Introducing Concepts - Unemployment and Inflation: Study with Video Lessons, Practice Problems & Examples

Unemployment occurs when individuals are willing and actively seeking work but cannot find a job. This rate typically rises during economic recessions, indicating a decline in the economy's ability to utilize its most valuable resource: the skills of its citizens. High unemployment is undesirable as it leads to decreased productivity and economic stagnation. Understanding the relationship between unemployment and economic cycles is crucial for grasping macroeconomic principles, including the impact of aggregate demand and supply on labor markets.

Unemployment

Alright. Now I want to introduce 2 more key concepts for this course that are interrelated, unemployment and inflation. So we're going to talk about them on a high level here. We're just introducing them, but we're going to go into a lot more detail on both of these topics in later videos. Okay? But here, we're just going to go over the definitions and some key trends related to these two topics. So let's start here with unemployment. What is unemployment? Well, obviously, it's when people don't have a job, right? But what is our specific definition? It's when a person is willing to work, actively searching for a job, but cannot find a job, right? So they're willing and actively searching for a job. That's different than someone who's like, oh yeah, I'd get a job but I, you know, I'm just going to watch some soap operas instead, you know. Yeah. Yeah. Yeah. I'll get a job. Mom, don't worry. I'm going to get a job. Mom, I'm going to get a job. Don't worry. Alright? So unemployment, we're actively searching for a work but cannot find a job. So let's look at this trend in our graph here when we talk about the unemployment rate over time. So what we have here, what we've shaded in purple, these purple sections, these are recessions in the economy. Okay? And generally, when you get shown a graph like this in a macroeconomics class, generally, they're going to show you the recessions. They'll do something like this where they'll highlight in a different color where the recessions are happening. And what do you see happening as a trend throughout all of these recessions? Look what we have. As these recessions are happening, what's happening to the unemployment rate? The amount of the percentage of people that are unemployed, Right? So notice throughout all of these recessions, what is happening to unemployment? It is increasing. Right? So the unemployment rate tends to increase during recessions. And that should sort of make logical sense, right, when we talk about, oh, no, the economy is going through a recession. You know, bad things are happening in the economy. Well, guess what? People can't find jobs. That's exactly, a main definition and a key flag to finding that we're in a recession is that these unemployment rates are increasing. Cool? But notice that even when the recession ended, we still had some changes in unemployment that were still kinda going up, but we have certain rules that mark what a recession is and when it starts and ends. And we see that it does start to recover and the unemployment does generally decrease outside of the recession. Right? Cool. So, obviously, when we talk about unemployment, it sounds like a bad thing. But why is it a bad thing? Well, it's undesirable because when people are unemployed, a nation is not using its most important resource and that is the skills of the citizens. The actual work power of the citizens. If they can't find jobs, well, they're not going to be able to produce anything and it's bad for the nation's economy. Right? So the most important resource there is the skill of the citizens putting the citizens to work. And when they can't find jobs, obviously, that's not good for the economy. Cool? So let's pause real quick and then we'll discuss a related topic of inflation. Let's check it out.

Here’s what students ask on this topic:

What is the definition of unemployment in macroeconomics?

In macroeconomics, unemployment is defined as the condition in which individuals who are willing and actively seeking work are unable to find a job. This means that the person is not only willing to work but is also actively searching for employment opportunities. This definition excludes individuals who are not actively looking for work, such as those who might say they want a job but are not making any effort to find one. Understanding this definition is crucial for analyzing labor market dynamics and economic health.

How does the unemployment rate change during a recession?

During a recession, the unemployment rate typically increases. This is because economic downturns lead to reduced demand for goods and services, causing businesses to cut back on production and lay off workers. As a result, more people are actively seeking jobs but are unable to find them, leading to a higher unemployment rate. This trend is often highlighted in economic graphs where periods of recession are marked, showing a clear rise in unemployment during these times.

Why is high unemployment considered undesirable for an economy?

High unemployment is undesirable because it indicates that a nation is not utilizing its most valuable resource: the skills and labor of its citizens. When people are unemployed, they are not contributing to the production of goods and services, leading to decreased economic output and productivity. This can result in economic stagnation, lower consumer spending, and reduced overall economic growth. Additionally, high unemployment can lead to social issues such as increased poverty and reduced quality of life.

What is the relationship between unemployment and economic cycles?

The relationship between unemployment and economic cycles is closely linked. During periods of economic expansion, businesses grow, and the demand for labor increases, leading to lower unemployment rates. Conversely, during economic recessions, demand for goods and services declines, businesses reduce their workforce, and unemployment rates rise. Understanding this relationship helps in analyzing how aggregate demand and supply affect labor markets and overall economic health.

What are the key trends in unemployment during recessions?

Key trends in unemployment during recessions include a noticeable increase in the unemployment rate. As the economy contracts, businesses face lower demand for their products and services, leading to layoffs and hiring freezes. This results in more people actively seeking jobs but unable to find them, thus increasing the unemployment rate. Even after a recession ends, it may take time for the unemployment rate to decrease as the economy gradually recovers and businesses start hiring again.