Unemployment Rate

What is the Unemployment Rate?

The unemployment rate represents the ratio of the workforce who is classified as "unemployed".  An unemployed individual can be defined as a person who is of age 16, or older, who does not have a job and has been actively looking a job over the past 4 weeks.  The formula for the unemployment rate can be calculated as follows:

Types of Unemployment

There are four key types of unemployment that exsits; frictional, structural, seasonal, and cyclical.  The first three are considered the components of the natural rate of unemployment.  The natural rate is the normal rate of employment which is not due to cyclical reasons. 

Frictional Unemployment

Frictional unemployment results from workers leaving their jobs or being laid off.  It basically represents workers in the transition phase from one job to another. 

Structural Unemployment

Structural unemployment results from a mismatch of worker skills with the available jobs in the market.  It can also occur if the unemployment occurs because workers do not live in the location where the job is located.

Seasonal Unemployment

Seasonal unemployment results due to seasonal shifts in demand for labor.  For example, during the Christmas season, it is very common to see companies hiring students for a couple weeks when sales are extremely high. 

Cyclical Unemployment

Cyclical unemployment is the result of shfts in the broad economic landscape.  This form of unemployment exists due to declines in real GDP during a recession or depression.  When the real GDP falls below the potential output of the economy, there is said to be positive cyclical unemployment, while the opposite is true when real GDP is greater than the potential output.

In general, it is typical to see an inverse relationship between real GDP and unemployment.