The unemployment rate is simply the percentage of the working population which is unemployed. There are two types of unemployment:
- Frictional unemployment: In this type, the unemployment is due to the people in between jobs or the transition period between two jobs.
- Cyclic unemployment: As the economy contracts or grows, certain jobs can become redundant and companies are forced to let go of its employees.
A low unemployment rate indicates that the economy is sufficient to generate new jobs as new people enter the workforce. Think about it, if there is high unemployment, it leads to people taking the first jobs they get. For example, a highly qualified specialist would take up a job as a pizza delivery person since there are no jobs for their specialisation. This leads to dissatisfaction in the employed workforce as well as unrest among the unemployed.
But if a low unemployment rate is good for the economy, is 0% unemployment the best?
The answer is not as straightforward as it seems. Research suggests if there are no unemployed people, there is no competition among the workforce and companies might be inclined to hire unskilled workers or the first person to apply for a job. This can lead to reduced efficiency and ultimately slow down the progress of the economy.
Thus, while a low unemployment rate helps stabilise the economy, 0%, as well as a high unemployment rate, is undesirable.
Stay tuned for the next installment in which the author will review the Inflation rate.
Visit QuantInsti for additional insight on this tutorial:
Disclosure: Interactive Brokers
Information posted on IBKR Traders’ Insight that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Insight are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.
This material is from QuantInsti and is being posted with permission from QuantInsti. The views expressed in this material are solely those of the author and/or QuantInsti and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.