Unemployment is a key economic indicator of the health of the economy. When too many people are jobless, they have to spend less on goods and services, which can cause economic contraction. Countries have a variety of policies to stimulate the economy and reduce unemployment. These include fiscal stimulus, cutting interest rates and introducing welfare programs to aid the jobless. These policies are more effective when they are properly diagnosed as the cause of unemployment and implemented in the right context.

What Are the Different Types of Unemployment?

There are several types of unemployment, but the official statistics only count those who lost their jobs through no fault of their own or who have not been able to find work for over four weeks. The US government surveys a random sample of households to produce the nation’s unemployment rate, which has been conducted monthly since 1940. Alternative measures of labor underutilization include the U3 rate (those who have lost their jobs or have completed temporary jobs), the U4 rate (discouraged workers who give a reason for not looking for work) and the U5 rate (marginally attached workers) and those working part time but want full-time employment for economic reasons).

There are several causes of unemployment, which vary across times and places. In the long run, unemployment rises when there is a shift in the amount of hours workers are willing to work for a given wage, or when there is a change in the supply of available workers, such as demographic changes or technological improvements that make some skills obsolete. Other factors that can contribute to unemployment include business cycle fluctuations, global competition, geographic shifts in demand and labor market rigidities such as strong unions, high unemployment benefits and inflexible labor laws.