Unemployment is an important issue addressed in the study of macroeconomics. A person is technically unemployed if he or she is willing and able to work, actively job searching, but unable to find a job. Therefore, by definition, people who are voluntarily idle are not classified as unemployed just those people who are not working but actively looking for a job are counted as unemployed.

The labor force is defined simply as the people who are willing and able to work. The size of the labor force is used to determine the unemployment rate.The percentage of the unemployed in the labor force is called the unemployment rate.

While studying employment, another important figure to determine is the labor force participation rate. Here, we compare the size of the labor force with the number of people that could potentially be a part of the labor force. It is important to note that we do not include people under the age of 16 in this figure.In addition, students, retirees, the disabled, homemakers, and the voluntarily idle are counted as not in the labor force. The labor force as the percentage of the total population over the minimum working age is called labor force participation rate.

Structural Unemployment, one of the three types of unemployment, is associated with the mismatch of jobs and workers due to the lack of skills or simply the wrong area desired for work. Structural unemployment depends on the social needs of the economy and dynamic changes in the economy.

For instance,advances in technology and changes in market conditions often turn many skills obsolete; this typically increases the unemployment rate. For example, laborers who worked on cotton fields found their jobs obsolete with Eli Whitney's patenting of the cotton gin. Similarly, with rise of computers, many jobs in manual book keeping have been replaced by highly efficient software. Workers who find themselves in this situation find that they need to acquire new skills before getting a new job.

Frictional Unemployment is always present in the economy, resulting from temporary transitions made by workers and employers or from workers and employers having inconsistent or incomplete information. This type of unemployment is closely related to structural unemployment due its dependence on the dynamics of the economy.

Frictional unemployment can be seen as a transaction cost of trying to find a new job; it is the result of imperfect information on available jobs. For instance, a case of frictional unemployment would a college student quitting their fast-food restaurant job to get ready to find a job in their field after graduation. Unlike, structural this process would not be long due to skills the college graduate has to offer a potential firm.

Unemployment that is attributed to economic contraction is called cyclical unemployment. The economy has the capacity to create jobs which increases economic growth. Therefore an expanding economy typically has lower levels of unemployment. On the other hand, according to cyclical unemployment an economy that is in a recessions faces higher levels of unemployment. When this happens there are more unemployed workers than job openings due to the breakdown of the economy. This type of unemployed is heavily concencrated on the activity in the economy.

The natural rate of unemployment is determined by looking at the rate people are finding jobs, compared with the rate of job separation (i.e. People quitting). In any given period, people are either employed or unemployed;As a result the sum of structural and frictional unemployment is referred to as the natural rate of unemployment also called "full employment" unemployment rate. This is the average level of unemployment that is expected to prevail in an economy and in the absence of cyclical unemployment.

Where,

• LF=Labor Force
• E=Employed
• U=Unemployed

If we assume a fixed labor force and unemployment rate (fixed at the natural rate), the number of people losing jobs must be equal to the number of people finding jobs. However, this model is too simple; we must consider the job separation rate, and the job finding rate to get a more accurate figure.

So, let... F = job finding rate

S = job separation rate

Then, F x U = S x E

This equality demonstrates that the unemployment rate (U/L) is positively related to job separation rate, and negatively related to the job finding rate. Therefore, a higher (S) will lead to a higher unemployment rate while a larger (F) yields a lower natural rate of unemployment. In conclusion, to reduce the natural rate of unemployment, (S) must be reduced, or (F) must be increased.

Okun's law simply states that a 1% change in the rate of unemployment will be associated with a 2% change in output.

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