Have you ever wondered what being unemployed means in terms of Economics? Have you thought about why unemployment numbers are so important for the government, institutional investors, and the overall economy?
Well, unemployment provides a general outlook of the health of the economy. If unemployment numbers are down, the economy is doing relatively well. However, economies experience different types of unemployment for multiple reasons. In this explanation, you’ll learn everything you need to know about the types of unemployment.
Overview of the types of unemployment
Unemployment refers to those individuals who are constantly looking to find a job but can’t find one. There are many reasons why those people can’t find a job. This often includes skills, certifications, the overall economic environment, etc. All of these reasons make different types of unemployment.
Unemployment occurs when an individual is actively looking for employment but is not able to find work.
There are two key forms of unemployment: voluntary and involuntary unemployment. Voluntary unemployment occurs when the wages don’t provide enough incentive for the unemployed to work, so they choose not to work instead. On the other hand, involuntary unemployment occurs when workers would be willing to work at the current wages, but they can’t simply find employers that would hire them. All the types of unemployment fall under one of these two forms. The types of unemployment are:
structural unemployment - a type of unemployment that lasts for long periods and is deepened by external factors such as technology, competition, or government policy
frictional unemployment - also known as ‘transitional unemployment’ and happens when there are individuals that voluntarily choose to leave their job in search of a new one or when new workers enter the job market.
cyclical unemployment - which occurs when there are business expansionary or contractionary cycles in the economy.
real wage unemployment - this type of unemployment occurs when at the higher wage rate, the labour supply will exceed the labour demand, causing an increase in unemployment
and seasonal unemployment - which occurs when the people working in seasonal occupations get laid off when the season is over.
Voluntary unemployment occurs when the wage doesn’t provide enough incentive for the unemployed to work, so they choose to claim unemployment benefits instead.
Involuntary unemployment occurs when workers would be willing to work at the current wage, but they can't find a job.
Structural unemployment
Structural unemployment is a type of unemployment that lasts for long periods and is deepened by external factors such as technology, competition, or government policy. Structural unemployment arises when employees lack the necessary job skills or live too far away from job opportunities and are unable to relocate. There are jobs available, but there is a significant mismatch between what employers need and what employees can provide.
The term ‘structural’ means that the problem is caused by something other than the economic cycle: it usually results from technological changes or government policies. In some cases, companies may be able to offer training programs in order to better prepare employees for workforce changes due to factors such as automation. In other cases—such as when workers live in areas where there are few available jobs— the government may need to address these issues with new policies.
Structural unemployment is a type of unemployment that lasts for long periods and is deepened by external factors such as technology, competition, or government policy.
Structural unemployment has been around since the late 1970s and early 1980s. It became increasingly prevalent in the 1990s and 2000s in the US as manufacturing jobs were outsourced overseas or new technologies made production processes more efficient. This created technological unemployment as employees were not able to keep up with the new developments. When these manufacturing jobs returned to the US, they came back at a much lower wage than before because workers had nowhere else to go. The same thing happened with service industry jobs as more businesses moved online or automated their services.
A real-life example of structural unemployment is the US labour market after the 2007–09 global recession. While the recession caused cyclical unemployment initially, it then translated into structural unemployment. The average unemployment period increased significantly. Workers’ skills deteriorated as they were out of jobs for a long time. Additionally, the depressed housing market made it harder for people to find a job in other cities as that would require selling their houses at substantial losses. This created a mismatch in the labour market, resulting in an increase in structural unemployment.
Frictional unemployment
Frictional unemployment is also known as ‘transitional unemployment’ and happens when there are individuals that voluntarily choose to leave their job in search of a new one or when new workers enter the job market. You can think of it as ‘in-between jobs’ unemployment. It doesn’t, however, include those workers who maintain their job whilst looking for a new one as they already are employed and still earn a salary.
Frictional unemployment occurs when individuals voluntarily choose to leave their job in search of a new one or when new workers enter the job market.
It’s important to note that frictional unemployment assumes that there are job vacancies in the economy to cover those unemployed. Furthermore, it assumes that this type of unemployment happens as a result of labour immobility, which makes it hard for workers to fill vacancies.
The number of job vacancies that are unfilled in the economy often serve as a proxy to measure frictional unemployment. This type of unemployment is not persistent and can be typically found in the short term. However, if frictional unemployment persists then we would be dealing with structural unemployment.
Imagine that John has spent his entire career being a financial analyst. John feels that he needs a career change and is looking to join a sales department in another company. John causes frictional unemployment to happen from the moment he quits his job as a financial analyst up to the moment he is hired in the sales department.
There are two main causes for frictional unemployment: geographical immobility and occupational mobility of labour. You can think of both of these as factors that give workers a hard time finding a new job immediately after they are laid off or decide to level their job.
The geographical immobility of labour happens when a person finds it hard to go work on another job that is outside of their geographical location. There are many reasons for that including family ties, friendships, not having enough information on whether job vacancies exist in other geographies, and most importantly the cost associated with changing geographic location. All these factors contribute to causing frictional unemployment.
The occupational mobility of labour happens when workers lack some of the skills or qualifications required to fill out the opened vacancies in the labour market. Race, gender, or age discrimination are also part of the occupational mobility of labour.
Cyclical unemployment
Cyclical unemployment occurs when there are business expansionary or contractionary cycles in the economy. Economists define cyclical unemployment as a period when firms don’t have enough labour demand to hire all individuals who are searching for work at that moment in the economic cycle. These economic cycles are characterised by a fall in demand, and as a result, firms lower their production. Firms will discharge the personnel who is no longer required, resulting in their unemployment.
Cyclical unemployment is unemployment caused by a fall in aggregate demand which pushes firms to lower their production. Hence hiring fewer workers.
Figure 2. Cyclical unemployment caused by a shift in
aggregate demand, StudySmarter Original
Figure 2 will help you understand what cyclical unemployment actually is and how it appears in an economy. Assume that for some external factor the aggregate demand curve has shifted leftwards from AD1 to AD2. This shift brought the economy to a lower level of output. The horizontal gap between the LRAS curve and the AD2 curve is what is considered to be cyclical unemployment. As the name suggests it was caused by a business cycle in the economy.
We previously mentioned how cyclical unemployment translated into structural unemployment after the 2007–09 recession. Think, for example, about the workers in construction companies at that time when demand for houses was at depressed levels. Many of them were laid off as there was simply no demand for new houses.
Real wage unemployment
Real wage unemployment occurs when there’s another wage set above the equilibrium wage. At the higher wage rate, the labour supply will exceed the labour demand, causing an increase in unemployment. Several factors could contribute to a wage rate above the equilibrium rate. The government setting a minimum wage could be one factor that could cause real wage unemployment. Trade unions demanding a minimum wage above equilibrium wage in some sectors could be another factor.
Figure 3. Real Wage Unemployment, StudySmarter Original
Figure 3 shows how real wage unemployment occurs. Notice that W1 is above We. At W1, the labour demand is lower than the labour supply, as employees don’t want to pay that amount of money in wages. The difference between the two is real-wage unemployment. This is shown by a horizontal distance between the quantities of labour employed: Qd-Qs.
Real wage unemployment occurs when there’s another wage set above the equilibrium wage.
Seasonal unemployment
Seasonal unemployment occurs when the people working in seasonal occupations get laid off when the season is over. There are many reasons this could happen. The most common ones are weather changes or holidays.
Seasonal unemployment works by having companies hire significantly more workers during certain times of the year. The reason for that is to keep up with the increase in demand that is associated with those particular seasons. This implies that a corporation may need more personnel during some seasons than during others, resulting in seasonal unemployment when the more profitable season ends.
Seasonal unemployment occurs when the people working in seasonal occupations get laid off when the season is over.
Seasonal unemployment is most common in tourist-heavy areas, as various tourist attractions cease or decrease their operations based on the time of the year or season. This is particularly true for outdoor tourist attractions, which may only be able to function under specific weather conditions.
Think of Josie who works at a beach bar in Ibiza, Spain. She enjoys working at the beach bar as she gets to meet many new people coming from all over the world. However, Josie doesn’t work there throughout the year. She only works at the beach bar from May to early October as this is the time tourists visit Ibiza and business generates profits. At the end of October Josie is laid off from work, causing seasonal unemployment.
Now that you’ve learned all about types of unemployment, test your knowledge using the flashcards.
Types of unemployment - Key takeaways
- Voluntary unemployment occurs when the wage doesn’t provide enough incentive for the unemployed to work, so they choose not to do it.
- Involuntary unemployment occurs when workers would be willing to work at the current wage, but they can't find jobs.
- The types of unemployment are structural unemployment, frictional unemployment, cyclical unemployment, real-wage unemployment, and seasonal unemployment.
- Structural unemployment is a kind of unemployment that lasts for long periods and is deepened by external factors such as technology, competition, or government policy.
- Frictional unemployment is also known as ‘transitional unemployment’ and happens when there are individuals that voluntarily choose to leave their job in search of a new one or when new workers enter the job market.
- Cyclical unemployment is unemployment caused by a fall in aggregate demand which pushes the firms to lower their production. Hence, hiring fewer workers.
- Real wage unemployment occurs when there’s another wage set above the equilibrium wage.
- Seasonal unemployment occurs when the people working in seasonal occupations get laid off when the season is finished.
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