Macroeconomics: Introduction, Factors, Policies, Impact on Trading – Part IV

Get started with Part I, Part II and Part III of this series.

Unemployment Rate

The unemployment rate is simply the percentage of the working population which is unemployed. There are two types of unemployment:

1. Frictional unemployment: In this type, the unemployment is due to the people in between jobs or the transition period between two jobs.
2. Cyclic unemployment: As the economy contracts or grows, certain jobs can become redundant and companies are forced to let go of its employees.

A low unemployment rate indicates that the economy is sufficient to generate new jobs as new people enter the workforce. Think about it, if there is high unemployment, it leads to people taking the first jobs they get. For example, a highly qualified specialist would take up a job as a pizza delivery person since there are no jobs for their specialisation. This leads to dissatisfaction in the employed workforce as well as unrest among the unemployed.

But if a low unemployment rate is good for the economy, is 0% unemployment the best?

The answer is not as straightforward as it seems. Research suggests if there are no unemployed people, there is no competition among the workforce and companies might be inclined to hire unskilled workers or the first person to apply for a job. This can lead to reduced efficiency and ultimately slow down the progress of the economy.

Thus, while a low unemployment rate helps stabilise the economy, 0%, as well as a high unemployment rate, is undesirable.

Stay tuned for the next installment in which the author will review the Inflation rate.

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