Unemployment can be a marker for economic health. The U.S. uses the Current Population Survey (CPS), a monthly sample survey of 60,000 households across different states to measure unemployment. The survey uses polls to calculate the unemployment rate across the United States.
The Bureau of Labor Statistics announces the number of unemployed and employed people every month. The unemployment rates are usually picked up and broadcasted on media outlets shortly after the announcement. Knowing what unemployment is and how it works can be valuable as an economist, everyday citizen, or investor.
What is unemployment?
A common definition of unemployment is when a person actively looking for work can’t find a job. The U.S. Bureau of Labor Statistics (BLS) lists certain criteria an individual must meet before being categorized as unemployed.
That includes the following;
- Not being employed during the week of the CPS (Current Population Survey) measurement.
- Unavailable to work, with the exception of temporary illness.
- Have attempted to find a job during the four-week period that ended with the week of the survey, or were temporarily laid off.
While this definition describes an unemployed person, it doesn’t explain the cause of unemployment. Below are different types of unemployment to provide more context.
Types of Unemployment
Cyclical
This refers to the change in the number of people employed when the economy ebbs and flows, experiencing stronger and weaker periods. In other words, when the economy is strong, more people may be employed whereas during weaker times, more people may be unemployed.
When the demand for goods and services tanks, oftentimes, it leads to layoffs as a means of reducing costs.
Structural
Structural unemployment happens when structural changes take place, like changing technology, and employees no longer have the skill set needed to fulfill available job roles. An example is when the internet emerged and replaced many jobs, leaving many workers behind. Structural unemployment can also happen if a company moves a far distance and employees can’t travel to the location.
Frictional
When people choose to leave their jobs, this is defined as frictional unemployment. Examples could include a person who resigns an in-person job to find a remote one or a graduate who leaves a low paying blue collar job to pursue a higher paying one that aligns with their discipline.
Frictional unemployment is a normal part of the work cycle as people often change jobs in search of better opportunities.
Underemployment
People who have a job but aren’t working at their full capacity are classified as underemployed. This is an important measure of unemployment as it helps assess how efficient the economy is in utilizing people’s skills, experience, and availability to work.
Underemployment also falls into two categories – visible underemployment and invisible underemployment. With the former, workers work part time but would like more hours. They may end up working multiple jobs to make up the difference and earn enough money.
With invisible underemployment, people take jobs that don’t align with their skills and expertise because it’s all they can get. This often means they’re underpaid, whereas they’d be better compensated if they could find a job in their field. An example is a mathematician working at a grocery store.
Institutional Unemployment
Government policies and societal factors are often drivers behind institutional unemployment. For example, laws that increase minimum wages, generous social benefit programs, or discriminatory hiring practices could fuel institutional unemployment.
Natural Unemployment
When natural economic factors are at play like people changing jobs, individuals losing employment to technology, or an inability to find employment, natural unemployment is occuring. In every economy, there will always be a level of natural unemployment, hence why the employment rate is unlikely to ever be 100%.
Seasonal Unemployment
Jobs that are restricted to a certain timeframe or time period create seasonal unemployment. That’s because when that season is over, people are left without a job. Jobs in those industries are usually seasonal because demand goes down and having people work year round isn’t sustainable.
For instance, water parks may only be open during warmer months, leaving many without a job during their down season.
Measuring Unemployment
The unemployment rate is calculated by dividing the number of people who are unemployed by the number of people in the labor force.
The unemployment rate impacts the stock market because when unemployment rates rise, stock prices fall. The reverse happens when unemployment rates drop, as it’s a signal the economy is stable and businesses are doing well.
