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Business Cycle and Economic Indicators

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Business Cycle and Economic Indicators

Do you know what the best ways are to check out the health of the economy? There are multiple things that can point to how well or how poorly the economy is doing. We call these things indicators. There are many types of economic indicators and some are seen as more important or more accurate than others. To learn about the types of indicators, indicator examples, business cycle information, and more, keep reading on!

Economic Indicators Definition

Economic indicators are essential economic statistics that can allow you to determine in which direction the economy is going. These indicators can assist investors in determining when to buy and sell holdings. Economic indicators are used also by professionals such as politicians and government bankers to change regulations and guarantee that the economy is headed on a good path.

Economic indicators are essential economic statistics that can allow you to determine in which direction the economy is going.

Economic Indicator Types

Economic indicators are divided into three categories: leading indicators, lagging indicators, and coincident indicators.

  • Leading: Predict future economic shifts. They're particularly valuable for forecasting short-term economic changes since they frequently shift before the market does. Essentially, leading indicators are economic activity metrics whose shifts can indicate the start of a business cycle.

  • Lagging: While leading indicators indicate the start of an economic cycle, lagging indicators affirm it. These are indicators that appear following an economic change or shift. They're most useful when they're utilized to verify specific patterns. The patterns themselves can be used to create economic projections, however the lagging indicators on their own are unable to be utilized to anticipate economic change directly.

  • Coincident: Coincident indicators are cumulative gauges of activity within the economy that fluctuates with the business cycle. As a result, these indicators aid in the identification of business cycles. Since they occur simultaneously with the shifts they indicate, coincident indicators supply useful information on the current economic situation in a certain area.

Economic Indicators Examples

There are many examples of economic indicators, and each of them can be grouped into one of the three types - leading, lagging, and coincident.

Leading Economic Indicators

The stock market and manufacturing are two examples of leading economic indicators.

Stock Market

Whilst the stock market isn't exactly a reliable leading indicator, it is the one many people tend to check out first. Earnings forecasts may be inaccurate, and the stock market itself is susceptible to manipulation. It can sometimes provide misleading results and projections for the economy's future. An economic collapse could occur if investors overlook underpinning economic indicators and market prices rise without support.

Manufacturing

Orders for durable products are a gauge of production activity. Commodities that aren't switched out for newer versions for at minimum a couple of years are referred to as durable goods. An example of this would be desktop computers. A rise in durable goods orders is often regarded as a marker of economic stability, whereas a drop could suggest economic instability.

Durable goods are commodities that aren't switched out for newer versions for at minimum a couple of years.

Lagging Economic Indicators

Income, unemployment, consumer price index (CPI), interest rates, gross domestic product (GDP), and currency are all examples of lagging economic indicators.

Income

Income is a lagging indicator. Salaries must rise along with the median living costs to ensure that the economy is functioning correctly. When incomes fall below the median living costs, it suggests that firms are cutting jobs, lowering rates of pay, or decreasing workers' hours. Various variables, such as age, sex, educational background, and race, are used to give a better idea as to how incomes are dispersed. They may reveal how particular groups' incomes fluctuate over time.

Unemployment

The amount of employment gained or lost is a major indicator of the health of the economy. When firms hire more people, it indicates that they are doing well. Increased hiring could also result in assumptions that additional individuals will have additional income to purchase commodities because there will be more people working. When unemployment levels increase suddenly or diminish more slowly than normal, it can lead to a fall in stock values since it suggests that firms are financially unable to hire more workers.

Get more interesting info about unemployment by visiting these explanations:

- Unemployment

- Measuring Unemployment

Unemployment is when someone is jobless, able to work, and actively searching for work.

CPI

Consumer Price Index (CPI) analyzes fluctuations in the prices paid by buyers for products and services over a given month. It's basically a gauge of changes in the cost of living. It serves as an indicator of inflation in terms of buying products and services, and is one of the clearest predictors of inflation in the United States.

Learn more about inflation in these articles:

- Consumer price index

- Costs of Inflation

- Price Indices

Consumer Price Index (CPI) is a way to analyze fluctuations in the prices paid by buyers for products and services over a given month.

Interest rates

Interest rates rise as the central bank rate rises. Rise and falls are caused by various economic and market circumstances. Borrowers become more hesitant to seek out loans if interest rates rise. Consequently, consumers are less likely to take on debt and firms are less likely to expand, which results in GDP growth possibly becoming stagnant. In the case that interest rates have gone down too much, then that can result in a spike in money demand and inflation.

GDP

Gross Domestic Product (GDP) is one of the earliest metrics used to assess an economy's health. It denotes economic output and growth, as well as the level of economic activity. When the GDP rises, it means that firms are making more of a profit. It also implies that the country's citizens will have a higher living standard. If GDP falls, it means the opposite is true.

We invite you to learn more in out articles:

- Real vs. Nominal GDP

- GDP

GDP quantifies the monetary worth of aggregate output in a country over a specific period of time.

Currency

Whenever a nation's currency is strong, it has more power in terms of buying and selling with other countries. With strong currency, a country can purchase goods for less money and sell them for more money in other countries. But if the country has weak currency, it attracts more visitors and entices other countries to purchase its commodities seeing them as less expensive.

Coincident Economic Indicators

Consumer spending and Producer Price Index (PPI) are examples of coincident economic indicators.

Consumer spending

Increases in consumer expenditure frequently come right before higher CPI numbers, while drops in spending could heighten fears of a recession. This increase and drop in consumer spending can directly affect the market.

Producer Price Index (PPI)

PPI measures price fluctuations across practically all product-manufacturing industries. PPI is significant since it is the first gauge of inflation provided each month. It catches pricing changes at the base level before they emerge at the retail stage.

Producer Price Index (PPI) is an indicator that measures price fluctuations across practically all product-manufacturing industries.

Key Economic Indicators Definition

Key economic indicators are indicators that give us a solid idea of how well the economy is performing overall. These are the ones that the government focuses on and watches the most. The key indicators in the U.S. that are most kept an eye on are: GDP, unemployment, and CPI. These key economic indicators vary together with the business cycle and therefore serve as a guide as to which point of the business cycle the economy is currently at.

Key economic indicators give us a good idea of how well the economy is performing overall and are the ones most focused on.

Business Cycle Definition

The business cycle is the movement between market crises (recessions) and economic growth (expansions). During recessions, the rate of unemployment increases rapidly and during recoveries usually drops. Despite the fact that highs and lows appear to be unavoidable, the majority of economists believe that macroeconomic research has led strategies that have helped balance the business cycle and stimulate economic stability.

Learn more on this topic in our article - Business Cycles

The business cycle is the movement between market crises (recessions) and economic growth (expansions).

Business Cycle Graph

The business cycle graph depicts how a country's overall output in the economy and employment fluctuate over time. Figure 1 below depicts the four long-term stages of an economy: expansion, peak, contraction, and trough.

Economic Indicators and the Business Cycle Business cycle diagram StudySmarter OriginalsFigure 1. Business cycle diagram, StudySmarter Originals

The business cycle consists of different phases and turning points each reflecting the occurring changes in economic variables such as GDP, employment and the price level. It is important to understand that these economic variables are facing the occurring changes from the business cycle but also are the reason for those changes within the business cycle itself.

Expansion is economic growth characterized by a rise in real output.

The next stage of the business cycle is the peak. This is the highest level of economic growth that the economy can attain. Prices have likewise reached their apex at this point.

The peak is the greatest level of economic growth above the trend growth

Contractions are the periods of falling economic growth which culminate in the troughs. Underemployment, falling economic growth, and poor sales due to diminished demand are all common features of contractions.

Prolonged periods of contraction can lead to a negative economic growth, which could lead to a recession. In the case that the recession worsens and economic activity stays underneath the trend line for prolonged periods of time, the country will be in a depression. Recessions and depressions are particularly bad as the economy's output and growth are continuing to decrease. Moreover, unemployment rises, productivity drops even further, and trade and business drop as well.

Recessions are prolonged periods of negative economic growth

The trough is when the economy is at its lowest point relative to the trend growth rate. The rate of economic growth is in the negatives. But there is a good side to this: the trough is as bad as it gets, meaning it can only go up from here. A trough usually precedes a recovery period where the economy begins its expansion phase again.

Troughs are times when the economy is at its lowest point relative to the trend growth rate


Economic Indicators and the Business Cycle - Key takeaways

  • Economic indicators are essential economic statistics that can allow you to determine in which direction the economy is going
  • The business cycle is the movement between periods of market crises and economic growth
  • Leading indicators are economic activity metrics whose shifts can indicate the start of a business cycle
  • The three types of indicators are: leading, lagging, and coincident
  • The four parts to a business cycle are the expansion, peak, contraction, and trough.

Frequently Asked Questions about Business Cycle and Economic Indicators

Economic indicators are essential economic statistics that can allow you to determine in which direction the economy is going. The business cycle is the movement between market crises (recessions) and economic growth (expansions).

Leading indicators are economic activity metrics whose shifts can indicate the start of a business cycle; While leading indicators indicate the start of an economic cycle, lagging indicators affirm it; Coincident indicators aid in the identification of business cycles.

Leading indicators can predict future economic shifts; Lagging indicators can be used to verify specific patterns within the economy; coincident indicators supply useful information on the current economic situation in a certain area. 

Indicators:


Leading: Stock market and manufacturing

Lagging: Income and unemployment

Coincident: Consumer spending and PPI


Business cycle:


Expansion, peak, recession, trough

After a recession phase, periods of expansion occur. This is when the economic growth line goes in an upward trend. Then the very top of the line is called the peak. This is the highest level of economic growth that the economy can attain. When the line begins to descend, this is known as a contraction. Contractions are moments within a business cycle in between peaks and troughs when economic activity is significantly reduced. And when the line continues going down and goes under the trend line, this is known as a trough. The trough is when the economy is at its lowest output relative to the trend output.

Final Business Cycle and Economic Indicators Quiz

Question

When does unemployment occur?

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Answer

Unemployment occurs when an individual is looking for a job, but he/she cannot find one. 

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Question

What is structural unemployment?

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Answer

Structural unemployment occurs when there are individuals seeking a job, but they are not able to find one because they don’t have the skills required or the number of jobs opened in an economy is lower than the number of people looking for a job.

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Question

What's the difference between structural unemployment and other types of unemployment?

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Answer

Unlike other types of unemployment, such as frictional, structural unemployment is much more persistent and lasts for more extended periods. This type of unemployment has long-term consequences for the economy and can result from different factors.

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Question

How do you know you are dealing with structural unemployment?

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Whenever you have more people seeking jobs than there are jobs in an economy, or whenever you have many unskilled individuals who cannot meet the demand for labor, you’re dealing with structural unemployment. 

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Question

What are the factors that can lead to structural unemployment?

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Answer

There are many factors that could lead to structural unemployment. The main causes of structural unemployment you should know of are: minimum wages, labor unions, and efficiency wages.

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Question

Explain how minimum wages lead to unemployment.

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Answer

In industries where there is a surplus of workers supplying their labor, companies would want to decrease their wages, but they can't really lower the wages due to the government's imposed minimum wage. In such a scenario, there are more people supplying their labor than there are companies demanding labor at the minimum wage rate. This will cause some people to secure jobs while others will remain unemployed.

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Question

Explain how labor unions lead to structural unemployment.

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Answer

When labor unions manage to negotiate higher wages for a certain industry where they have workers, this will discourage employers from hiring more due to the cost they face in improving and meeting the demands of labor unions.

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Question

Explain how efficiency wages lead to structural unemployment.

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Answer

When you have many companies providing efficient wages, it will make those companies very attractive. This will increase the number of people seeking a job in one of these companies, but only a limited number of workers will be hired. This will then cause an increase in structural unemployment.

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Question

What does it mean for the labor supply to slope downwards?

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Answer

It implies that when wages decline, businesses are more inclined to recruit new employees and vice versa. 

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Question

What are some examples of structural unemployment?

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Manufacturing industries, fruit-picking labor markets are examples of structural unemployment.

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Question

How individuals become structurally unemployed in manufacturing facilities?

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Answer

The manufacturing facility has much unskilled labor employed. Their job is to combine individual components into a finished product during clothes manufacturing. However, new technology is invented that can combine individual components into a finished product. It requires a small number of people to monitor the equipment. Some staff is hired to monitor and calibrate equipment, but the remainder must decide whether to continue their study or look for work in a new field. After introducing specialized production assembly technology, product assembly employees at a clothes manufacturing facility became structurally unemployed.

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Question

What happens to fruit-pickers when a fruit-picking robot is introduced?

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Answer

New robots that are able to pick the fruits will replace fruit-pickers. This will leave fruit pickers to be unemployed as their skills are no longer demanded. Additionally, they don’t have the skills needed to monitor the robots and help improve their algorithms. 

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Question

What is the main disadvantage of structural unemployment?

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One of the main disadvantages of structural unemployment is creating inefficiencies in the economy.

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How does structural unemployment create inefficiencies in an economy?

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Structural unemployment occurs when many people in an economy do not have the necessary skills required for the job openings. This then leads to one of the main disadvantages of structural unemployment, which is creating inefficiencies in the economy. Think about it, you have a large portion of people willing and ready to work, but they cannot do so as they lack the skills. This means that those people are not used to producing goods and services, which could add more to the overall output in an economy.

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Question

What does the theory of structural unemployment suggest?

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The theory of structural unemployment suggests that this type of unemployment results when there is a mismatch between the jobs in an economy and workers' skills.

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Why structural unemployment is harder to fix?

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Answer

This type of unemployment is harder for governments to fix as it would require a large portion of the labor market to be retrained.

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Question

What are the three parts to being unemployed?

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Answer

The person must be jobless, able to work, and actively seeking a job. Remember, if they aren't actively seeking a job they're not part of the labor force! 

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Question

In the US, who is responsible for collecting information regarding unemployment?

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Answer

The Bureau of Labor Statistics (BLS) is responsible for collecting unemployment information. They do a monthly survey on about 60,000 households and use the information to make their reports.

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Question

What is the name of the survey conducted every month in order to gather information about the unemployed?

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Answer

The Current Population Survey (CPS) is the monthly survey conducted to get information about unemployment from every eligible member of a household. It is not mandatory to participate in this survey, so the government depends on those who voluntarily offer up information.

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Question

What are the four types of unemployment?

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The four types of unemployment are cyclical, frictional, seasonal, and structural. Cyclical, frictional, and seasonal tend to be short-term unemployment, while structural tends to be long-term. 

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Question

Define cyclical unemployment

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Cyclical unemployment is when workers become jobless due to a reduction in demand caused by a damaged economy. Workers who get laid off due to there not being enough work for them to do usually end up getting their jobs back when the economy is better. 

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Question

Define frictional unemployment

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Frictional unemployment is the point in time where a person is between jobs or is trying to reenter the workforce. Most of those counted as unemployed in the US are frictionally unemployed. 

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Question

Define seasonal unemployment


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Seasonal unemployment is when workers lose their jobs due to the demand for the labor being low, or at the end of its season. Think of jobs such as harvest workers where they are only needed for part of the year to help pick the fruits/vegetables that will be sold to stores. 

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Question

Define structural unemployment

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Answer

Structural unemployment is when the structure of a job is not set up to a workers advantage. The skillset might not be needed or seen as valuable anymore, or they might get replaced with new technology. Think of self-checkout lanes at the grocery store replacing cashiers. 

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Question

What is a discouraged worker?

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A discouraged worker is someone who has given up the search for a job. They feel discouraged because they might not be able to find the job they want or might have gotten rejected from too many positions. This type of worker is not counted with the rest of the unemployed because they are not actively searching for a job. 

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Question

Are part-time workers counted with the employed group or with the unemployed group?

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Answer

Whether full-time, part-time, or even self-employed, these workers are counted with the rest of the employed. To be counted with the unemployed group, one must be jobless. 

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Question

If a recent college graduate is currently unemployed but has been sending out applications for jobs, what type of unemployment are they experiencing? 


  1. Seasonal unemployment
  2. Cyclical unemployment
  3. Frictional unemployment
  4. Structural unemployment

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Answer

Frictional Unemployment. 


If a person is between jobs or attempting to reenter the workforce, they are considered frictionally employed. Since school can be thought of as a "job" in this sense, then the student can be considered "in between jobs". 

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Question

True or False. 


Everyone in the United States must take part in the CPS.

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Answer

False.


First of all, not everyone is selected to take part in the survey. That would take a significant amount of time to complete and a lot of workers needed to conduct the surveys would have to be hired. Roughly 60,000 households are chosen every month and answering the questions is completely voluntary. 

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Question

Are retired people counted as employed or unemployed? 

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Neither. Those who are retired, as well as those who are too young to work, are not considered employed or unemployed. They are not counted as being part of the labor force.

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Question

What is hidden unemployment?

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Hidden unemployment refers to people who are technically unemployed but are not counted when calculating the unemployment rate. Those who are discouraged workers, those who work less hours than they would like, and those who are working a job they are overqualified for are all part of this group. 

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Question

What is frictional unemployment?

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Answer

Frictional unemployment is when a person is unemployed but still actively looking for work. It could be a person who is in between jobs, for example, or who is getting their first-ever job. 

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Question

What are 3 examples of frictional unemployment?

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Answer

  • People who are looking for a new job
  • People who are entering the workforce for the first time
  • People who are reentering the workforce

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Question

What happens to the rate of frictional unemployment when the economy is unstable?

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Answer

It decreases. Workers aren't confident that they can find new jobs at this time. Therefore, they stay at the ones they currently have and wait until the economy is back to normal.

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Question

Is frictional unemployment bad for the economy?

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Answer

Generally, no. Frictional unemployment (within reason) is seen to be a sign of a healthy economy. Workers feel confident that they will be able to find a new job with comparable pay even if they leave the job they currently have.

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Question

Give 3 reasons someone might leave their job and become financially unemployed.

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Answer

  • An employee doesn't feel fulfilled
  • An employee wants better opportunities
  • A person doesn't want to work full-time anymore 
  • An employee is not happy with their current working conditions
  • A person leaves to take care of sick family members
  • An employee has to move
  • An employee wants to go back to school 

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Question

What are discouraged workers?

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Workers who have given up on searching for a job. They may have started off as being frictionally unemployed, but at some point they felt that they're never going to get hired or get the job they want. They stop applying and looking for jobs and are therefore not even considered to be part of the labor force anymore.

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Question

What's hidden unemployment?

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Answer

Employment that is not counted when calculating the unemployment rate. These are people who are technically unemployed but might have stopped searching for a job, such as discouraged workers, or are working jobs they are overqualified for. 

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Question

Wait unemployment is...?

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Answer

When a person works a job they are overqualified for while waiting for the job they actually want to hire them. A good example would be a lawyer working a minimum wage job while waiting to hear back from a highly competitive law firm. 

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Question

How can frictional unemployment be controlled?

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Answer

It can be controlled by lowering the amount of unemployment benefits, increasing social presence, and offering more flexibility when it comes to work. The more convenient it is for people to work or to find open job positions, the quicker they'll leave their unemployment days behind. 

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Question

Why would increased job flexibility help control the rate of frictional unemployment?

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Answer

Increasing flexibility would allow workers to continue working without having to worry about the standard,  more rigid work structure that they currently have. For example, instead of worrying about running late to work in the morning due to traffic or other conditions outside of the workers' control, they can request to work from home. Or, if a worker is going to be moving soon, remote work could also allow them to continue working at their current job instead of having to find a new one.

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Question

What information must be known before calculating the frictional unemployment rate?

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Answer

The # of frictionally unemployed people and the # of the total labor force. The # of frictionally unemployed people is calculated by adding together all of the people who are in between jobs, are reentering the workforce, and those who are attempting to enter the workforce for the first time.

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Question

Why could lowering the unemployment benefits to control frictional unemployment possibly be a bad idea?

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Answer

While it would encourage people to find a job quicker, lowering the unemployment benefits could also make people find a job a bit too quickly. This is bad because in an attempt to find a job so they can pay their bills, they might accept a job they are overqualified and underpaid for. This leaves quality positions open that this person could have filled, so it's not necessarily a boost for the economy. 

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Question

What is natural unemployment?

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Answer

Natural unemployment is a hypothetical rate of unemployment and suggests that there will never be zero unemployment in an economy that is operating well. Employees leaving their current posts to look for better opportunities and advancements is seen as a good thing.

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Question

What two types of unemployment are considered to be natural?

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Answer

Structural and frictional. These are due to "natural" causes such as employees switching jobs or technological advances in society, which are bound to happen. 

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Question

What is the definition of the natural rate of unemployment?

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Answer

It is the combination of frictional and structural unemployment. 

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Question

Why is cyclical unemployment not counted when calculating the natural rate of employment? 

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Answer

Cyclical unemployment is not counted because it is not seen as natural unemployment. Outside factors can cause a rise in unemployment, pushing it out of the "normal' range. For example, a recession causing businesses to shut down and all employees there to lose their jobs will increase the rate of unemployment significantly.

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Question

Can the natural rate of unemployment ever be zero?

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No, the natural rate can never be zero. There will always be movement within the labor force, such as those joining the labor force for the first time, those getting hired/fired, or those who are switching jobs. This makes it impossible/undesirable to have a natural rate of zero.

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Question

What are the three main reasons people become unemployed and leave their jobs?

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Answer


  • Changing jobs/careers
  • College graduates entering the workforce
  • No longer having "valuable" skills the job market is seeking

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Question

Define unemployment

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Answer

Those who are jobless but are actively seeking a job. Those who are jobless but not searching are not part of the labor force and thus are not counted with the rest of the unemployed. 

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Question

What are the causes of changes in the rate of unemployment?

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Answer

Changing characteristics of the labor market and changes in public policy. Frictional and structural unemployment, for example, increase the rate of natural unemployment due to workers changing jobs or losing their jobs due to new technology growth.

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