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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.