Unemployment & Income Inequality

Does an increase in the unemployment rate mean that fewer people are employed? 

Not necessarily. It is possible for the unemployment rate to increase at the same time that the number of employed is increasing.

A demographic shift in the labor force like the entrance of women during World War II or the return to civilian life of members of the military can create a condition where the ratio of unemployed to the labor force increases even while overall employment is increasing.

Some types are actually positive for an individual and the economy while other types are bad for an individual but benefit society.

There are three main types of unemployment that exist in an economy:

This form of unemployment will always exist in a dynamic economy. It is short-run unemployment that is caused by people voluntarily changing jobs or due to a lack of knowledge about job opportunities and lack of labor mobility.

There will always be some unemployment at all times caused by workers changing jobs. Frictional unemployment occurs when both jobs and the workers qualified to fill them are available.

Government incentives create variations in frictional unemployment rates between countries.

Generous unemployment benefits give workers an incentive to spend more time searching for a job and thus increase the rate of frictional unemployment for the country.

Unemployment that results from an economy’s failure to adjust completely and efficiently to basic structural changes such as changes in technology, consumer preferences etc.

Structural changes prevent certain people from obtaining jobs because of their geographic location, age, race or inadequate education.

Unemployment that results from in adequate aggregate demand during the recession and depression phases of a business cycle.* 

Is it possible for a person to be both frictionally and structurally unemployed?

The classification of unemployment is not an exact science. A person who voluntarily leaves a job to search for another job for which he is unqualified would be both frictionally and structurally unemployed.

In a recession, this person might be frictionally, structurally, and cyclically unemployed.

1) Voluntary Unemployment
This occurs when the unemployed choose not to take a job at the going wage rate (e.g. wrong job, benefits too high). They could be counted as unemployed because they are still seeking a job – they just don’t want to take the one they are offered.

2) Seasonal Unemployment
In certain regions, unemployment may be seasonal. For example, unemployment rises in winter when there are no tourists.

3) Disguised Unemployment
This is when people do not have productive full-time employment, but are not counted in the official unemployment statistics.

Reducing poverty has become an international concern, yet there is no international consensus on guidelines for measuring poverty.

In pure economic terms, income poverty is when a family’s income fails to meet a federally established threshold that differs across countries. Typically it is measured with respect to families and not the individual, and is adjusted for the number of persons in a family. Economists often seek to identify the families whose economic position falls below some minimally acceptable level. Similarly, the international standard of extreme poverty is set to the possession of less than $1 a day.

Frequently, poverty is defined in either relative or absolute terms.

Absolute poverty measures poverty in relation to the amount of money necessary to meet basic needs such as food, clothing, and shelter. The concept of absolute poverty is not concerned with broader quality of life issues or with the overall level of inequality in society. It therefore fails to recognize that individuals have important social and cultural needs.

This, and similar criticisms, led to the development of the concept of relative poverty. Relative poverty defines poverty in relation to the economic status of other members of the society: people are poor if they fall below prevailing standards of living in a given societal context.

The relative deprivation approach to poverty examines the indicators of deprivation, which are then related back to income levels and resources.

It is possible to define the poor as those who lack basic necessities such as adequate food, shelter, healthcare, and education. Of course, this does raise the question of what constitute the basic necessities, and what level of each is considered adequate?

Unfortunately, while absolute standards of poverty are of some use in a domestic context, it is difficult or even impossible to define useful standards when making comparisons on an international scale. This is because the basic necessities of life differ markedly between nations.

For example, housing, clothing and nutritional needs vary greatly with climate.

Income distribution is the equality with which income is dealt out among members of a society.

Income inequality refers to the extent to which income is distributed in an uneven manner among a population. It can also be described as the gap between the rich and everyone else.

The equality or inequality of income in a particular country during an interval of time can be measured by a single number, known as the Gini Coefficient.

The Gini coefficient, named after the Italian statistician Corrado Gini, is a measure of dispersion that is based on the Lorenz curve developed by economist Max Lorenz.

It is a way of comparing how distribution of income in a society compares with a similar society in which everyone earned exactly the same amount. Inequality on the Gini scale is measured between 0, where everybody is equal, and 1, where all the country’s income is earned by a single person.