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Unemployment

Who is unemployed?

  • The unemployed are people able, available and willing to work at the going wage rate but cannot find a job despite an active search for work
  • Unemployment means that scarce human resources are not being used to produce goods and services to meet people’s needs and wants
  • Persistently high levels of joblessness have damaging consequences for an economy causing both economic and social costs
  • Problems caused by unemployment occur across a country but are often very bad and deep-rooted in local and regional communities and within particular groups of society – for example in the UK, more than one in six young people are out of work. The figure is much higher in Greece and Spain.

Types and Causes of Unemployment

Frictional Unemployment

Frictional unemployment is transitional unemployment as people move between jobs: For example, newly-redundant workers or people joining the labour market for the first time such as university graduates may take time searching to find work they want at wage rates they are prepared to accept.

  • Imperfect information in the labour market may make frictional unemployment worse if the jobless are unaware of the available jobs.
  • Incentives problems can also cause frictional unemployment as some people may stay out of work if they believe the tax and benefit system leaves them little or no better off from taking a job
  • When there are disincentives for people to accept work, this is known as the unemployment trap.

Frictional unemployment happens when it takes time for a country’s labour market to match the available jobs with people seeking work. The chart below shows the monthly level of unfilled vacancies in the UK. For most of the current decade there have been between 500,000 and 700,000 unfilled vacancies.

The recession caused a steep decline in the number of available jobs and by the summer of 2010 there were fewer than 500,000 unfilled posts set against a much larger pool of unemployed. The result is that the ratio of unemployed to job vacancies has grown, meaning that there are many people chasing each available job. This makes it tough to get back into paid work.

Structural Unemployment

Structural unemployment happens when there is a long-term decline in demand in an industryleading to fewer jobs being available as the demand for labour falls away – this leads to a decline in employment in a particular industry (sector) or a particular occupation. Examples might include:

  • Jobs on a production line being replaced by robots e.g. motor manufacturing
  • Unemployment caused by foreign competition (or changes in comparative advantage)

Structural unemployment exists where there is a mismatch between their skills and the requirements of the new job opportunities. This problem is due to occupational and geographical immobility of labour and requires investment to improve skills, give the unemployed suitable training and work experience and make them able to move location if needed to take a new job.

Globalisation inevitably leads to changes in the patterns of trade between countries. Britain has probably now lost a cost advantage in manufacturing goods such as motor cars, household goods and audio-visual equipment, indeed our manufacturing industry has lost jobs as some production has shifted to lower-cost centres in Eastern Europe and emerging market countries in Far East Asia.

Many of these workers may suffer from a period of structural unemployment, particularly if they are in regions of above-average unemployment rates where job opportunities are scarce.

Cyclical Unemployment: 

Cyclical unemployment is involuntary unemployment due to a lack of demand for goods and services. This is also known as Keynesian unemployment or demand-deficient unemployment

When there is a recession or a steep slowdown in growth, we see a rising unemployment because of plant closures, business failures and an increase in worker lay-offs and redundancies. This is due to a fall in demand leading to a contraction in output across many industries.

Firms are likely to reduce employment to cut costs and/or maintain profits – this is called “labour shedding” or “down-sizing”

The economy does not have to go into recession for cyclical unemployment to start rising. Many jobs can be lost even in a slowdown phase and one reason for this is because of rising productivity. Say for example that a country’s GDP is expanding at 1 per cent a year but output per worker is growing by 3 per cent. This means that the same national output can be produced using fewer workers.