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Economic Theory

2. Employment and Unemployment
Unemployment is the macroeconomic problem that affects people
most directly and severely. For most people, the loss of a job means a
reduced living standard and psychological distress. It is no surprise that

unemployment is a frequent topic of political debate and that politicians
often claim that their proposed policies would help create jobs.

For many people, their job is an important part of their self worth.
When unemployment separates people from the workforce, it can affect
family relationships as well as mental and physical health. The human
costs of unemployment alone would justify making a low level of

unemployment an important public policy priority. But unemployment
also includes economic costs to the broader society. When millions of
unemployed but willing workers cannot find jobs, an economic resource is

going unused. The opportunity cost of unemployment is the output that
could have been produced by the unemployed workers.
Every day some workers lose or quit their jobs, and some unemployed
workers are hired. This perpetual ebb and flow determines the fraction of

the labor force that is unemployed.
The definition of “employed” is fairly liberal. To be classified as
employed, it is sufficient to have done any work for pay or profit. People

may even be counted as employed if they did not work – for example, if
they were on vacation, out sick, on maternity/paternity leave, or unable to
work because of bad weather.
To be classified as unemployed, a person must be without a job,

currently available to work, and actively looking for work. Thus, a person
who does not have a job but who is not currently available to work or has

not actively looked for work is counted as out of the labor force.
Of course not everyone without a job should be counted as
unemployed. The point is that the adult population is not just divided into
employed and unemployed. A third group exists: people who do not have a

job, and for some reason – retirement, looking after children, taking a
voluntary break before a new job – are not interested in having a job,
either. It also includes those who do want a job but have quit looking,

often due to being discouraged by their inability to find suitable
employment. Economists refer to this third group of those who are not
working and not looking for work as out of the labor force or not in the
labor force.

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