101 Concepts for the Level I Exam

Concept 26: Unemployment

Unemployment types

Frictional unemployment is caused by the time lag necessary to match employees seeking work with employers seeking their skills.
Structural unemployment is caused by long-run changes in the economy that eliminate some jobs and require workers to gain new skills to be capable of the available jobs.
Cyclical unemployment is caused by changes in the business cycle.

Measures of unemployment

To be considered unemployed, a person must be actively searching for work.
Labor force includes employed and unemployed people.
Participation ratio (Activity ratio) = Labor Force / working-age population (Age group: 16 – 64).
Unemployment rate is the percentage of labor force that is unemployed; unemployment rate = unemployed people / labor force.
Discouraged workers are those who are available for work but are neither employed nor actively seeking employment.
- They are not considered in the labor force, not counted as unemployed.
- With better job prospects in an expansion, these workers start actively seeking work. This adds to the labor force and makes the unemployment ratio a lagging indicator of business cycle.
Underemployed individual is a person who is employed at a low-paying job despite being qualified for a significantly higher-paying one or works part time despite his preference for full time work.