Unemployment is defined as a situation where someone of working age is not able to get a job but would like to be in full-time employment.
Note: If a mother left work to bring up a child or if someone went into higher education, they are not working but would not be classed as unemployed as they are not actively seeking employment.
One grey area is voluntary unemployment. This occurs when the unemployed choose not to take a job a the going wage rate (e.g. wrong job, benefits too high e.t.c) They could be counted as unemployed because they are still seeking a job (they just don’t want to take one they are offered.
Unemployment in the UK Is measured in two ways
- Claimant count – the number of people eligible for unemployment benefits. (in the UK, Job Seekers Allowance)
- Labour force survey – A survey based on ILO standards – asking people whether they are out of work and actively seeking work.
- Since 1993, the claimant count method of unemployment has fallen more than the labour force survey. This suggests some people may be actively seeking work, but are not eligible for government benefits.
- For example, after six months, unemployment benefit is means tested. These people will be counted as unemployed, but not eligible for benefits. The Labour force survey is considered a more reliable method of calculating unemployment.
Types of unemployment
Summary of Unemployment types
- Demand Deficient Unemployment – Lack of aggregate demand in economy (e.g. unemployment rises in a recession)
- Structural Unemployment – workers lack necessary skills or suffer from geographical immobility
- Real Wage Unemployment – wages above equilibrium, e.g. due to high national minimum wage.
- Frictional unemployment – workers in between jobs
- Voluntary Unemployment. – workers prefer not to work
Demand Deficient Unemployment
Demand deficient unemployment occurs in a recession or period of very low growth. If there is insufficient aggregate demand, firms will cut back on output. If they cut back on output, then they will employ fewer workers. Firms will either cut back on recruitment or lay off workers. The deeper the recession, the more demand deficient unemployment there will be. This is often the biggest cause of unemployment, especially in a downturn. This is also known as cyclical unemployment – referring to how unemployment increases during an economic downturn.
Diagram showing fall in AD and lower output (Y1 to Y2)- which leads to higher unemployment
This is unemployment due to inefficiencies in the labour market. It may occur due to a mismatch of skills or geographical location. For example, structural unemployment could be due to:
- Occupational immobility. There may be skilled jobs available, but many workers may not have the relevant skills. Sometimes firms can struggle to recruit during periods of high unemployment. This is due to occupational immobility.
- Geographical immobility. Jobs may be available in London, but, unemployed workers may not be able to move there due to difficulties in getting housing e.t.c.
- Technological change. If an economy goes through technological change, some industries will decline. This is likely to lead to structural unemployment. For example, new technology (nuclear power) could make coal mines close down leaving many coal miners unemployed.
Real Wage Unemployment / Classical Unemployment
This occurs when wages are artificially kept above the equilibrium. For example, powerful trades unions or minimum wages could lead to wages above the equilibrium leading to an excess supply of labour (this assumes labour markets are competitive) In the above example an artificial wage of W2 keeps wages above the equilibrium level of W1. This leads to a fall in demand for labour (Q2). Supply also rises to Q3.
(Keynesian analysis suggests a fall in AD can lead to real wage unemployment because wages are sticky downwards. After a fall in demand equilibrium wages should fall – but they don’t so unemployment rises.)
This occurs when workers are in between jobs e.g. school leavers take time to find work. There is always likely to be some frictional unemployment in an economy as people take time to find a job suited to their skills.
This occurs when workers choose not to take a job at the going wage rate. For example, if benefits offer a similar take-home pay to (wage – tax), the unemployed may feel there is no incentive to take a job. Reasons for voluntary unemployment may include
- Generous unemployment benefits, which make accepting a job less attractive.
- High marginal tax rates, which reduce effective take-home pay.
- Unemployed hoping to find a job more suited to skills/qualifications.
- Some jobs are seen as ‘demeaning’ or too tedious. For example, fruit picking/security guard.
More on voluntary unemployment
Other Concepts about Unemployment
Seasonal Unemployment. In certain regions, unemployment may be seasonal e.g. unemployment rises in winter when there are no tourists.
Disguised / Hidden unemployment. Often unemployment statistics don’t include certain types of workers. For example, those put on incapacity benefit may not be counted as unemployed, but, it may really be a type of structural unemployment. See: Disguised Unemployment
Natural Rate of Unemployment. This is the level of unemployment when the labour market is in equilibrium. It is the difference between the labour force and those willing and able to accept a job at going wage rate. It encompasses the different supply side unemployment like frictional and structural unemployment. See: Natural Rate of Unemployment
Under-employment. This is when people have a job, but it is part-time or temporary. They would like to work full time, but only have a part-time income.
Unemployment in the US, Eurozone and UK. In the period 2000-2015, the Eurozone has experienced higher rates of unemployment, due to structural factors.
Last updated: 10th July 2017, Tejvan Pettinger, www.economicshelp.org, Oxford, UK