Employment is the amount of workers with a job. Unemployment is the amount of people willing and able to work at the market wage but without a job.
Many types of unemployment exist:
1) Keynesian (Demand-Deficient) Unemployment.
AD is insufficient for all workers to be employed. Let’s say an economy is in a recession where AD and real GDP are declining. Firms produce less and require less labour so lay-off workers. Workers want to work but some are involuntarily unemployed. Keynesian unemployment can persist even in the long-run. AD must rise to reduce unemployment.
2) Frictional Unemployment.
Frictional unemployment occurs when workers are moving between jobs. Workers are unemployed but searching for a new job. It is a short-run phenomenon. The government must reduce benefits to incentivize the unemployed to find jobs quicker. Also, the government must disseminate job information so that the unemployed can find jobs quicker.
3) Seasonal Unemployment.
Seasonal unemployment occurs when workers are unemployed during the off-season. Agriculture experiences seasonal unemployment as workers are employed during harvests but unemployed during winters.
4) Real Wage Unemployment.
5) Structural Unemployment.
Structural unemployment exists when there is a mismatch between labour’s skills and the skills required by employers. – Sectoral Unemployment: An economy goes through structural change, maybe mining declines, so skilled miners become unemployed because they do not have the skills to immediately get a different job. – Technological Unemployment: Maybe new technology is developed which replaces some workers who do not have the skills to immediately get other jobs.
Costs of Unemployment There are many costs of unemployment:
1) Lower Living Standards.
Anyone unemployed earns no wage and must go on unemployment benefits, so their income falls, they cannot buy as many goods and their living standards fall. At the extreme, without any social safety nets like unemployment benefits, the unemployed fall into poverty. Additionally, the unemployed’s dependents will suffer if they are not fed or looked after properly. However, the unemployed may benefit from more leisure time and, if unemployment benefits are available, the incomes and living standards of the unemployed may not fall that much.
An unemployed person cannot afford to buy many goods or services so they may turn to illegal activities and crime to get what they want. Run down areas in certain parts of the country may suffer the most if rising unemployment is a regional problem.
3) Lost Output.
An unemployed person is not working so some of the economy’s labour is not being used, the economy is inside its PPF and the economy suffers lost output. But, because output falls, income falls, consumption falls, AD falls and there is cost-push deflation.
4) Loss of Skills.
A person who is unemployed for a long time may become de-skilled, lose their skills, their human capital is damaged and consequently it becomes more difficult for them to find a job.
5) Lower Profits.
Rising unemployment means incomes fall, consumption falls and firms sell less goods and services so firms make lower profits. Firms may also be discouraged from investing because they make less profits so in the long-run LRAS shifts left and real GDP falls.
6) Lower Tax Revenue.
The government’s tax revenue falls because with less people working, the government receives less in income tax and there is less consumption so the government receives less VAT. The government must also spend more on unemployment benefits so they may need to raise taxes or cut spending on health or education to pay for more benefits.
Measuring Unemployment The International Labour Organization (ILO) measure of unemployment: – The ONS carry out the Labour Force Survey. A survey of 60,000 working age people (age range 16-65) are interviewed four times per year by phone. A person is defined as unemployed if they have been looking for work in the last four weeks and if they are ready to work within the next two weeks.
Unemployment: A Lagging Indicator Unemployment is a lagging indicator, that is, when a recession occurs there is a time delay before unemployment rises. This is because: – Workers may not be laid off immediately when sales fall because of contracts, it may be cheaper to keep the workers on rather than fire them. – Workers may not be fired immediately due to compassionate reasons. – Recruitment costs may be very high so it may be cheaper to keep workers on during a recession rather than fire them and employ new workers in the future. – Workers may not be laid off because they represent an expensive investment in human capital, it takes time and money to train workers. – If the economy is recovering from a recession, there is economic growth but unemployment may not fall immediately because firms may fear the recovery is only temporary.