Readers Question: What are the types of unemployment?
Firstly, we can make a distinction between:
- Supply-side unemployment (the natural rate of unemployment). These are usually microeconomic imbalances in labour markets.
- Demand-side unemployment (Unemployment caused by lack of aggregate demand in the economy). In recessions, we can expect demand deficient unemployment (sometimes called cyclical unemployment) to increase significantly.
- Frictional – This occurs when people are in between jobs. For example, a school-leaver may take some time to get his first job. There will always be some degree of frictional unemployment in an economy. Frictional unemployment
- Structural – This is unemployment due to occupational or geographical immobilities. Often occurs after structural change in the economy. E.g. closure of mines, left many miners struggling to find suitable work. For example, there may be jobs available in the service sector, but unemployed miners don’t have the relevant skills to be able to take the jobs. See: structural unemployment.
- Technological. This is very closely related to structural unemployment. It is the unemployment that may arise from the introduction of new technology which displaces workers. New technology will create new jobs in other areas (see: Luddite Fallacy), but those made redundant may lack the necessary skills and flexibility to seamlessly move from old job to the new jobs.
- Geographical Unemployment. This occurs when unemployment is concentrated in certain areas. Jobs may be available in some prosperous areas (e.g. London) however, there may be difficulties for the unemployed to move to these areas (e.g. difficulty in finding accommodation, children in schools, e.t.c.) Note, geographical unemployment is often considered part of structural unemployment. See: Geographical unemployment
- Real Wage Unemployment/ Classical. This occurs when wages are above the equilibrium wage causing lower demand for workers. For example, high minimum wages or powerful trades unions bargaining for wages above the equilibrium. (this may be exacerbated by a fall in aggregate demand)
With wages increased to W2 above the equilibrium of W1, there is real wage unemployment of Q3-Q1
See also: real wage unemployment.
- Voluntary unemployment. This occurs when people prefer to remain on benefits rather than take a job, i.e. the unemployed refuse a job offer. Some debate exists over the extent of voluntary unemployment. But, arguably high benefits may encourage some to stay on benefits rather than take low paid jobs. See: voluntary unemployment
- Seasonal Unemployment. Unemployment may be higher during certain periods (e.g. out of tourist season) See: seasonal unemployment
Demand Side Unemployment
- Demand deficient unemployment – a fall in AD leads to a fall in economic output. Therefore firms employ fewer workers. This is sometimes referred to as ‘cyclical unemployment’ – the idea that unemployment rises and falls with changes in the economic cycle. See: demand deficient unemployment.
- The spikes in unemployment in 1981, 1991 and 2011 are caused by economic recession and indicate demand deficient unemployment.
- The unemployment that occurs during periods of economic growth (e.g. 1993 to 2007) is due to supply-side factors – structural, frictional and real-wage unemployment.
Video on causes of unemployment
The Natural rate of unemployment
The natural rate of unemployment is the rate of unemployment – even when the labour market is in equilibrium. This is unemployment due to structural and frictional unemployment. A related concept is the NAIRU (non-accelerating inflation rate of unemployment). The key thing about the natural rate is that it is unemployment due to supply-side factors, and doesn’t include temporary demand-side factors.
This graph shows the actual unemployment rate and the ‘non-cyclical’ rate – which is an approximation of the natural rate. This shows that that the natural rate is much more stable than the headline rate, but can itself change. For example, the non-cyclical rate fell by 2020 – perhaps due to increased labour market flexibility.