1. UNEMPLOYMENT
Unemployment occurs when a person who is actively searching for employment is unable to find
work. Unemployment is often used as a measure of the health of the economy. The most frequently
cited measure of unemployment is the unemployment rate. This is the number of unemployed
persons divided by the number of people in the labor force.
Types of Unemployment
There are three primary categories of unemployment that are typically discussed. They are
structural, frictional, and cyclical unemployment.
Structural Unemployment
Structural Unemployment, one of the three types of unemployment, is associated with the
mismatch of jobs and workers due to the lack of skills or simply the wrong area desired for work.
Structural unemployment depends on the social needs of the economy and dynamic changes in the
economy.
For instance, advances in technology and changes in market conditions often turn many skills
obsolete; this typically increases the unemployment rate. For example, laborers who worked on
cotton fields found their jobs obsolete with Eli Whitney's patenting of the cotton gin. Similarly,
with the rise of computers, many jobs in manual book keeping have been replaced by highly
efficient software. Workers who find themselves in this situation find that they need to acquire
new skills in order to obtain a new job.
Frictional Unemployment
Frictional Unemployment is always present in the economy, resulting from temporary transitions
made by workers and employers or from workers and employers having inconsistent or incomplete
information. This type of unemployment is closely related to structural unemployment due to its
dependence on the dynamics of the economy. It is caused because unemployed workers may not
always take the first job offer they receive because of the wages and necessary skills. This type of
unemployment is also caused by failing firms, poor job performance, or obsolete skills. This may
also be caused by workers who will quit their jobs in order to move to different parts of the country.
Frictional unemployment can be seen as a transaction cost of trying to find a new job; it is the
result of imperfect information on available jobs. For instance, a case of frictional unemployment
would be a college student quitting their fast-food restaurant job to get ready to find a job in their
field after graduation. Unlike structural unemployment this process would not be long due to skills
the college graduate has to offer a potential firm.
2. Cyclical Unemployment
Unemployment that is attributed to economic contraction is called cyclical unemployment. The
economy has the capacity to create jobs which increases economic growth. Therefore, an
expanding economy typically has lower levels of unemployment. On the other hand, according to
cyclical unemployment an economy that is in a recession faces higher levels of unemployment.
When this happens there are more unemployed workers than job openings due to the breakdown
of the economy. This type of unemployment is heavily concentrated on the activity in the
economy. To understand this better take a look at our Business Cycles section.
Causes of Unemployment
A look at the main causes of unemployment – including: demand deficient, structural, frictional
and real wage unemployment.
Different Causes of Unemployment
1. Frictional Unemployment:
This is unemployment caused by the time people take to move between jobs, e.g. graduates or
people changing jobs. There will always be some frictional unemployment in an economy because
information isn’t perfect and it takes time to find work.
2. Structural Unemployment
This occurs due to a mismatch of skills in the labor market it can be caused by:
Occupational immobility. This refers to the difficulties in learning new skills applicable
to a new industry, and technological change, e.g. an unemployed farmer may struggle to
find work in high tech industries.
Geographical immobility. This refers to the difficulty in moving regions to get a job, e.g.
there may be jobs in London, but it could be difficult to find suitable accommodation or
schooling for their children.
Technological change. If there is the development of labor saving technology in some
industries, then there will be a fall in demand for labor.
Structural change in the economy. The decline of the coal mines due to a lack of
competitiveness meant that many coal miners were unemployed, however they found it
difficult to get jobs in new industries such as computers.
3. Classical or Real Wage Unemployment:
3. This occurs when wages in a competitive labor market are pushed above the equilibrium,
e.g. at W2 the supply of labor (Q3) is greater than the demand for labor (Q2).
Wages could be pushed above the equilibrium level by minimum wages or trades unions.
This is sometimes known as “disequilibrium” unemployment.
4. Voluntary Unemployment
This occurs when people choose to remain unemployed rather than take jobs available. For
example, if benefits are generous, people may prefer to stay on benefits rather than get work.
Frictional unemployment is also a type of voluntary unemployment as they are choosing to wait
until they find a better job.
5. Demand Deficient or “Cyclical Unemployment”
Demand deficient unemployment occurs when the economy is below full capacity.
For example, in a recession Aggregate Demand (AD) will fall leading to a decline in output
and negative economic growth.
With a fall in output firms will employ less workers because they are producing less goods.
Also some firms will go out of business leading to large scale redundancies.
In recessions, unemployment tends to rise rapidly as firms lay off workers.
4. Unemployment in UK fell from 1993-2006 during period of economic growth. It rose sharply
during recession of 2008-09.
Debate on Demand Deficient Unemployment
Classical economist’s emphasis supply side factors as the main cause of unemployment. They
argue that demand deficient unemployment tends to be only short term. However other Keynesian
economists emphasize the importance of aggregate demand in determining unemployment.
1. Wages are stick downwards, this means workers are not willing to accept a wage cut
2. If wages are cut then there is a fall in consumer spending this causes a fall in AD, therefore
this makes the unemployment situation worse.
3. Efficiency Wages Theory. This states that if wages are cut workers become dispirited and
work less hard leading to lower output.
4. During recession confidence is low and firms are reluctant to spend money on employing
more workers even at lower wage.
5. Keynes said in the long run wages may adjust, but in the long run we are all dead!.
6. In the 1930s mass Unemployment continued until WW2. However, when governments did
begin to spend on military expenditure, unemployment fell.
DEFINITION of 'Unemployment Insurance'
A source of income for workers who have lost their jobs through no fault of their own. Workers
who quit or are fired are generally not eligible for unemployment insurance. Workers who are self-
employed are also not eligible to receive unemployment insurance and must provide their own
rainy-day funds to cover times when no work is available.
Pakistan Labor Last Previous Highest Lowest Unit
Unemployment Rate 6.00 6.30 7.80 3.10 percent
Employed Persons 56920.00 55800.00 56920.00 26961.00 Thousand
Unemployed Persons 3730.00 3400.00 3730.00 903.00 Thousand
Population 188.20 184.35 188.20 45.85 Million
