It is important for economists and statisticians to know how many people are employed and how many are seeking employment. Since employment is one of the most trusted sources to understand the health of an economy, the rate of unemployment is a decisive factor for any economy.
The rate of unemployment is the percentage of unemployed people among the total labor force. In other words, it is the number of people unemployed but who are actively seeking employment. The unemployment rate is collected by national statistical institutes on a regular basis because the rate is subject to change depending on the condition of economies.
When an economy is in a healthy state or goes through expansion, the rate of unemployment falls while it increases when the economy is contracting or in a mode of recession. The rate of unemployment is a key resource for policymakers to judge and rectify the economy if needed.
Investors as well as the general public determine the efficiency of governments to bolster economic well-being by watching the rate of unemployment. A high rate of unemployment indicates ailing economies that are not suitable for investments. Also, individuals consider the lifestyle to be inferior in a country that has higher rates of unemployment.
An increased rate of unemployment is also a factor for disharmony in the families and the society. As income is directly related to employment, when the rate of unemployment goes up, the income reduces restraining the consumers to reduce consumption. This indirectly impacts demand and supply in the markets. In fact, the demand for products in a market is hit palpably when the employment rate is higher. Therefore, the central authorities controlling the economy seek to establish a better rate of employment.
There are three most prominent types of unemployment, namely cyclical, structural and frictional types of unemployment.
Cyclical unemployment is related to business cycles and occurs when there is a change in the cycles. In times of recession, the demand for jobs goes down due to a lack of economic well-being of employers. So, jobs may be cut or instances of new employee induction may be lowered. This leads to increasing unemployment levels.
Cyclical unemployment is often medium term lasting from one to 12 months in general. An example of an increase in the cyclical unemployment rate could be found in the recessions that hit the US in the 1990s. It decreased a bit during the 2000s but rose again later on.
Cyclical inflation shows that an economy may not be performing at its peak. To combat such kinds of inflation, monetary policies that increase the aggregate demand may be opted for. This is so because stronger demand increases the potential hiring process of organizations.
Structural unemployment arises when a mismatch takes place between the skills a potential candidate has and those required for the job. This may occur when the candidates don’t have the required skills for the job or the job is unreachable to the potential candidates for higher skill requirements.
If the industries decrease their expansion or new advanced technologies are implemented, workers may be laid off by the industries. The laid-off workers may find it difficult to up-skill themselves or they may need to relocate to another location which is not possible. So, this may increase the rate of unemployment.
Structural unemployment has been common among manufacturing industries in the last decade. Due to automation and the inclusion of newer, more-advanced technologies, the need for manpower has reduced considerably. So, the manufacturers are now reliant more on technology than manual workers which is directly increasing the structural rate of unemployment.
Frictional unemployment occurs when the workers become unemployed temporarily. An employee may be looking for a new job after being laid off by the previous company. Skilled people may be in transition from one job to another by upgrading their skills which may put them in the unemployment category.
The movement of labor is a critical factor for the economy because it allocates labor across the entire industry. However, employees may not get a job immediately. Industries may also not find a suitable candidate as and when required immediately. Therefore, there may be a mismatch between the vacancy and eligibility. This creates friction and such a kind of unemployment is referred to as frictional unemployment.
Some other forms of unemployment
Underemploy6ment refers to the availability of more working hours from the employee’s end. There can be two types of underemployment.
The first is where there is free time in the hands of the employee. The second is when the employee is full-time but working part-time currently.
Hidden unemployment is referred to as the hidden wish of discouraged workers to join the workforce again. For example, an onlooker of jobs may be discouraged by the inability to find a job he has been looking for a long time, but would still like to be employed.
Some workers may have jobs that do not exist around the year. These workers may be laid off partially during some seasons while they may be employed at other time periods. Examples of such workers include fruit pickers and ski instructors.
The three measures or estimates of unemployment are as follows:
Usual status unemployment provides the data of the unemployed people who have remained unemployed for the most part of a year. This hives the lowest measures of unemployment. This measure is used to check the activity of the unemployed persons who have been out of the labor force for a long time.
This type of measure is applicable to unemployment based on weeks. In such a measure, a person is termed unemployed if he is unemployed for even an hour. Depending on the survey period, in this status, a person may be called employed if he is employed for one day of a week.
This status considers the activity of an employed person for every day in the last seven days. The day is the benchmark in this type of measure. If a person does not get employment for a day, he/she is considered unemployed. Generally, a person is said to be employed if he works for at least four hours a day.
The rate of unemployment is an important measure to verify whether the economy is in good condition. Moreover, it also shows the government’s efficiency in shaping the economy.
As employment is also related to social welfare indirectly, a falling unemployment rate is considered good for the overall efficiency of the economy. It is notable that command economies are considered more employment-friendly as governments can create jobs without actual needs, but there are certain points that make them hard-hitting to the citizens.
1. What is the formula for the unemployment rate?
Ans. The formula for unemployment rate = unemployed / labor force x 100.
2. Why is unemployment considered bad in terms of social welfare?
Ans. Unemployment leads to a lack of income. Continued unemployment can reduce the consumption power of individuals which leads to less demand. Low demand is detrimental to economies as they create social disharmony.
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