5.02 Employment and Unemployment

Introduction

Unemployment rises and falls with changes in the business cycle. In general,

• as the economy grows, unemployment tends to fall
• as the economy contracts, unemployment tends to increase.

In this lesson, we will discuss what economists consider to be full employment and why people are still unemployed at full employment. However, the cyclical nature of the economy is only one cause of unemployment, so new terms like frictional and structural unemployment will be learned. This lesson will focus on the definition and calculation of unemployment and the differing causes.

Labor is one of the factors of production, which is one reason that unemployment is so important. When someone is unemployed, a factor of production is idle. Society loses use of that unemployed person as a resource to produce goods or services. This is output that cannot be replaced. For this reason, politicians, businesses, and society as a whole pay close attention to the unemployment rate.