Omar Bennett
Unemployment is a key indicator of economic health and occurs when individuals who are actively seeking work are unable to find employment. There are several types of unemployment, including frictional, structural, cyclical, institutional, demand deficient, and classical unemployment. Frictional unemployment occurs when people voluntarily change jobs or are transitioning into or out of the labour force, and it is usually short-lived. Structural unemployment happens when there is a mismatch between the jobs available and the people looking for work, either due to a lack of required skills or geographical accessibility. Cyclical unemployment relates to job losses during changes in business cycles, such as economic downturns or upturns, while institutional unemployment refers to specific circumstances that prevent individuals from finding work. Demand deficient unemployment occurs during recessions when companies reduce their workforce due to decreased demand. Classical unemployment, also known as real-wage unemployment, takes place when wages are too high for companies to hire all available workers.
| Characteristics | Values |
|---|---|
| Definition | "People are classified as unemployed if they do not have a job, have actively looked for work in the prior four weeks, and are currently available for work." |
| Types | Frictional, Structural, Cyclical, Institutional, Classical, Real-Wage, Long-term, Demand Deficit, and Voluntary |
| Causes | Recessions, Depressions, Technological Improvements, Job Outsourcing, Voluntarily Leaving One Job to Find Another, High Real Wages, Economic Downturns, Lack of Demand for Goods and Services, Fundamental Changes in Economy and Labour Markets, and Lack of Skills |
| Effects | Social and Economic Issues, Decreased Net Worth, Strained Family Relationships, Hindrance to Career Goals, Loss of Self-Respect, and Need for Professional Help |
| Measurement | Unemployment Rate = Number of Unemployed People / Total Number of People in the Workforce |
| Unemployment Rate During COVID-19 Pandemic | 14.8% in April 2020 |
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What You'll Learn
- Frictional unemployment: when people move between jobs or enter/leave the workforce
- Cyclical unemployment: when economic downturns cause a rise in unemployment
- Structural unemployment: when there's a mismatch between jobseekers' skills and available jobs
- Classical unemployment: when real wages are too high for companies to hire
- Voluntary unemployment: when a worker leaves a job for financial reasons
Frictional unemployment: when people move between jobs or enter/leave the workforce
Frictional unemployment is a type of unemployment that occurs when individuals voluntarily transition between jobs or enter/leave the workforce. It is considered "natural unemployment" as it is not directly related to factors that lead to an underperforming economy. Frictional unemployment is typically temporary and is viewed as a positive sign of a dynamic economy.
Frictional unemployment arises from the natural movement of labour within an economy. It occurs when workers voluntarily leave their current job to seek better opportunities, higher pay, or improved working conditions. This can include individuals who quit their jobs to return to school, learn new skills, or prioritize personal reasons such as family care or retirement. Frictional unemployment also encompasses new graduates entering the job market for the first time.
The existence of frictional unemployment highlights the heterogeneity of both jobs and workers. A mismatch can occur between the characteristics of supply and demand, including skills, payment expectations, work hours, location, and other factors. This results in a gap between leaving one job and finding another, leading to temporary unemployment. Frictional unemployment can be reduced by quickly matching job seekers with suitable job openings, and it tends to decline during economic recessions as workers are less likely to voluntarily leave their jobs.
Frictional unemployment is generally viewed positively by economists as it indicates a level of consumer confidence and a dynamic economy. It suggests that workers are seeking better positions, providing businesses with a pool of qualified candidates. Additionally, frictional unemployment is not a significant contributor to the overall unemployment rate as it is considered inevitable and temporary.
Frictional unemployment can be calculated by dividing the number of workers actively looking for jobs by the total labour force. This calculation helps to quantify the level of frictional unemployment within an economy, providing insights into the dynamics of the job market and the confidence of workers to voluntarily transition between jobs.
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Cyclical unemployment: when economic downturns cause a rise in unemployment
Cyclical unemployment is a type of unemployment that occurs as a result of economic downturns or periods of negative economic growth in a business cycle. It is the variation in the number of unemployed workers over the course of economic shifts, such as those related to changes in oil prices. Unemployment typically rises during recessions and declines during periods of economic growth.
During a recession, there is a decrease in demand as consumers are less likely to spend. As demand decreases, businesses are forced to lay off workers to make up for losses in sales and reduce expenses. This leads to a rise in unemployment. On the other hand, when the economy is doing well, businesses experience high demand for their products and services, resulting in increased production and hiring to meet this demand, which leads to a decrease in unemployment.
Cyclical unemployment is a natural result of economic downturns, but some downturns result in higher rates of cyclical unemployment than others. Typically, cyclical unemployment doesn't occur until the economy is performing very poorly, and entire companies are at risk of going under. When companies go out of business due to an economic recession, their workers become unemployed, leading to a sharp increase in cyclical unemployment.
Unemployment is a key indicator of economic health. A high unemployment rate represents a weak economy, while a low unemployment rate indicates a strong economy. During the Great Recession of 2008, global unemployment reached its highest level on record, with more than 200 million people, or 7% of the global workforce, looking for jobs in 2009.
To manage cyclical unemployment, economists and policymakers focus on creating tools to reduce its adverse effects. These tools aim to stimulate the economy and include various policy measures.
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Structural unemployment: when there's a mismatch between jobseekers' skills and available jobs
Structural unemployment is a long-lasting form of unemployment caused by fundamental shifts in an economy, such as technological advances, demographic changes, and government policies. It occurs when there is a mismatch between the jobs available and the job seekers, either due to a lack of required skills or geographical accessibility.
Technological advancements can render certain jobs obsolete, such as the impact of digitization on manual typesetters, or the use of industrial robots in manufacturing. This can lead to a situation where workers' skills are no longer in demand, and they may need to acquire new skills to remain employable. Additionally, the increasing use of technology may require a smaller number of higher-skilled workers, leaving those without adequate skills marginalized.
The geographical location of job seekers can also contribute to structural unemployment. Jobs may be available in certain regions, but if job seekers live too far away and are unable to relocate, they may not be able to access those job opportunities. This can be further exacerbated by a lack of competing companies in a given industry or city, leaving workers with limited options for employment.
Structural unemployment can also be influenced by factors within specific industries. For example, the manufacturing industry has experienced a decline in employment due to the migration of production jobs to lower-cost areas. Additionally, certain industries may undergo changes that render existing skills obsolete, requiring workers to acquire new skills to remain employable.
To address structural unemployment, policies focusing on skills development and the supply of labour can be implemented. It is important for workers to continually develop their professional skillsets and build their professional networks to increase their chances of finding employment.
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Classical unemployment: when real wages are too high for companies to hire
Classical unemployment, also known as 'real wage' unemployment, is a concept in economics that refers to a situation where real wages are too high for companies to hire people. It is based on the classical economic theory that every market, including the labour market, should reach an equilibrium where supply and demand for labour are equal. However, in cases of classical unemployment, this equilibrium is not achieved, and the demand for labour falls short of the supply, resulting in unemployment.
This type of unemployment is influenced by various factors, including the elasticity of labour demand and supply. When real wages rise above the market rate, the demand for labour decreases, while the supply increases. This results in a surplus of labour, leading to classical unemployment. The impact of higher wages is more pronounced when the supply of labour is more elastic, as it encourages more low-skilled workers to join the labour market, further increasing the surplus. Similarly, if the demand for labour is elastic, such as when capital can be easily substituted for labour, the reduction in demand can significantly affect the amount of surplus labour.
The existence of powerful trade unions that negotiate wages above the equilibrium, minimum wage laws, and deflation can also contribute to classical unemployment. During deflation, when prices are falling, maintaining full employment may require cutting wages. However, workers and firms often resist nominal wage cuts due to the psychological cost involved. Classical economists argue that wage flexibility could help resolve this type of unemployment.
However, Keynesian economists offer a different perspective, suggesting that the issue may lie in a lack of aggregate demand (AD) in the economy. They argue that cutting wages could lead to a further decrease in AD as workers' purchasing power declines. Additionally, in cases of monopsony, where a single buyer controls the market, minimum wages and trade unions may not be the primary causes of unemployment as monopsonies employ fewer workers than the market equilibrium.
Classical unemployment is closely linked to economic activity and growth. During economic downturns, firms may opt to reduce work hours or impose pay cuts before resorting to layoffs. As a result, unemployment rates tend to rise during prolonged downturns and decline during periods of economic growth. Classical unemployment can also be influenced by structural changes, such as technological advancements, which can displace workers who lack the necessary skills, and demographic shifts, such as an aging population, which can lead to a decrease in the labour force and lower unemployment rates.
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Voluntary unemployment: when a worker leaves a job for financial reasons
Unemployment is a term used to describe a situation where a person is actively seeking employment but is unable to find work. It is a key indicator of the economic health of a country, with high rates of unemployment signalling economic distress and low rates indicating a strong economy.
Voluntary unemployment is a type of unemployment that occurs when a worker leaves their job of their own accord. This can be for a variety of reasons, including personal, medical, or family circumstances. However, to receive unemployment compensation, the worker must prove that they had "compelling and necessitous" reasons for leaving, or "good cause". For example, financial difficulties can be considered "good cause" if the employee has informed their employer of the issue and has made every effort to resolve the situation. Other examples of "good cause" include unacceptable working conditions, family circumstances, and receiving a firm offer for another job. Simply having the possibility of getting a new job or leaving to obtain a financial incentive is not considered "good cause".
In the context of financial reasons, an employee may have "good cause" to voluntarily leave their job if they are facing financial difficulties that their current job is unable to resolve. This could include situations where the employee is not being paid enough to cover their living expenses, or where their wages do not match the level of risk or danger associated with the work. In such cases, the employee would need to prove that they informed their employer of the issue and made a “good faith effort” to resolve it before quitting.
It is important to note that the definition of "good cause" can vary depending on the specific circumstances and the relevant employment laws and regulations. As such, each case of voluntary unemployment is unique and must be evaluated on its own merits.
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Frequently asked questions
The Bureau of Labor Statistics defines unemployment as people who do not have a job, have actively looked for work in the previous four weeks, and are currently available for work.
There are four main types of unemployment: frictional, structural, cyclical, and voluntary. Frictional unemployment refers to those who are in between jobs. Structural unemployment occurs when there is a mismatch between the jobs available and the people looking for work, often due to skill sets or location. Cyclical unemployment relates to job losses during changes in business cycles, such as economic downturns. Voluntary unemployment happens when a worker leaves a job for various reasons, such as finding a better fit or due to financial reasons.
Unemployment is typically measured by the unemployment rate, which is calculated by dividing the number of unemployed people by the total number of people in the workforce or labour force. This measurement helps indicate a country's economic health.
Unemployment can be caused by various factors, including recessions, depressions, technological advancements, job outsourcing, and voluntary job changes. Classical unemployment, or real-wage unemployment, occurs when wages are too high for companies to hire more workers. Structural unemployment can also be caused by fundamental changes in the economy, such as technological advances, government policies, and competition.
Long-term unemployment, lasting longer than 27 weeks, can have significant negative consequences. These include financial problems, strained family relationships, difficulty achieving career goals, loss of self-respect, and mental health issues.
