Unemployment (Part 1)

To learn unemployment and its factors, we're going to utilize the following situation:

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

We'll start by identifying the three types of unemployment that determine the total unemployment rate!

Types of unemployment

Unemployment is composed of three types:

  • Frictional unemployment (Uf)
  • Structural unemployment (Us)
  • Cyclical unemployment (Uc)

Frictional unemployment (Uf) explained

Frictional unemployment (Uf) is made up of 3 groups of people:

1. Those who just quit.
2. Those who just got fired.
3. Those who just started looking for a job.

Economically, this unemployment rate is usually around 3% (typically 1% of the workforce from each component).

Frictional unemployment (Uf), based on the definition, can be calculated with the following formula:

Uf = Total # of Quits + Total # of Fired + Total # of Started Looking

In Crammerville, we can see 2 just quit their jobs...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

Uf = 2 + Total # of Fired + Total # of Started Looking

...1 got fired...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

Uf = 2 + 1 + Total # of Started Looking

...and 1 just started looking for a job.

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

Uf = 2 + 1 + 1

Therefore, there are 4 people in Crammerville experiencing frictional unemployment!

Uf = 2 + 1 + 1 = 4

To determine the percentage of frictional unemployment in Crammerville, we need to divide this by our entire labor force...

Uf% = 4 / Labor Force

...which in our case is 100 workers...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

Uf% = 4 / 100

...resulting in a frictional unemployment (Uf) rate of 4%!

Uf% = 4 / 100 = 4%

Structural unemployment (Us) explained

Structural unemployment (Us) is long-term unemployment, typically by excess workers in a given industry.

Industries that have too many workers cannot employ all of them, thus, some will always be unemployed because they cannot differentiate themselves effectively in the market.

To solve for the structural unemployment rate, we are going to use the following formula:

Us% = Total # of Long-term Unemployed / Labor Force

In Crammerville, we can see 2 people have been long-term unemployed...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

...therefore we'll plug in 2 for Total # of Long-term Unemployed.

Us% = 2 / 100

This results in a structural unemployment (Us) rate of 2%!

Us% = 2 / 100 = 2%

Cyclical unemployment (Uc) explained

Cyclical unemployment (Uc) is the unemployment that results from negative changes in the economic environment. 

This is typically a direct result of the economy being bad. In other words, when the total output (Y) of the economy is less than the total potential output (Yp), resulting in GDP being less than Potential GDP.

To solve for Uc%, we are going to use the following formula:

Uc% = Total # Laid Off Because Bad Economy / Labor Force

In the example, we can see 4 people were laid off because of the economy...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

...therefore we'll plug in 4 for Total # Laid Off Because Bad Economy.

Uc% = 4 / 100

This results in a structural unemployment (Us) rate of 2%!

Uc% = 4 / 100 = 4%

How to calculate overall unemployment rate

We'll apply the below formula to determine the unemployment rate (U) for Crammerville:

U = Total # of Unemployed / Labor Force

To calculate the Total # of Unemployment...

U = Total # of Unemployed / Labor Force

...we'll sum the frictional, structural, and cyclical unemployment...

U = (Uf + Us + Uc) / Labor Force

...which had the following values:

U = (4 + 2 + 4) / Labor Force

Considering that Crammerville has a a labor force of 100...

Situation: Crammerville's population is 120, containing 5 children. The labor force 100 has workers: 90 of which are working, 2 just quit their jobs, 1 was just fired, 1 recently entered the labor market, 4 were laid off because the economy was bad, and 2 have been unemployed for 5 years because they have no marketable skills. The remaining people of Crammerville who are not in the labor force wish they had a job, but have given up looking.

U = (4 + 2 + 4) / 100

...this means there is an overall unemployment rate of 10% in Crammerville!

U = (4 + 2 + 4) / 100 = (10) / 100 = 10%

The total unemployment rate (U) in an economy is the sum of Frictional unemployment (Uf), structural unemployment (Us), and cyclical unemployment (Uc).

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ApplyPRACTICE PROBLEMS (PREVIEW ONLY)
ConceptProduction Functions
ConceptUnemployment (Part 1)
ConceptUnemployment (Part 2)
ConceptConsumer Price Index (CPI) (PREVIEW ONLY)
ConceptOkun's Law (PREVIEW ONLY)

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