Unemployment – HelpfulMBA

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About unemployment

Unemployment is the most commonly used indicator for understanding conditions in the labour market and a lagging indicator of business activity. To say that, the unemployment rate did not begin until a few months after the onset of a recession and did not decline immediately after the recovery phase. This reflects a combination of a slow increase in the number of jobs and ongoing increases in the size of the population and labour force.

As an example, the Great Recession during the period 2007 to 2009 has resulted in 8 million U.S. jobs lost. At the outset of the recession, the unemployment rate was 5% and reached its peak of 10% in December 2009 before getting back to the pre-recession level in mid-2014, but it was still slightly above 6%.

How is the unemployment rate measured?

Should we count everyone without a job as unemployed? Of course not. For instance, it seems inappropriate to count children, retirees or college students as suffering the pains of unemployment. Others are not working because they are taking care of kids, on parental leave, being ill or on vacation.

With the above saying, unemployment refers to the condition in which individuals who are capable of working and are actively seeking work, are unable to find a job. The unemployment rate is the percentage of people in the labour force who are unemployed.

In other words, we should not divide the entire population into two distinct groups: employed and unemployed. A third group exists: children, students, retirees, people who don’t have a job and for some reason – are not interested in having a job. Economists refer to this third group as out of the labour force or not in the labour force.

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The calculation

The size of the labour force is the sum of employed and unemployed groups.

Employed – definition varies depending on the country (e.g. In the United States of America, those with temporary, part-time, or full-time jobs are considered employed, as are those who perform at least 15 hours of unpaid work for a family business or farm).
Unemployed – includes people who are not in a paid job, but who are actively looking for work.

The unemployment rate is then calculated as a percentage of people in the labour force who are unemployed.

The participation rate expresses the labour force as a percentage of the working-age population. Labour force participation typically moves with the business cycle. When businesses hire more workers and offer higher wages, the incentives are greater for them to look for work actively.

Labour force – the sum of employed and unemployed workforce
Working age population – the sum of labour and non-labour force

Main types of unemployment

Cyclical unemployment

Cyclical unemployment occurs when there is an economic downturn, typically during periods of recession or slow economic growth. A shortfall in demand for goods and services leads businesses to cut back on production and consequently reduce their workforce.

Cyclical unemployment is often described as being temporary in nature, as it fluctuates with the economy. When the economy recovers, many of these jobs are restored.

E.g. During the 2008 Global Financial Crisis, cyclical unemployment spiked as businesses across many industries laid off workers due to reduced demand. As the economy recovered, many of these jobs came back.

Structural unemployment

Structural unemployment occurs when there is a mismatch between the skills that workers have and the skills needed by employers, or when shifts in the economy permanently alter the demand for certain types of jobs. Workers may become unemployed if they work in industries that are declining in size or have skills that could be automated as a result of large-scale technological advances.

This type of unemployment tends to be more long-lasting than any other type of unemployment because it can take a number of years for workers to develop new skills or move to a different region to find a job that matches their skills.

E.g. A classic example is the decline of the coal mining industry in many parts of the world. As energy production shifted toward renewable sources, coal miners found themselves unemployed because their skills were no longer in demand. These workers needed retraining to find jobs in other sectors, such as renewable energy or other industries.

Frictional unemployment

Frictional unemployment refers to short-term unemployment when individuals move between jobs or when people transition into and out of the labour force. It is a natural and inevitable part of a healthy economy and likely occurs at all points of the business cycle.

E.g. A software engineer might leave their current job to search for a role that offers more career growth, higher pay, or a better work-life balance. While they search for this new role, they experience frictional unemployment.

Underemployment

Underemployment occurs when individuals are working in jobs that do not fully utilise their skills, education or experience or when they are working fewer hours than they would like to sustain a living. Underemployment rates are generally higher among groups that have a larger proportion of people working part-time, such as females, younger workers and older workers.

E.g. An engineer who can only find work as a taxi driver due to a lack of opportunities in their field is considered underemployed in terms of skill. Similarly, a part-time retail worker who is actively seeking full-time employment but can’t find it would be considered underemployed in terms of hours.

Hidden unemployment

Hidden unemployment refers to the segment of the workforce that is not captured in the official unemployment statistics but is still not fully utilised in the labour market. This category includes people who are unemployed and discouraged workers.

E.g. A person who has given up searching for work after months of fruitless job hunting due to a lack of opportunities in their field is a discouraged worker. They are not counted in the official unemployment rate but are part of the hidden unemployment category.

Seasonal unemployment

Seasonal unemployment occurs when individuals are temporarily out of work due to seasonal variations in demand for certain types of labour. Some examples include ski instructors, fruit pickers and holiday-related jobs.

E.g. For instance, during the apple harvest in autumn, farms might hire a significant number of temporary workers to help with the picking and packing of apples. Once the harvest is over and the season changes, the demand for these workers drops, leading to unemployment for those who were only employed for the harvest period.

References

Adam, H 2024, What Is Unemployment? Causes, Types And Measurement, Investopedia, available at <https://www.investopedia.com/terms/u/unemployment.asp>.

Brown, T & Foreman, C 2022, UH Macroeconomics 2022, OpenStax, Houston, TX, pp. 259-323.

Ceyda, O n.d., Unemployment: The Curse of Joblessness, International Monetary Fund, available at <https://www.imf.org/external/pubs/ft/fandd/basics/unemploy.htm>.

Reserve Bank of Australia n.d., Unemployment: Its Measurement and Types, Reserve Bank of Australia, available at <https://www.rba.gov.au/education/resources/explainers/unemployment-its-measurement-and-types.html>.

The FRED @ Blog 2017, What is unemployment?, Federal Reserve Bank of St. Louis, available at <https://fredblog.stlouisfed.org/2017/03/what-is-unemployment/>.

Julia Nguyen

Julia is a professional with nearly a decade of experience in corporate finance and financial services. She holds two master’s degrees—a Master’s in Finance and an MBA, both of which reflect her dedication to business excellence. As the creator of helpfulmba.com, she aims to make business concepts approachable to a wide audience. When she isn’t working or writing for her website, Julia enjoys spending quality time with her child, preparing healthy meals, and practising meditation, finding balance in both her professional and personal life.

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