Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Unemployment: Wasting Talent and Productivity


In This Chapter


Discovering why unemployment matters


Comparing different ways to measure unemployment


Classifying unemployment by the underlying causes


Seeing how policy makers can reduce unemployment
If you’ve ever been unemployed, you know that it can be a disheartening experience. Despite being willing and able to do plenty of jobs in return for the market wage in that industry, for whatever reason no job materialises.

The ‘standard logic’ in economics is that the wage rate should adjust to ensure that the supply of labour equals the demand for labour. In other words, the number of people willing to work at the going wage should exactly equal the number of people that firms want to hire at that wage (we discuss this theory in more detail in this chapter). In theory, this logic eliminates all involuntary unemployment – the only people who are unemployed would be those who don’t want to work at the going wage. But this situation is clearly not the case in reality. So the big question is: what stops the labour market from ensuring that everyone who’s willing and able to work at the going wage gets a job?

This chapter gives you a good idea about the answer to this and other questions that may have been bothering you about unemployment. We describe two different ways of measuring a country’s level of unemployment and two methods that economists use to classify unemployment. We also discuss how policy makers can use the information that economists provide to help combat unemployment.

Understanding the Importance of

Unemployment: Opportunity Cost

Macroeconomists are highly preoccupied by the costs of unemployment, as well as ways in which it can be effectively reduced, for a number of reasons.

First and foremost, unemployment can be deeply distressing for those experiencing it. On average, people who are unemployed have worse mental and physical health, are more likely to experience divorce and report lower levels of life satisfaction in surveys. This reason on its own is sufficient incentive for policy makers to attempt to reduce unemployment.

In addition, unemployment involves a large economic cost: the additional output that would have been produced had these people been working. Economists call this the opportunity cost of unemployment. The unemployed person could’ve helped to build a road, produced something of value or taught someone a skill and so on. And even though they can do all these things when they eventually find a job, they never recover the time lost to unemployment.

Countries with high levels of unemployment, where perhaps 20 per cent or more of the labour force is unemployed, are wasting a huge amount of human talent and productivity. Just think about all the goods and services the unemployed could produce if they were able to find work.