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, i.e., what percentage, 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).”

If someone deliberately left the job market to raise their children, they are not unemployed. An unemployed person must be looking for work.

Unemployment insurance

The word ‘unemployment’ may also refer to benefit payments that jobless people receive. We call this type of benefit unemployment insurance, benefits, or the dole (UK).

To receive these benefits, people must meet certain requirements. The benefits do not last forever. In some countries, people may claim benefits for more than a year. In others, however, the insurance only lasts about six months.

Unemployment – seeking work

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.

Classical economists

Proponents of classical economics and the Austrian School of economics believe that market mechanisms help resolve job problems on their own.

Classical and Austrian School economists are against labor market interventions, such as including regulations and unionization. They say that interventions may reduce hiring.

Followers of Keynes

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. This reduction subsequently reduces demand for workers.

They believe in publicly funded job creation programs, financial stimuli, and expansionist monetary policies when a country is in recession.

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

Four main types:

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.

It is joblessness that a change in technology typically causes, rather than fluctuations in supply and demand.

It is the most difficult type of unemployment to address, because it is the result of changes in the economy’s structure.

Frictional

The time between jobs when a person is searching for, or switching jobs. People in this category are not usually without work for long.

When the economy is thriving, people are more willing to leave their jobs when they are looking for another one.

When the economy is doing badly, however, fewer people take that risk. They worry that they might not be able to get back to work.

Hidden

Joblessness that is not reported in official statistics because of the method in which a government agency gathers statistics.

Most jurisdictions, for example, do not include people who are underemployed. If you are doing part-time work but would like a full-time job, you are underemployed.

Underemployment also includes people who work, but cannot find a job that matches their skills. For example, a qualified doctor who works as a taxi driver is underemployed.

The majority of countries only include people out of work who are actively looking for a job in their unemployment statistics.

Long-term

A high jobless rate that lasts for more than a year. We also refer to this type as hardcore unemployment.

The Nasdaq Business Glossary has the following definition of the term:

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

This type of jobless person is the least likely to find a job. They are also the least likely to want to have a job. Psychologists say that being out of work for a long time changes our motivation.

Many governments do not include hardcore unemployment figures in their official statistics.

A significant percentage of people who haven’t worked for a long time lack the skills that the job market needs. Either their skills are no longer relevant, or they never had any.

The Great Depression and Great Recession

The Great Depression was a severe, international economic downturn. It 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. The number of jobless people rocketed to 15 million workers, i.e., 30% of the nation’s workforce.

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

Natural Rate of Unemploymentthis is the lowest rate of joblessness 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?