Most governments try to limit unemployment and contain inflation because these conditions can lead to social and political unrest. The graph below shows the relationship between these variables and the business cycle:
Interpretation of the graph:
The table below lists some important terms related to unemployment:
Terms related to unemployment | |
Employed | Number of people with a job. Excludes informal workers such as illegal workers. |
Working age | Those between 16 and 64 years of age. |
Labor force | Includes unemployed and employed i.e. working age population who are either working or looking for work. Discouraged workers are not included here. |
Unemployed | People who are actively seeking employment, but currently without a job. To be considered unemployed, one must have been looking for work in the past 4 weeks. |
Long-term unemployed | People who have not been working for a long-time (3-4 months). |
Frictionally unemployed | People who are between jobs. They are not working at the time of filling the survey. But, they are not 100 percent unemployed. They have another job waiting and are yet to start. |
Structurally unemployed | Unemployment that arises because the demand for certain skills has reduced while employers are looking for a different set of skills. Ex: need for typists decreased because of computers/public telephone operators decreased in developing countries because of mobile phones. It can also be due to changes in business, technology, etc. |
Activity (participation) ratio | |
Underemployed | A person who has a job that pays significantly less for the qualifications they possess. Ex: a person out of work with a CFA charter working in a grocery store. |
Discouraged worker | A person who has stopped looking for a job probably because of a weak economy. They are not included in the unemployment rate. If they stop looking for work, then unemployment rate may decrease in a recession. |
Voluntarily unemployed | Person voluntarily outside the labor force. Ex: early retirees, a 22-year old who is pursuing a Master’s degree and hence not looking for work. |
Unemployment rate |
Unemployment Rate
Unemployment rate =
Overall payroll employment and productivity indicators: