What is unemployment? Well we first must examine employment. People who are employed are people who work, or don't work temporarily because they are on leave. People who are unemployed are not employed, looked for employment in the previous 4 weeks, and are available for work. People not in the labor force are the rest of the people that don't fit in above. The labor force equals employed + unemployed categories.
Unemployment Rate = (number of unemployed) / (labor force) * 100) usually ~5%
Labor-force participation rate = (labor force) / (adult population) * 100
The normal rate of unemployment around which the unemployment rate fluctuates is known as the natural rate of unemployment. Deviation from the natural rate is known as cyclical unemployment.
Is the unemployment rate accurate? Movement into and out of the labor force is very frequent. Some unemployed might only do so to qualify for government programs that assist the unemployed. Some are discouraged workers who have given up searching but don't show up in unemployment statistics.
Most spells of unemployment are short and most unemployment observed at any given time is long-term. Funemployment is an oxymoron because it isn't fun. Workers unemployed for many months are more likely to suffer economic and psychological hardship.
Why is there always some unemployment? The economy is very dynamic and is constantly changing. There is frictional unemployment that occurs when a worker is searching for a new job, and explains short spells. There is structural unemployment when wages are too high and there is a surplus of labor, and explains longer spells of unemployment.
Frictional unemployment is necessary, but can be decreased through quicker spread of information like through the Internet. The government provides some employment agencies that inform people of job vacancies and some public training programs. Government intervention efficiency is still being debated.
Another government program is unemployment insurance, workers get 50% of their wage for 26 weeks only if they were laid off. This slightly lengthens frictional unemployment.
Minimum wage laws and unions cause wages to be higher than the equilibrium level, causing there to be more labor supply than demand, causing structural unemployment. Unions do collective bargaining with firms to set conditions, and threaten strikes (withdrawal of labor). Union insiders benefit with better wages, but outsiders are worse off because the supply of labor increases outside of the union making other wages elsewhere decrease. The efficiency of unions is still being debated.
The Theory of Efficiency Wages state that higher wages increase the productivity of labor. Higher wages mean better worker health, better worker turnover (less likely to quit), better worker quality, and better worker effort. Again, the increase in wages causes more unemployment.
So, the four main reasons of unemployment are job search (frictional), minimum-wage laws (structural), unions (structural), and efficiency wages (structural). All economies must watch these very carefully. Unemployment is not simple at all and requires a complex solution yet to be discovered. How we choose to organize our society decides how much of a problem it is.
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