a. Before we discuss unemployment, we need to understand that unemployment also follows the trends depicted by the business cycles:
i. When the economy is just out of the trough, there is a very high unemployment rate.
ii. From the beginning of the early recovery up to the late expansion phase, the unemployment levels begin to fall down until it reaches a very low level, as a result of the tight labor market, creating the potential for the price-wage inflationary spiral.
b. Here are some of the important terminologies that are discussed while explaining unemployment:
i. Unemployed: People who are actively seeking a job but do not have a job.
ii. Frictionally unemployed are in the process of changing jobs.
iii. Long-term unemployed have been out of work for a long time, but are still looking.
iv. Underemployed: Employed people who have the qualifications to work a higher-paying job.
v. Discouraged worker: An unemployed person who stopped looking for a job.
vi. Voluntarily unemployed: Person who is outside of the labor force voluntarily.
vii. Employed: Number of people with a job.
viii. Labor force: Number of people with a job or actively seeking a job.
ix. Unemployment rate: Ratio of the number of unemployed persons to the labor force.
x. Activity ratio (participation ratio): Ratio of the labor force to the total population of working-age persons.
c. The unemployment rate is considered one of the important measures of unemployment conditions in the economy. The information required for the calculation of the unemployment rate can be obtained from the surveys, unemployment issues, and the information issued by the international labor organization.
However, the unemployment rate is considered as a lagging indicator because:
i. It lags the current environment.
ii. Payroll growth does not fully cover employment at small businesses.
iii. Hours worked (including overtime) and use of temporary workers is an indicator of slowing and recovering businesses.
d. The other issues with respect to the use of the unemployment rate as a measure of productivity are:
i. Distortions from discouraged workers: The number of unemployed may drop because workers become discouraged and may increase when they rejoin the workforce to resume searching.
ii. The reluctance of employers to lay off workers when business slows and to hire when business increases.