This unit explores two important macroeconomic challenges: unemployment and business cycles. Understanding them helps us see how economies grow, slow down, and recover—and what happens to people and jobs along the way.
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What is Unemployment?
Unemployment occurs when people who are willing and able to work can’t find a job. It’s not just an economic problem—it also affects people’s lives, families, and society as a whole.
Unemployment is measured as a percentage of the labor force that is jobless but actively looking for work. A high unemployment rate usually signals poor economic health.
Types of Unemployment
Different types of unemployment occur for different reasons:
Frictional Unemployment: Short-term and natural. Happens when people are between jobs or just entering the workforce.
Structural Unemployment: Occurs when there’s a mismatch between skills and available jobs, often due to technology or changes in the economy.
Cyclical Unemployment: Linked to the ups and downs of the economy. It rises during recessions and falls during booms.
Seasonal Unemployment: Found in jobs that depend on seasons (like agriculture, tourism, or festivals).
Voluntary vs. Involuntary Unemployment: Voluntary means a person chooses not to work. Involuntary means they want a job but can’t find one.
Causes and Impact of Unemployment
Unemployment can happen for many reasons—like low demand, automation, government policies, or even global economic issues.
Its impact includes:
Loss of income for individuals
Reduced consumer spending, affecting businesses
Increased government spending on welfare
Social issues like crime, poverty, and frustration among youth
A high unemployment rate is a warning sign for policymakers.
The Phillips Curve – Inflation vs. Unemployment
The Phillips Curve shows an interesting relationship: when unemployment is low, inflation tends to be high, and vice versa. This means that trying to reduce one can worsen the other.
However, this trade-off doesn’t always hold true—especially during stagflation, when both unemployment and inflation are high.
Business Cycles – Boom to Bust
Business cycles refer to the natural rise and fall of economic activity over time. They have four main phases:
Expansion: Economy grows, jobs increase, incomes rise.
Peak: Growth reaches its highest point.
Recession: Economic activity slows down, jobs are lost.
Trough: The lowest point—after which recovery begins.
These cycles affect everything—jobs, production, income, and government policies.
Causes and Control of Business Cycles
Causes:
Changes in investment
Government policies
Consumer confidence
Global events (like wars, pandemics, oil prices)
Control Measures:
Monetary policy: Adjusting interest rates and money supply to boost or slow the economy.
Fiscal policy: Changing government spending and taxes to manage demand.
Stabilization policies: Long-term policies aimed at avoiding large economic swings.