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Unemployment
The percentage of the labor force that is seeking a job but does not have one is
known as the unemployment rate
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The sum of the employed and unemployed workers represent the total labor force
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They are considered to be
outside the labor force
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All of these measures consider only persons 16 years of age
or older
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Model of Labor Force Movement

Employed

Unemployed

The diagram shows seven possible movements:

Not in the
Labor Force

1
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2
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3
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4
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5
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6
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7
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From this model, we see that a worker may end up in the grouping of "unemployed"
from one of two possible paths: 1) by job separation, either as a job loser or a job
quitter, and 2) by moving into the labor force, either as a new entrant or as a reentrant
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Over the years, several different
definitions have been proposed for full employment, but such a definition is
complicated by the fact that the economy always has some unemployment, even
during economic expansions
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For example, job
seekers tend to spend time to find the best possible job rather than take the
first one available, and employers take the time to interview several
candidates to find the best fit
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Structural unemployment - refers to unemployment caused by a mismatch
between workers and jobs
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For example, technological change may have caused a worker's
skills to become obsolete, and he or she may experience a period of
unemployment before finding the opportunity to develop new skills and to

adapt
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Since zero unemployment is unachievable in a free labor market, Milton Friedman
used the term natural rate of unemployment to describe the baseline rate of
unemployment, considering that some unemployment cannot be avoided
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It does not include cyclical unemployment that results from a
downturn in the business cycle
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Rather than a simple trade-off
between the rate of inflation and the rate of unemployment, under the natural rate
hypothesis once the rate went below the natural rate, inflation would accelerate
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The natural rate of unemployment changes over time
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S
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This variability and lack of precision in the natural rate of
unemployment represent a source of uncertainty with which policy makers must
deal
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With regard to
frictional unemployment and labor surplus we see at least two levers controlled by
public policy: 1) unemployment insurance, and 2) minimum wage laws
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Seasonal Variations
The number of job seekers changes over the course of the year due to seasonal
effects
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If left
unadjusted, such changes make it difficult to compare unemployment figures from
one month to the next
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S
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The result is that the reported unemployment rate more accurately reflects the
underlying state of the economy
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The severity of the impact of unemployment
depends in part on how quickly and easily an unemployed person can find work
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Statistics reported by the U
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Department of Labor indicate that since 1948, the
average duration of unemployment in the U
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ranged from a low of approximately 7
weeks to a high of approximately 20 weeks
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Limitations of the Unemployment Rate Measurement
The unemployment rate is not a perfect indicator of employment in the economy
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These persons tend
to make the reported unemployment rate lower than it otherwise would be
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Due to this effect, the reported
unemployment rate is higher than it otherwise might be
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Discouraged workers and ones collecting unemployment benefits without seeking a
job make it difficult to distinguish between those who are unemployed and those who
are not in the labor force
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As long as any bias in
the unemployment rate is relatively constant over time, then the rate is still useful for
measuring changes in the economy from one period to the next
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Impact of Unemployment
Unemployment presents problems for both the individual and for the economy as a
whole
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The individual's economic hardship is
mitigated somewhat by unemployment insurance benefits
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