The three types of unemployment:

• Frictional unemployment - consists of search unemployment and wait unemployment. This correctly implies that labor markets do not operate perfectly nor instantaneously in matching workers and jobs.
• Structural unemployment - unemployment resulting when the skills do not match those required for jobs. That is skills become obsolete.
• Cyclical unemployment - unemployment caused by the recession phase of the business cycle

Defining "full employment"

• Full-employment unemployment rate = total of frictional and structural unemployment
• The aforementioned unemployment rate is also called the natural rate of unemployment
• Full-employment occurs when cyclical unemployment is zero.

This means there will always be some people unemployed due to frictional or structural unemployment

The labor force contains all people except for

1. potential workers that are not seeking work
2. juveniles 16 years of age or younger
3. people that are institutionalized - e.g. in mental hospitals or correctional facilities

unemployed workers are those workers who are part of the labor force but are not actively seeking work.

Measuring Unemployment

    Unemployment rate = (unemployed / labor force) * 100

This calculation of unemployment rate is criticized for many reasons

1. by counting part-time workers as fully employed, the calculation understates unemployment
2. there are numerous workers who, after unsuccessfully seeking employment, become discouraged and drop out of the labor force. The number of discouraged workers is larger during recession. Because discouraged workers are not counted, this calculation understates the unemployment rate
3. People provide false information

Economic Cost of Unemployment

• Unemployment makes economies unable to reach full employment
• Okun's Law - for every 1 percent that the actual unemployment rate exceeds the natural rate, a 2.5% percent GDP gap occurs.

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