THE CAUSES AND CATEGORIES OF

UNEMPLOYMENT

TYPES OF UNEMPLOYMENT

There are three types of unemployment:

1. FRICTIONAL UNEMPLOYMENT

2. STUCTURAL UNEMPLOYMENT

3. CYCLICAL UNEMPLOYMENT

FRICTIONAL UNEMPLOYMENT

Frictional unemployment consists of those searching for jobs or waiting to take jobs soon. This type of unemployment is regarded as somewhat desirable, because the economy is more productive if workers take the time to find jobs that are well-matched to their skills, and workers that are unemployed for short amounts of time while searching for the right job don’t experience great hardships.

Workers who spend time looking for employment are engaged in job search.

Frictional unemployment is also regarded as inevitable because of two reasons:

1. the constant process of job creation and job destruction

2. new workers are always entering the job market

STRUCTURAL UNEMPLOYMENT

Structural unemployment results when there are more people seeking jobs in a labor market than there are jobs available at the current wage rate.

This type of unemployment results due to changes in the structure of the demand for labor, for example, when certain skills become obsolete or geographical distribution of jobs changes.

The most important factors that lead to a wage rate that is above the equilibrium price are minimum wages, labor unions, efficiency wages, and the side effects of government policies.

CAUSES OF STRUCTURAL UNEMPLOYMENT

A minimum wage is a government mandated floor on the price of labor. This price floor leads to a surplus in the labor market, which means that more people want to work than can find jobs at the minimum wage, which leads to structural unemployment.

Labor unions can win higher wages from employers than workers that bargain individually can, through collective bargaining. The union can threaten firms with a labor strike, which is a collective refusal to work. This pushes the wage that workers receive above the equilibrium, so that there are more people willing to work at the wage being paid than there are jobs available, which leads to structural unemployment.

CAUSES OF STRUCTURAL UNEMPLOYMENT

Efficiency wages refer to when the employer sets the wages above the equilibrium wage as an incentive for their workers to perform better. The result of efficiency wages is more workers than jobs available, which leads to structural unemployment.

Side effects of public policy also may contribute to structural unemployment, as an unintended side effect. When the unemployment benefits reduce the incentive to quickly find a new job, thus keeping people unemployed for longer, the benefits increase structural and frictional unemployment.

THE NATURAL RATE OF UNEMPLOYMENT AND CYCLICAL

UNEMPLOYMENT

A certain amount of unemployment is normal, or “natural”, and actual unemployment fluctuates around this normal level.

The Natural Rate of Unemployment (NRU) is the normal unemployment rate around which the actual rate of unemployment rate fluctuates.

Cyclical unemployment is the difference between the actual and the natural rates of unemployment. It is caused by the recession phase of the business cycle, and is sometimes called deficient demand unemployment.

RELATIONSHIPS BETWEEN THE TYPES OF UNEMPLOYMENT

1. NATURAL UNEMPLOYMENT = FRICTIONAL UNEMPLOYMENT + STRUCTURAL UNEMPLOYMENT

2. ACTUAL UNEMPLOYMENT = NATURAL UNEMPLOYMENT + CYCLICAL UNEMPLOYMENT

The NRU is also called the full employment rate of unemployment.

Full employment does not mean zero unemployment. It is reached when labor markets are in balance; the number of job seekers equals the number of job vacancies. At this point the economy’s potential output is being achieved.

The natural rate of unemployment is not fixed; it changes over time and is affected by economic policies.

CAUSES IN THE CHANGEIN THE NRU

The causes of change in the natural rate of unemployment are:

1. Changes in the characteristics of the labor force: more women, older/younger workers, more educated, etc.

2. Changes in labor market institutions: unions, employment agencies, and technological change for example.

3. Changes in government policies: minimum wages, unemployment benefits, job training, employment subsidies, for example.