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Defining who is considered unemployed and how the unemployment rate is calculated.
Imagine a city where every single person has a job, but no one is allowed to quit to find a better one or move to a new house. Does that sound like a dream economy, or a trap?
To understand unemployment, we first need to define the Labor Force. This group consists only of people who are either currently working or actively looking for work. In most countries, you must be at least 16 years old to count. We divide the population into two main categories: those In the Labor Force and those Not in the Labor Force. People like full-time students, retirees, and stay-at-home parents are considered 'Not in the Labor Force' because they aren't seeking paid employment. To be officially Unemployed, a person must be without a job, available to work, and must have actively looked for work within the last four weeks.
Quick Check
If a 70-year-old grandmother is happily retired and not looking for a job, is she considered 'unemployed' by economists?
Answer
No, she is considered 'Not in the Labor Force' because she is not actively seeking work.
In Econville, there are 100 people in the labor force. 95 people have jobs, and 5 people are actively looking for work.
1. Identify the number of unemployed: . 2. Identify the labor force: . 3. Apply the formula: .
The unemployment rate is .
Quick Check
If the number of unemployed people stays the same, but more people give up looking for work and leave the labor force, what happens to the unemployment rate?
Answer
The unemployment rate actually goes down, which can be misleading because the economy isn't necessarily doing better.
It might seem like unemployment is the ultimate goal, but economists disagree. A healthy economy needs some unemployment. This is called the Natural Rate of Unemployment. It includes Frictional Unemployment (people between jobs or new graduates looking for their first role) and Structural Unemployment (when skills don't match available jobs, like a typewriter repairman in the age of computers). If unemployment were , businesses could never hire new people to grow, and workers would have no freedom to quit a bad job to find a better one. A 'full employment' economy usually has an unemployment rate around to .
City Alpha has a total population of people. - are children or retirees. - people have jobs. - people are looking for work.
Step 1: Find the Labor Force. . Step 2: Use the rate formula. .
Note: The children/retirees are ignored in the calculation.
Who is included in the Labor Force?
If a country has 90 million employed people and 10 million unemployed people, what is the unemployment rate?
Frictional unemployment is generally considered a negative sign for an economy.
Review Tomorrow
In 24 hours, try to write down the formula for the unemployment rate and list three types of people who are NOT in the labor force.
Practice Activity
Look up the current unemployment rate for your country or state. Research whether it has gone up or down in the last six months.