UNEMPLOYMENT

Types, Causes & Examples

- Tushar Patra, GRADE 12

 WHAT IS
UNEMPLOYMENT
BASICS
?
• Unemployment is when individuals are actively looking for
employment but aren’t able to get employment.
• Usually this figure is portrayed as a percentage calculated by
dividing the number of unemployed individuals by the number
of all currently employed individuals in the labor force.
• For example, India currently has an unemployment rate of
9.78% in August of 2021. From a total available workforce of
471.6 million.
WHY DO WE
CARE
BASICS ABOUT
UNEMPLOYMENT
?
• Unemployment rate is an economic indicator as it signals the
ability of workers to readily gain employment contributing to
the productive output of an economy.
• More unemployment = lower economic production
• The rate of unemployment can also translate towards economic
distress if unemployment is persistent and long-term.
• A lower rate of unemployment would gain higher economic
production while raising living standards and wage growth.
Downside of low rate of unemployment is a concept called
‘overheating’ where there’s inflationary pressure as low
unemployment rate is a trade off for inflation.
• Two main categories of unemployment: Voluntary and
Involuntary Unemployment
• They are further categorised into 4 types: Frictional, Cyclical,
Structural, Institutional.
CATEGORIES
VOLUNTARY INVOLUNTARY
UNEMPLOYMENT UNEMPLOYMENT
• Individual has left the job willingly in search for other • Individual has been ‘laid-off’ or ‘fired’ and now is in search for
employment. It could be for a job with better pay (economic other employment.
reasons), or even for social reasons.
 TYPES OF UNEMPLOYMENT

FRICTIONAL
UNEMPLOYMENT
• Occurs when individuals voluntarily leave jobs in pursuit of other jobs
within the economy. This is apparent even in an economy that is
growing and stable. Thus, frictional unemployment is always present in
the economy. Typically the assumption that is made here is that these
individuals will pursuit jobs that are more productive and suited to their
skill set.
• This form of unemployment is least problematic as unemployment is
short-term and temporary.
• However failures can occur when individuals are in search for jobs,
mainly they are either unaware of possible vacancies in jobs of their
skill set or are unemployed for too long, which would be inefficient and
cause the reduced consumption. This is an undesirable situation in the
economy and thus governments can intervene in the form of creating a
national department of labour which would provide necessary
information on jobs and perhaps providing temporary employment at
government sponsored projects.
• An example can be high school graduates looking for employment is
frictional unemployment. Or if a teacher leaves their current
employment in pursuit of better employment. The time-frame between
jobs is considered as Frictional Unemployment.
TYPES OF UNEMPLOYMENT
CYCLICAL
UNEMPLOYMENT
• Cyclical Unemployment is the impact of economic expansion
or recession (business cycle) on the total unemployment.
• During recessions, unemployment goes up and the opposite can
be said during expansion where unemployment goes down.
Unemployment goes up because of demand-deficit (occurring
during recessions), as demand is less than supply, as so firms
no longer require excess employees and thus many are laid off
and become unemployed.
• To fix cyclical unemployment monetary policies and fiscal
policies are required to boost Aggregate Demand. In fiscal
policy the government could reduce taxes on goods and income
to increase consumption by households and firms, increase
government spending thus increasing aggregate demand. In
Monetary policy interest rates can be lowered to stimulate
borrowing and in-turn increase spending. (**Subject to
marginal propensity)
• An example can be the Financial Crisis of 2008, the
construction industry. As more and more individuals defaulted
on their mortgage payments for their home, and as policies
become more stringent on who is eligible for a loan, naturally
demand for homes went down drastically and construction of
new homes declined as well.
 TYPES OF UNEMPLOYMENT
STRUCTURAL
UNEMPLOYMENT
• Can be caused by factors such as technology or government
policy or even in the long run as an economy grows.
• Occurs because workers lack the required job skills or live too
far from regions where employment is available and cannot
move closer. Work is available, but there is a mismatch
between what skill sets are required by employers and what
skill sets the workers can provide.
• As technology progresses in an economy many jobs become
redundant and obsolete. For instance, during the industrial
revolution horse drawn transport was dropped in favour of gas
power vehicles.
• In the long-run sectoral change can also occur as more workers
shift employment from primary sector to secondary and tertiary
sector.
• To fix the problem of structural unemployment one of the most
effect ways is by government intervention. Governments can
educate workers to be more flexible in skill sets in-turn making
their field of employment flexible, this can be done in
polytechnic institutions. They could provide subsides to
employers who are willing to re-train and educate workers
while also sponsoring employees who are seeking a career
change by providing them with subsidies and benefits such as
guaranteed family healthcare. They can also implement
monetary policies that promote certain industries or sectors of
TYPES OF UNEMPLOYMENT
INSTITUTIONAL
UNEMPLOYMENT
• Institutional unemployment results from long-term or
permanent institutional factors and incentives in the economy.
• Factors such as government policies, labour market phenomena
& labour market institutions can contribute towards it.
• An example can be if governments provide too much subsidy to
citizens. For instance, if the government provides too much
child support for women, the female demographic of workers
can reduce which isn’t great as some choose to quit working
and stop contributing to Aggregate Demand thus reducing the
overall output of the economy.
 QUESTION

Sectoral change is part of what form of unemployment?

 BIBLIOGRAPHY

• https://www.investopedia.com/terms/u/unemployment.asp
• https://www.investopedia.com/terms/c/cyclicalunemployment.asp

• ECONOMICS Textbook, 6th Edition, 2020