APMacro: 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.


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