ECON 101 · Macroeconomics

Un-
employment

When workers who want jobs cannot find them — one of the most visible and costly failures of a market economy.

Prof. Muhebullah Karimzada · UNBC Economics

Measuring the Labour Market

Who counts as unemployed?

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The Labour Force

Everyone aged 15+ who is either employed or actively searching for work. Excludes retirees, full-time students, and discouraged workers who have stopped looking.

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Unemployment Rate

The share of the labour force that is jobless and actively searching for work.

u = (Unemployed ÷ Labour Force) × 100

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Hidden Unemployment

Discouraged workers (gave up searching) and underemployed workers (part-time who want full-time) are excluded from the official rate — causing it to understate true joblessness.

Three Types of Unemployment

Not all unemployment has the same cause — and that matters for policy. The right remedy depends on the type.

Frictional Workers are between jobs — searching, relocating, or transitioning. Normal and healthy: it reflects workers finding better matches. Duration is usually short.

Structural A skills mismatch — available jobs don't match the skills of unemployed workers. Caused by technological change or industry decline. Longer-lasting and harder to address.

Cyclical Caused by a downturn in aggregate demand — firms hire less when spending falls. Rises sharply in recessions. The primary target of fiscal and monetary stabilisation policy.

The Natural Rate of Unemployment

Even at "full employment," some unemployment always exists. The natural rate (NRU) is unemployment when the economy produces its potential output — cyclical unemployment is zero.

NRU NRU = Frictional + Structural. In Canada, economists estimate the NRU at roughly 5–6%. It shifts over time as demographics, technology, and institutions change.

Full Empl. "Full employment" means zero cyclical unemployment, not zero unemployment. At full employment, actual output equals potential GDP and the output gap is zero.

Okun's Law Each 1% of excess unemployment above the NRU costs approximately 2% of potential GDP — a powerful reminder of how costly recessions really are.

The Costs of Unemployment

Unemployment imposes both economic costs on the nation and profound social costs on individuals and families.

Economic Costs

📉 Lost Output & Revenue

Unemployed workers produce nothing. Lost output is permanent — goods not made, services not rendered. Tax revenues fall while government spending on benefits rises.

Okun's Law: 1% excess unemployment ≈ 2% of potential GDP lost.

Policy implication: Cyclical unemployment — caused by insufficient aggregate demand — is the primary target of stabilisation policy. Fiscal and monetary tools both work by restoring demand and returning employment toward the natural rate.

The Policy Toolkit

Addressing Unemployment

Different types of unemployment call for different policies. No single tool addresses all three — matching the remedy to the type is essential.

Demand-side Fiscal and monetary policy address cyclical unemployment — stimulus spending, tax cuts, or lower interest rates all raise aggregate demand and boost employment.

Supply-side Job training, education investment, and apprenticeship programmes reduce structural unemployment by closing the skills gap between workers and available jobs.

EI Employment Insurance supports workers through frictional spells — providing income during job search and acting as an automatic stabiliser during downturns.

Demand-Side

Fiscal policy — government spending ↑ or taxes ↓ to raise AE

Monetary policy — lower interest rates to stimulate investment

Targets cyclical unemployment

Supply-Side

Job training to retrain displaced workers

Education investment to raise human capital

Targets structural unemployment

Key insight: Fiscal and monetary policy are powerful against cyclical unemployment — but cannot fix structural unemployment, which requires long-run investment in education and skills.

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Behind every unemployment statistic is a person — with skills, ambitions, and a family to support. Understanding the causes of unemployment is the first step toward addressing them with the right tools.

— Prof. Muhebullah Karimzada · ECON 101 · UNBC

Unemployment · Labour Force · NRU · Okun's Law · Cyclical · Structural · Policy

Un-employment