Understanding Economic Cycles and Unemployment Metrics

The Importance of the Economic Cycle

The economic cycle is important because of its direct impact on jobs and income.

Defining an Unemployed Person

A person is officially defined as unemployed if they meet the following four criteria:

• Working Age: They are 16 years old or older, with no upper age limit.
• Has No Job: Working even one hour or more in the survey week classifies a person as employed.
• Available for Work: They are not in an institution (such as a nursing home) and are not a full-time student.
• Looking for Work: They have actively looked for work in the last four weeks, unless they are waiting for recall after a layoff, have been hired and are waiting to start a new job within 30 days, or were prevented from looking by a temporary sickness.

Weaknesses of the Unemployment Rate

Beyond the fact that 16 is a relatively young starting age, there are several weaknesses in the standard unemployment rate calculation:

1. Student Status: Students with jobs are counted as employed, but full-time students without jobs are not considered available for work and are excluded from the labor force.
2. Duration: The rate ignores the duration of unemployment, though the Bureau of Labor Statistics (BLS) provides supplemental measures for this.
3. Underemployment: It ignores underemployment, which includes part-timers who want but cannot find full-time work. The BLS tracks these as "Involuntary Part-Timers."
4. Discouraged Job-Seekers: It does not count people who have given up looking for work because they have lost hope of finding a job.

BLS Measures of Unemployment

The BLS provides six distinct measures of the unemployment rate. The "official" and most commonly cited measure is designated as U-3.

The U-6 measure modifies this to account for underemployment and discouraged job-seekers. The numerator for U-6 is calculated as: Unemployment + Involuntary Part-Timers + Marginally Attached workers.

Three Primary Types of Unemployment

• Frictional Unemployment: This occurs when people are between jobs. It is not necessarily smart to accept the first job offer, and this is not considered a major macroeconomic problem.
• Cyclical Unemployment: This is caused by a failure of the economy to create enough jobs when it fails to produce up to its potential. This is the specific type of unemployment addressed in macroeconomic studies.
• Structural Unemployment: This is caused by fundamental problems in a particular industry or occupation, representing microeconomic unemployment. This includes:
  • Declining Industries: When corporations move production out of the country.
  • Technological Changes: When automation or new tech replaces human labor.