When we think of unemployment, we usually think of people without jobs. It is usually only a hot topic when the economy is experiencing a downturn or there are companies that are closing down. However, unemployment is a much more complex and natural thing that affects everyone’s every day life.
Within the field of macroeconomics, unemployment has a different definition. This definition is what will be applied as part of our AP macroeconomics unemployment review definition. It is important to keep this in mind and separate it from what you have considered unemployment up until now.
This review will help you understand the types of unemployment and its causes. It will help you understand the role of unemployment in macroeconomics and why it is a good and natural occurrence. Finally, we will help you look at unemployment from an AP Macro perspective and how it might appear on the exam.
What is Unemployment?
In truth, there is no hard and fast definition of what unemployment is. However, it has actual costs and effects on the economy as a whole. It affects the standard of living of a country. Unemployment also means that the country is not reaching its full production potential. Despite this, there are several different types of unemployment, some of which are actually good.
The three types of employment have a rating from best to worst in the eyes of economics. During your AP Macroeconomics review, you will have to study the different types and their effects. These types of unemployment are:
1. Frictional: This is the best case scenario in terms of unemployment. People who are frictionally unemployed are between jobs. This means they are not in the midst of looking for a new job, but rather they already have one and they are waiting to start working. Frictional unemployment would be the only kind in a perfect economy.
This type of unemployment is considered when economists consider the country’s full employment rate, or natural rate of unemployment, which is about 5% in the United States.
2. Structural: This type of unemployment is part of an underdeveloped or mismanaged economy. People are structurally unemployed when they are well-qualified but are not able to find a job to realize their full potential. An extreme case of this would be an engineer who cannot find a job and ends up working as a fast food restaurant.
A person is also structurally unemployed when their job becomes obsolete. For example, a type writer repairman was probably relevant and popular in the past, but is now a niche job. Many repairmen became unemployed as a result.
A structurally unemployed person would be considered underemployed, which means they are working in a position beneath their skill level, or they are unemployed due to changing times.
3. Cyclical: If you remember from past AP macro lessons, the business cycle is the rhythm of the economy. It is filled with ups and downs and the government attempts to use fiscal policy and monetary policy to moderate the severity of the business cycle.
Cyclical unemployment is the result of the business cycle. During the economy’s downward slopes people get laid off. This can either be due to lower demand or the failure of the business due to mismanagement. Because of the extreme nature of this type of unemployment, it is generally considered the most severe type.
No matter which type of unemployment is happening at the time, it has a general effect on the economy. This effect on the economy is measured by way of Okun’s Law. The law states that for every 1% increase in the country’s unemployment rate there will be a 2% fall in its potential GDP. The potential GDP is how much the country could be producing if it were at full employment.
Okun’s Law is demonstrated by the following equation: % change in GDP = 3% – 2x
The 3% in the equation is the assumed GDP growth rate when the country is at full employment (5% unemployment in the United States) and x is the change in the unemployment rate.
The relationship between the economy’s performance and unemployment is further demonstrated by the Phillip’s curve, which is very likely to appear on an unemployment related FRQ on the AP macro exam.
The Phillip’s curve is as follows:
The Phillip’s Curve demonstrates the relationship between unemployment and inflation. The long run Phillip’s curve (LRPC) is vertical as unemployment should even out in the long run. The short run Phillip’s curve (SRPC) is downward sloping, representing a negative relationship between the inflation rate and the unemployment rate. The point at which the LRPC and the SRPC intersect is the full employment rate.
When the point moves down the slope, unemployment increases and inflation falls. When the point moves up the slope, the opposite happens and inflation increases. The AP will ask you to demonstrate a recessionary gap or an inflationary gap. An inflationary gap occurs as the point moves up the SRPC while the recessionary gap occurs as the point moves down the SRPC.
Now that we know the types of unemployment and how it affects the GDP, how do we know when someone is actually considered unemployed? Is it everyone who does not have a job at the time?
Unemployment is basically when someone does not have a job and is currently looking for a new one. The key to this is that the person will have to be actively looking for a job in order to be considered unemployed. That means people who are not looking for a job are not considered in the unemployment rate.
Those who are not considered unemployed are as follows: active duty members; most of the homeless; stay at home parents; full-time students; and anyone younger than the legal working age (16 years old). It should be noted that while someone in one of these groups might want a job, if they are not looking, they are not unemployed.
How is Unemployment Represented in an FRQ?
There are several ways that the AP econ exam might ask you about unemployment, especially in a free response question. There has never been a direct question about unemployment itself, but rather how it might affect the economy or be affected by the current economic situation.
The most common scenario is shown in this FRQ by the CollegeBoard. The first question presents that the United States economy is operating at full employment. These types of questions will always tell you the status of the unemployment rate, whether it is at, above, or below full unemployment. You must consider the effects on the economy that this might have, especially considering its relation to aggregate supply in the short- and long-run as well as aggregate demand.
You will have to relate the unemployment rate to all aspects of the economy and eventually draw conclusions to other parts of macroeconomics, including interest rates and personal savings considerations and how they affect the economy as a result.
The second scenario is presented as the Phillip’s curve. You will have to calculate the effect the unemployment or inflation rates have on the economy based on the Phillip’s curve. You will more than likely have to draw a Phillip’s curve and correctly label it to get your point across.
In the above example from the 2013 AP Macroeconomics exam, the Phillip’s curve is mainly dealing with the effects on interest rates. However, if you read further, all the questions also have to deal with unemployment. This means that you will have to associate what the unemployment rate has to do with interest rates and inflation.
Finally, there is a small part of the employment rate that has to do with the production possibilities curve. If you remember, this curve presents the frontier for producing all possible goods for any country. A point on the frontier represents the maximum amount of goods the country can produce at that point, giving a trade-off of one product for another at full employment.
You will also use the production possibilities curve to demonstrate a recession and inflation to show how the unemployment rate affects production. As a general rule of thumb, when the unemployment rate rises, production of goods decreases from what is considered the potential perfect position for that country.
In the end, you also have to take unemployment into consideration for fiscal policy. When the government enacts fiscal policy, you will have to consider how that policy will affect the unemployment rate. In this case, when the government wants expansionary policy, the unemployment rate should fall. During contractionary policy, the unemployment rate will go up. The two policies can be represented by the Phillips curve which shows the direct relationship between inflation and unemployment.
Unemployment is an integral part of the AP Macroeconomics exam. You will have to use your knowledge of unemployment and relate it to other aspects of the economy. When you understand how unemployment works and how it affects the economy, then you are one step closer to getting a 5 on the AP exam.
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