Unemployment is the macroeconomic problem that affects people most directly and severely. For most people, the loss of a job means a reduced living standard and psychological distress. It is no surprise that unemployment is a frequent topic of political debate and that politicians often claim that their proposed policies would help create jobs. In reality, not everyone in the labor force has a job all the time: in all free-market economies, at any moment, some people are unemployed. The unemployment caused by the time it takes workers to search for a job is called frictional unemployment.

The Unemployment Rate

Labor Force = Number of Employed + Number of Unemployed

Unemployment Rate





labor-force participation rate


When the real wage exceeds the equilibrium level and the supply of workers exceeds the demand, we might expect firms to lower the wages they pay. Structural unemployment arises because firms fail to reduce wages despite an excess supply of labor. We now turn to three causes of this wage rigidity: minimum-wage laws, the monopoly power of unions, and efficiency wages.

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