Question

The FOMC believed in November 1994 that the target rate of unemployment was 6.25%. Given the official civilian unemployment rate of 5.6% at that point in time, what type of unemployment did the FOMC believe existed in the U.S. economy at that point in time?

Answer 1

Answer:

The type of unemployment that FOMC believe existed at that point in time is FRICTIONAL UNEMPLOYMENT. This is because people were trying to change jobs in search for better payments or a job that more precisely matches their skills, or because of a change in locale or family situation.

Frictional unemployment and other types of unemployment are explained below.

Explanation:

Frictional Unemployment

Frictional unemployment is always present in the economy. It comes from temporary transitions that workers make when moving from job to job looking for better pay or a job that more precisely matches their skills, or because of a change in locale or family situation. It is also a reflection of new or returning workers into the labor force (e.g., graduating college students or empty nesters rejoining the marketplace).

Frictional unemployment may also be the result of employers refraining from hiring or laying off workers for reasons unrelated to the economy.

Structural Unemployment

Structural unemployment is created when there is a mismatch in the demographic or industrial composition of a local economy. For example, structural unemployment can be high in a place where there are technically advanced jobs available but the workers in that area lack the skills to perform them, or conversely, in a locale where there are workers available but no jobs for them to fill.

Advances in new technologies can cause a decline in older industries, which then must shed workers to stay competitive. One example is the U.S. newspaper industry. Many newspaper reporters, editors and production workers have lost their jobs over the past decade as web-based advertising eclipsed newspapers’ traditional sources of revenue and circulation waned as more consumers got their news from television and the Internet. Laid-off journalists, printers, deliverers, etc., all increased the structural unemployment numbers.

Another example is small family farmers, whose farms cannot match the economic power of wealthy agri-businesses. Scores of farmers left the land and entered the workforce. When they fail to find jobs, they add to the structural unemployment statistics, as do factory workers whose employers have moved operations to low-wage countries.

Cyclical Unemployment

Cyclical unemployment occurs when there is not enough demand for goods and services in the economy at large to provide jobs for everyone who wants one. According to Keynesian economics, it is a natural result of the boom and bust business cycles implicit in the nature of capitalism. When businesses contract during a recessionary cycle, workers are let go and unemployment rises.

When unemployed consumers have less money to spend on goods and services, businesses must contract even further, causing more layoffs and more unemployment. The cycle continues to spiral downward unless and until the situation is improved by outside forces, particularly government intervention of some kind.