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.

Frictional unemployment

2. Structural Unemployment

This occurs due to a mismatch of skills in the labour market it can be caused by:

Occupational immobilities. 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 immobilities. 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 labour saving technology in some industries, then there will be a fall in demand for labour.
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:

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This occurs when wages in a competitive labour market are pushed above the equilibrium, e.g. at W2 the supply of labour (Q3) is greater than the demand for labour (Q2).
Wages could be pushed above the equilibrium level by minimum wages or trades unions. This is sometimes known as “disequilibrium” unemployment.
Classical 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”

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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.

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Unemployment in UK fell from 1993-2006 during period of economic growth. It rose sharply during recession of 2008-09.

More on demand deficient unemployment

Debate on Demand Deficient Unemployment

Classical economists 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!.

· In the 1930s mass Unemployment continued until WW2 suggesting Keynes was right and Classical economists wrong

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