Unemployment
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One of the greatest factors in our economy today is unemployment. Unemployment is the labor force participants that have inability to find jobs. There are certain exceptions to being unemployed such as woman who devotes her time to being a housewife or a person who is doing charity work and donating their time. An important rule of thumb before discussing how unemployment affects our economy is to remember that, to get the maximum out of the available production capacity we need to reach full employment.
Before I get started on discussing how unemployment effects our economy I would like to show some interesting statistics. According to the Government 6.5 million people are unemployed, 5.5% of people are unemployed, and 12% of people are below the poverty line. But according to the infamous Michael Moore up to 13 million people are unemployed, up to 11% of people are unemployed and 20 % of people are below the poverty line. As you can see, the United States Government has totally different numbers than Michael Moore. This is because the government can not account for everyone in their country. People without homes can not be counted as homeless because there is no way to contact all of them, or not count them twice.
The types of unemployment are cyclical that is related to the business cycle, falling GDP growth, and workers who are laid off due to falling demand for labor. Iit is caused also by declining aggregate demand. Then there is structural that is a mismatch of labor skills with the offered job vacancies. It is cause by economic reforms and new technologies such as the car industry and by workplace downsizing and tariff or quota cuts. Frictional is another type of unemployment and is from people moving jobs or looking for their first job or rejoining the work force, this is just normal labor market turnover. Seasonal unemployment is self explanatory; examples would be Christmas jobs or fruit pickers.
Arthur Okun measured the relationship of the production possibilities curve and unemployment. Okuns law can be stated as saying that for every one percentage point by which the actual unemployment rate exceeds the “natural” rate of unemployment, there is a 2 to 4 % “GDP Gap”. That is, unemployment above the inflation-threshold unemployment rate corresponds to real gross domestic product below potential output (Case 1).
When a country is facing unemployment problems there are certain opportunity costs for it’s citizens, which means the economy is not running on full production frontier. These opportunity costs are lower living standards, consume resources, no production contribution.