If the typical recession were nothing more than a 2–3 percent fall in real GDP, most people would probably shrug it off as a nuisance. But recessions are typically associated with a sharp rise in unemployment, so that the costs are painfully concentrated on a narrow segment of the population. Why the economy should suffer from recurring bouts of unemployment is one of the great puzzles of macroeconomics. In this chapter, we explore the concept and causes of unemployment and lay the groundwork for macroeconomic policies that might reduce it.
The Concepts of Employment and Unemployment
One implication of the perfectly competitive model of the labor market as we described it in the last chapter is that everyone who wants to work at the market wage is able to find work at that wage. To put another way: there is no involuntary unemployment. Yet, every month the government announces that some significant percentage of the labor force is unemployed. An important question, then, is, why is there unemployment?
Before we attempt to answer that question, it will help to understand what unemployment means. In this section, we shall consider labor markets out of equilibrium. Our goal is to define some important concepts. We return to the question of why the labor market is out of equilibrium in the next section.