know that growth in employment only reduces the rate of unemployment if it exceeds the growth in the number of people wanting a job;
understand what is meant by the ''natural" rate of unemployment; and
know how the way in which unemployment is measured can explain paradoxical movements in the measured unemployment rate.
3.1 Defining and Measuring Unemployment
The unemployment rate is defined as the number of unemployed, people who want to have a job but do not have one, expressed as a percentage of the labor force, the total number of people aged 16 and over who want to have a job:
Several qualifications, such as that the rate refers to the noninstitutionalized civilian population (i.e., people not in prisons or mental institutions) aged sixteen and over, are incorporated in the official definition, but do not affect its basic meaning. Figure 3.1 shows how these concepts are related.
The measured rate of unemployment can be an underestimate or an overestimate of this "true" unemployment rate. Underestimation occurs because part-time workers are counted as employed, even if they really want full-time work. Overestimation occurs when people not wanting work pretend to want work in order to collect unemployment benefits, when unemployed are not willing to take a job unless it pays an unrealistically high wage rate, or when those measured as unemployed are actually "employed" in the underground economy. But the biggest problem with measuring unemployment is the discouraged/encouraged worker phenomenon.
The unemployed are people who want a job but don't have one. The main problem in measuring unemployment is finding some reliable way of determining who really wants a job. For lack of a better way, this is done by classifying as unemployed only those actively looking for work. Thus to be counted officially as unemployed someone must be without work and looking for work.
But what about people without work who have looked long and hard for a job and have become convinced that there is no job out there for them? They become discouraged in their search for a job and stop looking. Suddenly these discouraged workers are no longer counted