What is Unemployment? Definition and Meaning

Unemployment is a state of being jobless when you are looking for work. The jobless rate is a measure of the percentage of the total labor force that is not currently in employment. It refers to how many workers per 100 in the population who are out of work. However, it only includes people who can work and are looking for a job.

We calculate it as a percentage by dividing the total number of unemployed by the number of people in the labor force.

According to the U.S. Bureau of Labor Statistics Division of Labor Force Statistics, “the official unemployment rate for the nation is the number of unemployed as a percentage of the labor force (the sum of the employed and unemployed).”

The word may also refer to benefit payments that jobless people receive.

Joblessness occurs when people don’t have jobs and are seeking work. In times of economic prosperity the jobless rate for an economy is normally low. In contrast, when an economy is going through a recession, jobless rates are high.

There are a number of different theories concerning the causes, consequences and solutions for joblessness.

In classical economics, and the Austrian School of economics, it is believed that market mechanisms help resolve job problems on their own. Classical and Austrian School economists are against interventions made by the labor market (including regulation and unionization) – they say they may reduce hiring.

Keynesian economists argue that joblessness occurs in cycles and that government intervention in the economy can potentially help bring down joblessness during times of recession.

Keynesian economists say that recurrent shocks can reduce aggregate demand for goods and services and consequently reduce demand for workers. They believe in publicly funded job creation programs, financial stimuli, and expansionist monetary policies when a country is in recession.

Unemployment rateThe jobless rate is one of the main indicators analysts look at when assessing the health of a nation’s economy.

Four main types of unemployment:

Structural – when an economy cannot provide jobs for people because the job market is asking for skills that the unemployed labor force does not have, i.e. there is a skills shortage.

Frictional –  the time between jobs when a person is searching for, or switching jobs.

Hidden – unemployment that is not reported in official statistics because of the method in which the the statistics are collected.

Long-term – high unemployment that lasts for more than a year. We also refer to this type as hardcore unemployment.

The Nasdaq Business Glossary defines the unemployment rate as:

“The percentage of the people classified as unemployed as compared to the total labor force.”

The Great Depression and Great Recession

The Great Depression was a severe economic downturn that affected North America, Europe and other industrialized nations from 1929 to about 1939. It was the longest-lasting and most severe depression of the 20th century.

By 1932, US manufacturing output had plummeted to 54% of its 1929 level. Unemployment rocketed to between 12 and 15 million workers, i.e. 25% to 30% of the nation’s workforce.

During the Great Recession, which followed the Global Financial Crisis on 2007/2008, the unemployment rate in the US rose from 5% in 2007 to 10% in 2009.

Natural Rate of Unemploymentthis is the lowest rate of unemployment at which the employment market can be in stable equilibrium – inflation remains constant year after year.

Unemployment rate – a lagging indicator

The unemployment rate responds to changes in the GDP growth rate. When GDP shrinks, joblessness rises. On the other hand, when GDP grows strongly, joblessness declines. However, the unemployment rate does not change straight away, i.e., there is a lag of a few months.

Hence, we say that the unemployment rate is a ‘lagging indicator.’

Video – What is unemployment?