Unemployment rate

There are several reasons the unemployment rate rises or falls. Although a clear reason is a change in
the number of job seekers, the unemployment rate may also be affected by a change in the size of the
labor force. When workers become discouraged and stop looking for employment, they leave the labor
force. It is common in economic downturns for the labor force to decrease (or increase more slowly
than usual) in size as many give up on finding work and are therefore no longer counted as officially
unemployed. For that reason, economists often point out that the unemployment rate is misleading and
understates the labor market’s weakness. Conversely, during an economic recovery, high
unemployment rates can persist despite an increase in jobs as more workers begin looking for work and
re-enter the labor market.

Labor Force

The labour force, or currently active population, comprises all persons who fulfil the requirements for
inclusion among the employed (civilian employment plus the armed forces) or the unemployed. The
employed are defined as those who work for pay or profit for at least one hour a week, or who have a
job but are temporarily not at work due to illness, leave or industrial action. The armed forces cover
personnel from the metropolitan territory drawn from the total available labour force who served in the
armed forces during the period under consideration, whether stationed in the metropolitan territory or
elsewhere. The unemployed are defined as people without work but actively seeking employment and
currently available to start work.

Discouraged worker

A discouraged worker is a person who is eligible for employment and can work, but who is currently
unemployed and has not attempted to find employment in the last four weeks. Discouraged workers
usually have given up on searching for a job because they found no suitable employment options or
failed to secure a job when they applied. The causes for worker discouragement are complex and varied.
In some cases, workers fall out of the workforce because they are not equipped to deal with
technological change in their workplace.

Types of Unemployment

Cyclical Unemployment

Cyclical unemployment occurs with changes in economic activity over the business cycle. During an
economic downturn, a shortfall of demand for goods and services results in a lack of jobs being available
for those who want to work. Businesses experiencing weaker demand might reduce the amount of
people they employ by laying off existing workers, or hiring fewer new workers. As a result, people
looking for work will also find it harder to become employed. The opposite situation occurs when
demand strengthens.

Structural Unemployment

Structural unemployment occurs when there is a mismatch between the jobs that are available and the
people looking for work. This mismatch could be because jobseekers don’t have the skills required to do
the available jobs, or because the available jobs are a long way from the jobseekers.
Frictional Unemployment

Frictional unemployment occurs when people move between jobs in the labour market, as well as when
people transition into and out of the labour force. Movement of workers is necessary for a flexible
labour market and helps achieve an efficient allocation of labour across the economy. However, people
may not find jobs immediately and need to invest time and effort in searching for the right job.
Businesses also spend time searching for suitable candidates to fill job vacancies. As a result, people
looking for jobs are not matched immediately with vacancies and may experience a period of temporary
unemployment.

Inflation

Inflation is a rise in prices, which can be translated as the decline of purchasing power over time. The
rate at which purchasing power drops can be reflected in the average price increase of a basket of
selected goods and services over some period of time. The rise in prices, which is often expressed as a
percentage, means that a unit of currency effectively buys less than it did in prior periods. Inflation can
be contrasted with deflation, which occurs when prices decline and purchasing power increases. Prices
rise, which means that one unit of money buys fewer goods and services. This loss of purchasing power
impacts the cost of living for the common public which ultimately leads to a deceleration in economic
growth. The consensus view among economists is that sustained inflation occurs when a nation's money
supply growth outpaces economic growth.

What Is the Rule of 70?

The rule of 70 is a way of estimating the time it takes to double a number based on its growth rate. It
can also be referred to as doubling time. The rule of 70 calculation uses a specified rate of return to
determine how many years it'll take for an amount—or a particular investment—to double. When
comparing different investments with different annual compound interest rates, the rule of 70 is
commonly used to quickly determine how long it would take for an investment to grow. Although it's
only an estimation of the future value of an investment, it can be effective in determining how many
years it'll take for an investment to double. The rule of 70 is often used in discussions of population
growth, and it can also be used to make estimates about economic growth, usually measured by gross
domestic product (GDP).

Shoe leather cost

Metaphorically, shoe leather cost is the cost of time and effort (or opportunity costs of time and effort)
that people expend by holding less cash in order to reduce the inflation tax that they pay on cash
holdings when there is high inflation. These costs include, having to make additional trips to the bank,
not being able to make change, or not being able to make unexpected purchases. The term comes from
the fact that more walking is required (historically, although the rise of the Internet has reduced it) to go
to the bank and get cash and spend it, thus wearing out shoes more quickly. A significant cost of
reducing money holdings is the additional time and convenience that must be sacrificed to keep
less money on hand than would be required if there were less or no inflation.
Why would you expect unemployment to fall during an economy's expansion phase?

When it comes to studying the economy, growth and jobs are two primary factors economists must
consider. There is a clear relationship between the two, and many economists have framed the
discussion by trying to study the relationship between economic growth and unemployment levels.
Economist Arthur Okun first started tackling the discussion in the 1960s, and his research on the subject
has since become known as Okun’s law. Below is a more detailed overview of Okun’s law, why it is
important, and how it has stood the test of time since first being published. In its most basic form,
Okun’s law investigates the statistical relationship between a country’s unemployment rate and the
growth rate of its economy. The economics research arm of the Federal Reserve Bank of St. Louis
explains that Okun’s law “is intended to tell us how much of a country’s gross domestic product
(GDP) may be lost when the unemployment rate is above its natural rate.” It goes on to explain that “the
logic behind Okun’s law is simple. Output depends on the amount of labor used in the production
process, so there is a positive relationship between output and employment. Total employment equals
the labor force minus the unemployed, so there is a negative relationship between output and
unemployment (conditional on the labor force).”

Why might governments sometimes try to combat recession by lowering interest rates?

Interest rates typically decline during recessions as loan demand slows, bond prices rise, and the central
bank eases monetary policy. During recent recessions, the Federal Reserve has cut short-term rates and
eased credit access for municipal and corporate borrowers. No price in the economy is as important as
the price of money. Interest rates arguably drive the business cycle of expansion and contraction.
Market rates reflect credit demand from borrowers and the available credit supply, which in turn
reflects preference shifts between savings and consumption.

What are financial intermediaries?

A financial intermediary is an entity that acts as the middleman between two parties in a financial
transaction, such as a commercial bank, investment bank, mutual fund, or pension fund. Financial
intermediaries offer a number of benefits to the average consumer, including safety, liquidity,
and economies of scale involved in banking and asset management. Although in certain areas, such as
investing, advances in technology threaten to eliminate the financial intermediary, disintermediation is
much less of a threat in other areas of finance, including banking and insurance. Financial intermediaries
move funds from parties with excess capital to parties needing funds. The process creates efficient
markets and lowers the cost of conducting business. For example, a financial advisor connects with
clients through purchasing insurance, stocks, bonds, real estate, and other assets. Banks connect
borrowers and lenders by providing capital from other financial institutions and from the Federal
Reserve. Insurance companies collect premiums for policies and provide policy benefits. A pension fund
collects funds on behalf of members and distributes payments to pensioners.