When people stop looking for work because they Cannot find a job but still want a job theyre called?

Learning Objectives

• Define and differentiate between employed, unemployed, and being in or out of the labor force

Unemployment can be a terrible and wrenching life experience—like a serious automobile accident or a messy divorce—whose consequences can be fully understood only by someone who has gone through it. For unemployed individuals and their families, there is the day-to-day financial stress of not knowing where the next paycheck is coming from. There are painful adjustments, like watching your savings account dwindle, selling a car and buying a cheaper one, or moving to a less expensive place to live. Even when the unemployed person finds a new job, it may pay less than the previous one. For many people, their job is an important part of their self worth. When unemployment separates people from the workforce, it can affect family relationships as well as mental and physical health.

The human costs of unemployment alone would justify making a low level of unemployment an important public policy priority. But unemployment also includes economic costs to the broader society. When millions of unemployed but willing workers cannot find jobs, an economic resource is going unused. An economy with high unemployment is like a company operating with a functional but unused factory. The opportunity cost of unemployment is the output that could have been produced by the unemployed workers.

Calculating Unemployment

Unemployment is typically described in newspaper or television reports as a percentage or a rate. A report might say, for example, from January 2013 to December 2013, the U.S. unemployment rate dropped from 8.0% to 6.7%, and by the close of 2015, it had fallen to 5.0%. At a glance, the changes between the percentages may seem small. But remember that the U.S. economy has over 160 million adults who either have jobs or are looking for them. A rise or fall of just 0.1% in the unemployment rate of 160 million potential workers translates into 160,000 people, which is roughly the total population of a city like Syracuse, New York, Brownsville, Texas, or Pasadena, California. Large rises in the unemployment rate mean large numbers of job losses. The decrease in unemployment from 8% in 6.7% 2013 meant an additional 2.02 million people were employed who had previously been looking for work.

Who’s In or Out of the Labor Force?

Should everyone without a job be counted as unemployed? Of course not. Children, for example, should not be counted as unemployed. Surely, the retired should not be counted as unemployed. Many full-time college students have only a part-time job, or no job at all, but it seems inappropriate to count them as suffering the pains of unemployment. Some people are not working because they are rearing children, ill, on vacation, or on parental leave.

Learn about what constitutes the labor force in this short video:

You can view the transcript for “(Macro) Episode 18: Unemployment” here (opens in new window).

The point is that the adult population is not just divided into employed and unemployed. A third group exists: people who do not have a job, and for some reason—retirement, looking after children, taking a voluntary break before a new job—are not interested in having a job, either. It also includes those who do want a job but have quit looking, often due to being discouraged by their inability to find suitable employment. Economists refer to this third group of those who are not working and not looking for work as out of the labor force.

Figure 1. Employed, Unemployed, and Out of the Labor Force Distribution of Adult Population (age 16 and older), 2016. The total adult, working-age population in 2016 was 253.5 million. Out of this total population, 151.4 million were classified as employed and 7.7 million were classified as unemployed. The remaining 94.4 million were classified as out of the labor force. As you will learn, however, this seemingly simple chart does not tell the whole story.

The U.S. unemployment rate, which is based on a monthly survey carried out by the U.S. Bureau of the Census, asks a series of questions to divide up the adult population into employed, unemployed, or not in the labor force. To be classified as unemployed, a person must be without a job, currently available to work, and actively looking for work in the previous four weeks. Thus, a person who does not have a job but who is not currently available to work or has not actively looked for work in the last four weeks is counted as out of the labor force.

• Employed: currently working for pay
• Unemployed: Out of work and actively looking for a job
• Out of the labor force: Out of paid workforce and/or not actively looking for a job
• Labor force: the number of employed plus the unemployed

discouraged workers: those who have stopped looking for employment due to the lack of suitable positions available out of the labor force: those who are not working and not looking for work—whether they want employment or not; also termed “not in the labor force” underemployed: individuals who are employed in a job that is below their skills

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There are three main types of unemployment: cyclical, structural, and frictional. Cyclical unemployment is, unfortunately, the most familiar. It occurs during a recession. The second two—structural and frictional—make up the natural unemployment rate.

This article summarizes nine types of unemployment. In addition to the four listed above, it explains long-term, seasonal, and classical unemployment. It also explains the terms "real unemployment" and "underemployment."

The Bureau of Labor Statistics (BLS) defines unemployment very specifically. To count as unemployed, out-of-work employees must have these three qualities:

1. They aren't working, even part time or temporarily.
2. They are available to work.
3. They actively looked for work in the past four weeks.

This last point is important and often controversial. If someone has stopped looking for work, the BLS no longer counts them as being part of the labor force or as unemployed. But it does report them separately under the category of "marginally attached to the labor force." These are people who look for work in the past 12 months but not in the past four weeks.

To calculate the unemployment rate, divide the number of unemployed by the number in the labor force.

Cyclical unemployment is caused by the contraction phase of the business cycle. That's when the demand for goods and services falls dramatically. It forces businesses to lay off large numbers of workers to cut costs.

Cyclical unemployment creates more unemployment. The laid-off workers have less money to buy the goods and services they need. That further lowers demand.

In the form of expansive monetary policy and fiscal policy, government intervention is required to stop the downward spiral. After the stock market crash of 1929, the government did not step in right away. This delay led to the Great Depression, which lasted 10 years and led to a 25% unemployment rate.

Frictional unemployment occurs when workers leave their old jobs but haven't yet found new ones. Most of the time, workers leave voluntarily, either because they need to move or have saved enough money to allow them to look for a better job.

Frictional unemployment also occurs when students are looking for that first job or when mothers are returning to the workforce. It also happens when workers are fired or, in some cases, laid off due to business-specific reasons, such as a plant closure.

Frictional unemployment is short-term and a natural part of the job search process. In fact, frictional unemployment is good for the economy, as it allows workers to move to jobs where they can be more productive.

Structural unemployment exists when shifts occur in the economy that create a mismatch between the skills workers have and the skills needed by employers.

An example of this is an industry’s replacement of machinery workers with robots. Workers now need to learn how to manage the robots that replaced them. Those that don't learn need retraining for other jobs or face long-term structural unemployment.

A long recession often creates structural unemployment. If workers stay unemployed for too long, their skills have likely become outdated. Unless they are willing and able to take a lower-level, unskilled job, they may stay unemployed even when the economy recovers. If this happens, structural unemployment leads to a higher rate of natural unemployment. 

Natural unemployment consists of two of the three main types of unemployment: frictional and structural. It explains why there will always be some level of unemployment, even in a healthy economy. People will always be changing jobs, and sometimes they leave a job before finding a new one. There will always be some people with skills that are no longer needed.

The lowest level of unemployment was 2.5%, right after the Korean War. Employers had a hard time finding workers. It occurred because the economy was in a bubble that soon burst and led to a recession. A healthy economy will have a natural unemployment rate of 4.5%-5%.

Long-term unemployment occurs for those actively looking for a job for over 27 weeks. The effects are devastating. Many employers overlook someone who's been looking for that long. The emotional and financial costs can be very damaging, according to a Pew Research Survey.  For example, 38% have lost self-respect. Almost 30% said their new job was worse than their old one. Sadly, 43% said they would have a hard time achieving their career goals.

Real unemployment is not one of the types of unemployment, but it's an important term to understand. Many people argue that instead of the “official” unemployment rate, we should use an alternate rate. The Bureau of Labor Statistics calls it the "U-6" rate. Others call it the “real” unemployment rate because it uses a broader definition of unemployment.

It includes these two categories:

• Marginally attached workers: They haven't looked for work in the past four weeks, but have looked within the past year. Some of them become discouraged workers who have given up looking for work.
• Part-time workers: They would like a full-time job but can only find part-time employment.

You might also hear of seasonal unemployment as another type of unemployment. As its name suggests, seasonal unemployment results from regular changes in the season. Workers affected by seasonal unemployment include resort workers, ski instructors, and ice cream vendors. It could also include people who harvest crops. Construction workers are laid off in the winter in most parts of the country. School employees can also be considered seasonal workers.

The BLS does not measure seasonal unemployment. Instead, it adjusts its unemployment estimates to rule out seasonal factors. This adjustment gives a more accurate estimate of the unemployment rate.

Classical unemployment is also known as “real wage unemployment” or “induced unemployment.” It’s when wages are so high that employers can't hire all the available workers. In other words, wages are higher than the laws of supply and demand would normally dictate.

It occurs in one of these three situations:

1. Unions negotiate higher salaries and benefits.
2. Long-term contracts set a wage that has become too high due to a recession.
3. The government sets a minimum wage that's too high.

The result is that companies must pay more in wages per employee. So, they can afford fewer employees. Those that are laid off are victims of classical unemployment.

Underemployed workers have jobs, but they aren't working to their full capacity or skill level. This category includes those who are working part-time but would prefer full-time jobs. It also includes those who are working in jobs where they aren't being utilized. Underemployment is often caused by cyclical unemployment. During a recession, underemployed workers will take what they can to make ends meet.

Some definitions of underemployment include unemployment. Others include segments of society that are not included in the standard definition of unemployment but are counted in the real unemployment rate. Awareness of underemployment helps you understand the big picture of unemployment.

Effective strategies and policies for reducing unemployment depend heavily on which type of unemployment you're targeting. For instance, reducing structural employment requires training programs to provide new skills for displaced workers. Mitigating cyclical unemployment, on the other hand, often depends on fiscal and monetary interventions from the government.

Unemployment is funded by state and federal taxes on employers that go toward unemployment insurance programs. State taxes vary, but the federal unemployment tax is 6% of the first $7,000 of each employee's wages each year.

The time limit for collecting unemployment benefits varies by state. Most states provide benefits for up to 26 weeks, but nine states provide less, and two provide more.

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