession phase of the business cycle
o It is a result of an insufficient demand for goods
Full-employment
Full Employment is something less than 100 percent employment of the
labor force. It occurs when there is no cyclical unemployment. Some
frictional and structural unemployment is necessary for short-term
growth.
Potential output occurs at the Natural Rate of Unemployment (NRU); this
is when the economy is said to be proudcing its greatest potential output.
o The NRU occurs when the number of job seekers equals the
number of job vacancies.
o The economy can operate for a while at an unemployment rate
below the NRU.
o The NRU is different between countries; Canada's NRU, for
instance, is not the same as the United States
Economiccosts of unemployment
GDP gap= actual GDP- potential GDP
o A positive GDP gap occurs when acutal GDP exceeds potential
GDP, however, positive GDP gaps create inflationary pressure.
Okun's Law - for every one percentage point increase in unemployment
rate above the natural rate, a negative GDP gap of about 2 percent
occurs.
Unequal Burdens - Part of the burden of unemployment is that its cost is
unequally distributed.
o Occupation: Workers in lower-skilled occupations have higher
unemployment rates than workers in higher-skilled occupations.
Lower-skilled workers have more and longer structural

3. unemployment, and are less likely to be self-employed than are
higher-skilled workers.
o Age: Teenagers have higher unemployment rates than adults.
Teenagers have lower skill levels, quit their jobs more frequently,
are more frequently fired, and have less geographic mobility than
adults.
o Race and ethnicity: Unemployment rate for African-Americans and
Hispanics is higher than that for whites. This is because of lower
rates of educational attainment, greater concentration in lower-
skilled occupations, and discrimination in the labor market.
o Gender: The employment rates for men and women are very
similar.
o Education: Less educated workers, on average, have higher
unemployment rates.
o Duration:The number of persons unemployed for long periods (15
weeks or more) as a percentage of the labor force is much lower
than the overall unemployment rate.
Non-economicCosts
o A depression and severe cyclical unemployment means idleness.
When workers are idle, they lose skills, self-respect and morale. It
also leads to the breakup of families and unrest in the country
o Povertyincreases
o Racial/ethnictensionsincrease
 Ex: The rise of Hitler when Germany suffered from severe
unemployment
Individual level:
o Increased suicide, homicide, fatal heart attacks, strokes, mental
illness
International Comparison
Unemployment rates differ greatly among nations at any given time ecause
the different natural rates of unemployment and different phases of business
cycle. Also, nations may be in different phases of their business cycles, which
can explain why between 1995 and 2005, the US unemployment rate was
considerable lower than the rates in Italy, France, and Germany.