Unemployment Rate and Inflation

Unemployment Rate and Inflation

Unemployment Rate

For purposes of the most commonly reported statistical definition, at any time, a productive resource like labor may fall into one of three categories. Labor may be employed, unemployed, or not be in the labor force (Womer, 2007).

To be considered unemployed for purposes of the monthly household survey conducted by the U.S. Bureau of Labor Statistics (BLS)—whose definition is broadly consistent with that used by the OECD—a respondent must have actively, albeit unsuccessfully, sought work within the past four calendar weeks. Respondents are considered employed if they have worked at least 1 hour for a wage or 15 hours or more in a family business within the past week. The data are self-reported, and the issues of part-time employment versus desired full-time employment and working in a second-choice occupation are unaddressed in the monthly reported unemployment rate (Parkin, 2006). However, supplementary surveys are taken by the BLS to gauge these different measures.

Unemployment arises from four sources: job loss and the end of temporary assignments (42 percent), quitting jobs (14 percent), reentrants to the labor force (36 percent), and new entrants to the labor force (8 percent). The percentages indicated in the parentheses refer to the relative importance of these individual sources in the United States in 1999. The causes of unemployment can be classified into three basic types: frictional, structural, and cyclical factors (Jahoda 2007). Frictional unemployment, also called search unemployment, refers to people who are between jobs or just entering or reentering the labor market. Structural unemployment is joblessness due to the mismatch between workers' skills and employers' needs or to workers' unwillingness to relocate. Cyclical unemployment arises from reductions in production over the business cycle (Spruit, 2008).

While frictional employment may be voluntary and short term, structural unemployment tends to be involuntary and lasts longer due to the time involved in retraining. Cyclical unemployment reflects the extent of economic recessions and so is driven in the short term by the business cycle. The sum of frictional and structural unemployment is known as the natural rate of unemployment, which is determined primarily by long-term factors such as changes in demographics and economic structural and institutional variables.

Normally, the actual unemployment rate fluctuates around the natural rate over time. Sometimes a high level of unemployment may persist for a lengthy period (hysteresis) which, for example, Europe has experienced since the mid-1970s and which has eased ...