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:

1. Expansion: Economy grows, jobs increase, incomes rise.

2. Peak: Growth reaches its highest point.

3. Recession: Economic activity slows down, jobs are lost.

4. 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.