Quiz 13: Economic Growth: Are We Living in a New Economy


The labor force , as defined by the US Department of Labor, consists of all individuals over the age of 16, who are not housed in institutions (such as prisons, mental hospitals, and so forth), who are either under paid employment, seeking employment, or waiting to be recalled from a layoff. Therefore, this definition excludes individuals who are under 16, those who are institutionalized, and those who are not seeking employment. It is this last item that presents a little difficulty in the definition, because the pool of individuals not seeking employment includes discouraged workers. These are workers who have given up on trying to find employment, and as such are excluded from the figuring of the unemployment rate. For example, during an economic downturn, some workers who are unsuccessful for a very long time at finding employment become discouraged and stop actively seeking work. They are then not counted among the unemployed, regardless of the circumstances of their abandonment of employment seeking. For this reason, some have criticized the Department of Labor's definition of unemployment.

The unemployment rate is calculated using the following formula: img For example, if there are 5,000,000 unemployed persons, and the labor force consists of 100,000,000 workers, then the unemployment rate is img Thus, the unemployment rate is the proportion of the total labor force that is unemployed. The unemployment rate changes over time as the business cycle goes through states of economic growth and contraction. During periods of economic growth, the overall increase in demand for goods and service leads to companies requiring more individuals to produce those goods and services. Consequently, there is a greater demand for labor, and the unemployment rate goes down as the unemployed are hired into these positions. During periods of economic contraction, as the demand for goods and services decrease, companies can no longer afford to employ as many workers, so more workers become unemployed after being laid off.

Unemployment is categorized into three different "types," as follows: cyclical, structural, and frictional. • Cyclical unemployment is related to the business cycle, which is the repeating growth and contraction of the economy. During periods of economic contraction, the demand for goods and services is reduced, and as a consequence, companies must scale down their operations to match the lower demand for their products. This often entails laying off workers. Cyclical unemployment occurs when the economy shrinks, as in a recession. • Structural unemployment is a long-term type of unemployment related to a decrease in the demand for a certain type of labor. This may happen when changes in technology or consumer preferences cause a reduction in a demand for a certain type of product or service, thus rendering workers who specialize in that market to experience unemployment when companies no longer need workers to help produce that product. Difficulty in transferring skills to another industry may cause prolonged periods of unemployment for the displaced workers. • Frictional unemployment is a short-term type of unemployment that occurs when workers are temporarily unemployed when leaving one job and beginning or seeking another job. Often, workers experience a break in employment between one position and the next, and the result is frictional unemployment. Thus, some unemployment is unavoidable because of this necessity. Frictional unemployment also includes seasonal workers who undergo known periods of unemployment.