2.3 Unemployment

a. Define the labor force, the unemployment rate, and the labor force participation rate. b. Explain how changes in employment and the labor market affect the unemployment rate and the labor force participation rate. c. Calculate the unemployment rate and the labor force participation rate.

• The unemployment rate is the percentage of the labor force that is out of work.
• The labor force participation rate is another measure of the labor market activity in an economy. The labor force participation rate is the percentage of the adult population that is in the labor force.
• Enduring understanding MEA-1: An economy’s performance can be measured by different indicators such as gross domestic product (GDP), the inflation rate, and the unemployment rate.

Define the limitations of the unemployment rate.

• The measured unemployment rate is often criticized for understating the level of joblessness because it excludes groups such as discouraged workers and part-time workers.
• Enduring understanding MEA-1: An economy’s performance can be measured by different indicators such as gross domestic product (GDP), the inflation rate, and the unemployment rate.

a. Define the types of unemployment and the natural rate of unemployment. b. Explain changes in the types of unemployment.

• Economists primarily focus on three types of unemployment: cyclical, frictional, and structural.
• The natural rate of unemployment is the unemployment rate that would exist when the economy produces full-employment real output. It is equal to the sum of frictional and structural unemployment.
• The deviation of the actual unemployment rate from the natural rate is cyclical unemployment.
• The natural rate of unemployment can gradually change over time because of such things as changes in labor force characteristics.
• Enduring understanding MEA-1: An economy’s performance can be measured by different indicators such as gross domestic product (GDP), the inflation rate, and the unemployment rate.