Econ: Unemployment

Unemployment is the condition of not having a job, but actively seeking work. The unemployment rate is the number of unemployed divided by the civilian labor force. While the unemployment rate gives us useful information about economic performance, it fails to consider underemployed workers who can only find part-time and discouraged workers, who have given up looking for work.

Frictional unemployment includes those who are temporarily between jobs or seeking a first job, while seasonal unemployment results from changes in the weather or other seasonal factors; these types of unemployment always exist. Structural unemployment results from permanent changes in demand for products (e.g., automation replaces workers, or plants close because we instead rely on imports). Workers facing structural unemployment must retrain for new careers or move to where those jobs may still exist. Cyclical unemployment is layoffs due to downturns in the economy, which disproportionately strike the construction, auto, and other durable goods industries.

Full employment is achieved when there is no cyclical unemployment, because there is always some level of frictional and structural unemployment. It is important to recognize that full employment does not mean the complete elimination of unemployment; the natural rate of unemployment simply recognizes that the economy is producing at its potential output. The GDP gap is the difference between potential GDP and actual GDP. When actual GDP is lower than the potential GDP, unemployment rises.

A recession is the contraction phase of the business cycle. It begins after the economy reaches a peak of activity and ends as the economy reaches its trough. The National Bureau of Economic Research (NBER) describes a recession as a period of decline in total output, income, employment and trade, usually lasting six months to a year and marked by widespread contractions in many sectors of the economy. A common rule of thumb for recessions is two quarters of negative GDP growth. On the other hand, a depression is a prolonged period of economic recession marked by a significant decline in income and employment. Depressions are caused by the same factors that lead to a recession. The National Bureau of Economic Research decides when recessions occur, but there is no widely accepted definition of depressions. A common rule of thumb that some people use is a 10% decline in economic output as measured by the gross domestic product (GDP). Before the Great Depression, all economic downturns were called depressions. After the Great Depression, the term recession was used to describe downturns so that people wouldn’t remember the terrible time that they had during the Great Depression.


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