Civilian Unemployment Rate
Connections

Connections to Key Topics with Additional Resources

Topic Connections and Additional Resources
Scarcity, Choice, and Opportunity Cost

The choice of accepting a job offer has an opportunity cost (the possibility of a better job), as does the choice of continuing the job search process (the wages and benefits of the foregone job offer).

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Income Distribution and Poverty

While it may seem reasonable to assume that people living in poverty are unemployed, in fact there are many "working poor" households in which the wage is insufficient to bring household income above the poverty threshold. In fact, most job creation in recent years has been in the relatively lower wage service sector. Some economists associate the increasing number of working poor to the declining role of labor unions in the private sector.

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Labor Markets

Prior to the Great Depression, many classical economists assumed that high rates of unemployment would only be transitory. Wages and salaries would adjust downward in the labor market in response to a decrease in labor demand, preventing a prolonged deviation from full employment. Keynes became prominent by arguing persuasively that unions, minimum wage laws, oligopolistic industrial employers, and various institutional factors create labor market rigidities that prevent downward flexibility in wages.

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Unemployment, Employment, and Inflation

The unemployment rate is the percentage of the overall labor force that is unemployed. The labor force is made up of all people 16 and older who are either employed in a job or are unemployed but seeking work. Children, homemakers, retirees, students (who do not have jobs), and discouraged former workers are not included in the labor force.

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Aggregate Demand/ Aggregate Supply

The macroeconomic equilibrium occurs at the level of real GDP where aggregate demand equals aggregate supply. If equilibrium real GDP is below the full-employment level, cyclical unemployment is positive and there is room in the economy for reducing the unemployment rate without accelerating inflation. In contrast if equilibrium real GDP exceeds the full-employment level, the unemployment rate cannot be sustained without accelerating inflation.

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Monetary Policy

A key goal of monetary policy is to maintain low rates of inflation. If the Federal Reserve concludes that economic conditions are favorable for accelerating inflation, such as when wage growth is outpacing productivity, then the Fed will move toward contractionary monetary policy. In contrast, expansionary monetary policy is far more likely when inflation pressures are light, but economic growth has slowed and unemployment rates have increased.

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Fiscal Policy

When the unemployment rate is above full-employment level, policy makers will consider expansionary fiscal policy (increasing government spending and/or decreasing taxes). Conversely if the unemployment rate is below the full-employment level, policy makers will consider contractionary fiscal policy (decreasing government spending and/or increasing taxes).

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Comparative Economics Systems European countries such as France, Germany, and Italy have succeeded in achieving a high level of per-capita income, but suffer from chronically high rates of unemployment compared to those in the U.S. and Great Britain. The culprits likely include relatively high employment taxes, rules making it difficult for employers to lay off or fire workers, and relatively generous unemployment benefits. The former Soviet Union and its Eastern Bloc satellites evaded high unemployment rates by utilizing outdated labor-intensive manufacturing facilities.

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Equilibrium Equilibrium in the labor market occurs at the wage rate where the supply of labor equals the demand for labor. If wages tend to be "downwardly sticky" (i.e., nominal wages can rise but do not tend to decline), then a decline in labor demand, such as during a recession, can produce an excess supply of labor -- cyclical unemployment.

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Market Failure, Regulation, and Public Choice EMany people living in poverty are numbered among the "working poor" -- those who work but whose earnings are below the poverty threshold. Some economists consider income inequality to be a type of market failure. Minimum wage laws, when effective, force employers to pay an above-equilibrium wage rate. Economic theory suggests that the result will be an increase in the unemployment rate.

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Government and the Economy Many people living in poverty are numbered among the "working poor" -- those who work but whose earnings are below the poverty threshold. Minimum wage laws, when effective, force employers to pay an above-equilibrium wage rate. Economic theory suggests that the result will be an increase in the unemployment rate. Alternatively, government could allow the market to set equilibrium wages and pay the working poor a wage subsidy, which could reduce unemployment.

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Resource Markets Labor is a resource, or factor of production, and consequently a labor market is a resource market. Unemployment in a resource market can occur when wages are "downwardly sticky" and either labor supply increases or labor demand decreases.

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