AP® Macroeconomics review sheet from Aim for Five (aimforfive.com/macro/units/2/2-3)
Unit 2 · Topic 2.3
2.3 Unemployment
The unemployment rate is the share of the labor force that is out of work but looking for a job. To use it well, you need to know who counts as being in the labor force, how to calculate the unemployment and participation rates, why the measured rate can understate joblessness, and the three types of unemployment.
Key terms
- labor force
- unemployment rate
- labor force participation rate
- discouraged workers
- cyclical unemployment
- natural rate of unemployment
Who counts
The U.S. Bureau of Labor Statistics sorts the adult population (ages 16 and up, not in the military, prisons or similar institutions) into three groups.
Employed: did any work for pay, even part-time. Unemployed: has no job, is available to work, and has actively looked for one in the past four weeks (people on temporary layoff waiting to be recalled also count). Not in the labor force: everyone else, such as full-time students, retirees, stay-at-home parents and people who have stopped looking.
The labor force = employed + unemployed.
Movements between groups change the rates in ways you should be able to predict. A worker who is laid off and starts job hunting moves from employed to unemployed: the unemployment rate rises and the participation rate stays the same. A retiree leaves the labor force: the participation rate falls. A student who starts looking for a first job joins the labor force as unemployed: both rates rise.
- Unemployment rate = (unemployed ÷ labor force) × 100
- Labor force participation rate = (labor force ÷ adult population) × 100
Why the rate can understate joblessness
Discouraged workers want a job but have given up looking, so they leave the labor force. They aren't counted as unemployed, which makes the unemployment rate look lower than real joblessness.
Part-time workers who want full-time work count as employed, the same as someone working 40 hours a week. So do people working in jobs well below their skill level (underemployment). The official rate doesn't capture either problem.
Three types of unemployment
Frictional unemployment isn't all bad: it lets people find jobs that fit them. Structural unemployment usually lasts longer and may require retraining or moving.
| Type | Cause | Example |
|---|---|---|
| Frictional | Time spent between jobs or searching for a first job | A new graduate interviewing for positions |
| Structural | Workers' skills or location don't match the jobs available, often because of new technology or shifts in what's produced | A typist whose job was replaced by software |
| Cyclical | Falling spending during a recession | A factory worker laid off because car sales dropped |
The natural rate
The natural rate of unemployment = frictional + structural. It's the unemployment rate when the economy is producing at full-employment output. Full employment does not mean zero unemployment; some frictional and structural unemployment always exists.
Cyclical unemployment = actual rate − natural rate. In a recession it's positive. In a boom, the actual rate can fall below the natural rate, which makes cyclical unemployment negative.
The natural rate isn't fixed forever. It drifts as the workforce changes: an older workforce, better job-search websites or a growing mismatch between workers' skills and open jobs can all move it.
Worked examples
Try each one yourself first, then open the solution.
- Example 1Calculator allowed
Calculating the two rates
A country's adult population is 250 million. 150 million are employed, 10 million are unemployed, and 90 million are not in the labor force. Find the labor force, the unemployment rate and the labor force participation rate.
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- Step 1: Labor force = employed + unemployed = 150 + 10 = 160 million.
- Step 2: Unemployment rate = 10 ÷ 160 × 100 = 6.25%.
- Step 3: Labor force participation rate = 160 ÷ 250 × 100 = 64%.
Answer: Labor force 160 million; unemployment rate 6.25%; participation rate 64%.
- Example 2Calculator allowed
Discouraged workers (classic trap)
Starting from the numbers above, 1 million unemployed people become discouraged and stop looking for work. What happens to the unemployment rate and the labor force participation rate?
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- Step 1: Discouraged workers leave the labor force. Unemployed falls to 9 million, and the labor force falls to 159 million. The adult population is still 250 million.
- Step 2: New unemployment rate = 9 ÷ 159 × 100 ≈ 5.66%, down from 6.25%.
- Step 3: New participation rate = 159 ÷ 250 × 100 = 63.6%, down from 64%.
- Step 4: The trap: the unemployment rate fell, but nobody found a job. The fall reflects people giving up, not a healthier job market.
Answer: The unemployment rate falls (to about 5.66%) and the participation rate falls (to 63.6%), even though no one was hired.
- Example 3
Finding cyclical unemployment
The actual unemployment rate is 7%. Frictional unemployment is 2% and structural unemployment is 3%. What are the natural rate and the cyclical rate, and what does that suggest about the economy?
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- Step 1: Natural rate = frictional + structural = 2% + 3% = 5%.
- Step 2: Cyclical = actual − natural = 7% − 5% = 2%.
- Step 3: Positive cyclical unemployment means the economy is producing below full-employment output, as in a recession.
Answer: Natural rate 5%; cyclical unemployment 2%; the economy is in a recession (below full employment).
Common mistakes
- Dividing by the adult population when finding the unemployment rate. Divide by the labor force.
- Counting discouraged workers or full-time students as unemployed. They're not in the labor force.
- Saying full employment means 0% unemployment. It means unemployment equals the natural rate.
- Including cyclical unemployment in the natural rate. The natural rate is only frictional plus structural.
On the exam
- Expect to calculate the unemployment rate or participation rate from data, and to predict how each changes when people move between groups (hired, laid off, discouraged, retiring).
- Free-response questions often ask whether unemployment is above or below the natural rate in a given AD–AS situation, so link this topic to output gaps in 3.5.
Connected topics
Videos
Check yourself
4 questions on 2.3 Unemployment. Pick an answer to see if you got it, and why.
| Category | Number of people (millions) |
|---|---|
| Adult population | 250 |
| Employed | 152 |
| Unemployed (actively looking for work) | 8 |
| Not in the labor force | 90 |
Hypothetical labor market data
What is the unemployment rate?
What is the labor force participation rate?
Suppose 2 million of the unemployed become discouraged and stop looking for work, while everything else stays the same. Which of the following describes the effects?
A recent college graduate spends two months interviewing for jobs before accepting an offer. During those two months, the graduate is an example of which type of unemployment?
0 of 4 answered