There are a variety of types of unemployment, and all types are not created equal.

Some unemployment is an unavoidable and necessary consequence of economic growth, as economic progress inevitably renders some jobs obsolete.

• Employment in fields like farming have declined significantly over the past 150 years, and some jobs have essentially disappeared (telephone switchboard operators, wagonmakers, etc.).
• These jobs are destroyed becasue of the appearance of new jobs in areas like IT server technician and automotive engineer.

To calculate the unemployment rate, the population must first be subdivided into a number of smaller groups.

A person is unemployed only if he or she is in the labor force, is actively looking for work, but cannot find a job.

The unemployment rate is then given by:

\(Unemployment \: Rate = \frac{\# \: of \: Unemployed}{Labor \: Force}\)

As of July, 2021, the US labor force numbered 161.35 million people, of which 8.7 million were unemployed. This implies an unemployment rate of:

\(5.4\% = \frac{8.7 \: million }{161.35 \: million}\)

From an individual perspective, unemployment, especially if it is long term unemployment, can be both financial and psychologically devastating.

From a economy-wide perspective, unemployment means that the economy is underperforming.

While the unemployment rate is arguably the best indicator of the labor market, it is not the whole story.

• The unemployment rate misses discouraged and underemployed workers.

The broadest measure of unemployment is the U-6, which includes discouraged, marginally attached, and underemployed workers.

A marginally attached worker someone who has either looked for work or held a job in the past year, but is not currently looking.

U-3 considers somebody employed if they worked as little as one hour. However, many people working part time would prefer to work full time but cannot find a full time job. These people are classified as underemployed workers.

The three main types of unemployment are:

• Frictional Unemployment
• Structural Unemployment
• Cyclical Unemployment

Frictional Unemployment is (typically) short term unemployment caused by the difficulties that exist in matching potential employees with jobs.

Many people who are frictionally unemployed are unemployed by choice, as this includes people leaving their jobs to find new ones. It also includes recent college graduates, stay-at-home parents returning to the workforce, etc.

For the most part, frictional unemployment is good for the economy.

Economist Joseph Schumpeter coined the term creative destruction to describe the constant process of product and process innovation that replaces old products and processes.

Schumpeter called creative destruction “the essential fact of capitalism”

Innovation and competition drive economic growth, creating new jobs and destroying old jobs.

Official government figures mask the creative destruction process.

• For example, the number people focus on in the jobs report is the number of new jobs in a month. In August 2018, this number was 78,000.

• The 78,000 figure is arrived at by taking the difference between the number of new hires, 5.784 million, and the number of job separations, 5.706 million.

Structural unemployment is persistent, typically long-term unemployment that is caused by long-lasting shocks or permanent features of an economy that prevent the labor market from working effectively.

Structural unemployment can result from a number of economic forces:

• economy-wide shocks, like oil shocks (or pandemics?).
• globalization
• new IT
• shifting from manufacturing to services

Structural unemployment has significant economic and social costs.

• Lowered economic output
• Psychological costs on the unemployed, such as elevated suicide rates and reduced happiness.

Labor market regulations generally have the following effects:

• Create insurance for workers, particularly those workers who have full-time jobs.
• Make it harder to find a full-time job.
• Reduce the efficiency of labor markets.
• Increase the duration of unemployment.
• Increase the amount of unemployment, particularly among young, minority, or “risky” workers.
  • e.g. ex-convicts, people you know little about, high variance workers…

The Kaitz index is a measure of how high the minimum wage is in any given area.

\(Kaitz\;Index=\frac{Minimum\:Wage}{Median\:Wage}\)

The median wage is the wage such that half of all workers earn more the median and half of all workers earn less than the median.

The Kaitz index is often use as a shorthand to estimate the potential harm of a minimum wage.

• If Kaitz<40%, the general consensus is that the minimum wage is too low to have a noticeable unemployemnt effect.
• If Kaitz>60%, most economists believe that the minimum wage will have a large unemployment effect.
• There is no general consensus on the 40%-60% range.

There are also policies that can reduce structural unemployment:

At-Will Employment refers to a labor market in which a worker can be fired or quit at any time for any reason, so long as that reason is not illegal (discrimination, etc.).

Active Labor Market Policies are (typically) government programs designed to help unemployed workers find jobs by:

• enhancing their motivation and incentives to find work
• improving their job readiness and skills through education or job retraining programs
• improving their job search skills and assisting with their job search

Cyclical Unemployment is unemployment that is correlated with the business cycle.

Generally speaking, unemployment increases during a recession.

When GDP falls, firms fire workers, thus increasing unemployment.

The Natural Rate of Unemployment is calculated by summing the frictional and structural rates of unemployment.

The natural rate changes very slowly - The factors that influence structural and frictional unemployment change slowly

This is unlike the regular unemployment rate which includes cyclical unemployment