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By, Poonam Ashok

CONTENTS Introduction Types of unemployment Causes and effect of unemployment Conclusion .

Yet others see unemployment as largely due to voluntary choices by the unemployed (frictional unemployment). . There is also disagreement on how exactly to measure unemployment.g. the USA experiences lower unemployment levels than countries in the European Union. wages stay high because they are naturally 'sticky'. Classical or neoclassical economics tends to reject these explanations. The prevalence of unemployment is usually measured using the unemployment rate. traditionally. taxes. Most economic schools of thought agree that the cause of involuntary unemployment is that wages are above the market clearing rate. the Great depression) throughout economic cycles. Keynesian economics emphasizes unemployment resulting from insufficient effective demand for goods and services in the economy (cyclical unemployment). Different countries experience different levels of unemployment. Alternatively. Others point to structural problems.Introduction Unemployment occurs when a person is available to work and seeking work but currently without work. there are disagreements as to why this would be the case: the economists argue that in a downturn. although there is variant there. However. such as minimum wage laws. and focuses more on rigidities imposed on the labor market from the outside. inefficiencies. and other regulations that may discourage the hiring of workers (classical unemployment). whilst others argue that minimum wages and union activity keep them high. some blame unemployment on disruptive technologies or Globalization. which is defined as the percentage of those in the labor force who are unemployed. inherent in labour markets (structural unemployment). with countries like the UK and Denmark outperforming Italy and France and it also changes over time (e.

seeing the attainment of full employment of resources and potential output as the normal state of affairs. To the Economist. in such a case mass unemployment can be expected. . as during the Great Depression of the 1930s. Classical economics rejects the conception of cyclical unemployment. though it can also be persistent. it accepts the theory to some extent as full employment can never be reached This type of unemployment is the most serious one. Some consider this type of unemployment one type of frictional unemployment in which factors causing the friction are partially caused by some cyclical variables. It gets its name because it varies with the business cycle. less production is needed and consequently fewer workers are being demanded. a surprise decrease in the money supply may shock participants in society. However. This kind of unemployment coincides with unused industrial capacity (unemployed capital goods). some workers would remain unemployed. For example. the number of unemployed workers exceeds the number of job vacancies. Keynesians argue that this type of unemployment exists due to inadequate effective aggregate demand. In this case. Keynesian economists see it as possibly being solved by government deficit spending or by expansionary monetary policy. the country is in recession. which aims to increase non-governmental spending by lowering interest rates. so that if even all open jobs were filled. When demand falls. This arises when demand for most goods and services fall.Types of unemployment Cyclical unemployment This refers to unemployment that rises during economic downturns and falls when the economy improves.

Such a mismatch can be related to skills.g. Therefore. Frictional unemployment coincides with an equal number of vacancies. Changes in the supply of or demand for labor cause movements along this curve. This is in fact beneficial to the economy since it results in a better allocation of resources.g. a downward-sloping. jobs or locations). when the frictionally unemployed receive benefits). location. it is compatible with full employment. the frictionally unemployed will be few as they will get many job offers. When for instance demand far exceeds supply. governments will seek ways to reduce unnecessary frictional unemployment. it is therefore maximal when the labor market is in equilibrium. combating prejudice (against certain workers. Workers as well as employers accept a certain level of imperfection. or those . schooling and training facilities. relocation of industries and services. However. Numerically. The frictions in the labor market are sometimes illustrated graphically with a Beveridge curve. payment. searching for new ones.Frictional unemployment This unemployment involves people in the midst of transiting between jobs. reduction of the gap between gross and net wages (e. Policies to reduce frictional unemployment include: • • • • • • • • • educational advice. they will invest some time and effort to find a better match. since some work will not get done. by taxing consumption instead). facilities to increase availability and flexibility (e. Examples include workers employed during farm harvest times. daycare centers).g. Frictional unemployment exists because both jobs and workers are heterogeneous.g. An increase (decrease) in labor market frictions will shift the curve outwards (inwards). information on available jobs and workers. taste. the economy suffers. Another type of frictional unemployment is seasonal unemployment. New entrants (such as graduating students) and reentrants (such as former homemakers) can also suffer a spell of frictional unemployment. It is sometimes called search unemployment and can be voluntary. incentives and regulations (e. work time. attitude. risk or compromise. and a multitude of other factors. but usually not right away. if the search takes too long and mismatches are too frequent. convex curve that shows a fixed relationship between the unemployment rate on one axis and the vacancy rate on the other. and a mismatch can result between the characteristics of supply and demand. aid or grants to overcome a specific obstacle (e. if a handicapped worker is employed). where specific industries or occupations are characterized by seasonal work which may lead to unemployment.

the cost of selling one's house in a depressed local economy). Workers are "left behind" due to costs of training and moving (e. the demand side must grow sufficiently quickly to absorb not only the growing labor force but also the workers made redundant by increased labor productivity. such as discrimination or monopoly power. the willingness to switch into the available jobs. One possible example in the rich countries is the present combination of the shortage of nurses with an excess labor supply in Information Technology. Unemployed programmers cannot easily become nurses. As indicated by Okun's Law. Much technological unemployment (e. Structural unemployment is a result of the dynamics of the labor market and the fact that these can never be as flexible as. it is very expensive to unite the workers with jobs. Seasonal unemployment may be seen as a kind of structural unemployment.. Even though the number of vacancies may be equal to the number of the unemployed..g.working winter jobs on the ski slopes or summer jobs such as life-guarding at outdoor pools and agricultural labor. Otherwise. The fact that aggregate demand can be raised to deal with this problem suggests that this problem is instead one of cyclical unemployment. Alternatively.g. and the legal requirements of such professions. financial markets. That is.g. As with frictional unemployment. the unemployed workers lack the skills needed for the jobs — or are in the wrong part of the country or world to take the jobs offered. technological unemployment might refer to the way in which steady increases in labor productivity mean that fewer workers are needed to produce the same level of output every year. Structural unemployment Structural unemployment involves a mismatch between the sufficiently skilled workers looking for jobs and the vacancies available. Structural unemployment is hard to separate empirically from frictional unemployment. simple demand-side stimulus will not work to easily abolish this type of unemployment. migratory farm work). plus inefficiencies in the labor markets. The most-cited official unemployment measures erase this kind of unemployment from the statistics using "seasonal adjustment" techniques. except to say that it lasts longer. since it is a type of unemployment that is linked to certain kinds of jobs (construction work. because of the need for new specialized training. e. due to the replacement of workers by machines) might be counted as structural unemployment. . we see a jobless recovery such as those seen in the United States in both the early 1990s and the early 2000s. It is a mismatch of skills and opportunities due to the structure of the economy changing.

However. Some economists theorize that this type of unemployment can be reduced by increasing the flexibility of wages (e.g.those with part time or seasonal jobs who would rather have full time jobs. even though they are not employed. but would prefer to be working. The same applies to those who have taken early retirement to avoid being laid off. .. institutions such as "the minimum wage" deter employers from hiring all of the available workers. anti social behavior or drug abuse. due to the way the statistics are collected. to make the labor market more like a financial market Hidden unemployment Hidden. such as mental or physical disability. unemployment is the unemployment of potential workers that is not reflected in official unemployment statistics. Because of hidden unemployment. Hardcore unemployment Hard core unemployment refers to those individuals who might be considered unemployable because of some personal characteristic. abolishing minimum wages or employee protection). because the cost would exceed the technologically-determined benefit of hiring them (the marginal product of labor). the problem here is not aggregate demand failure. Those who have given up looking for work (and sometimes those who are on Government "retraining" programmes) are not officially counted among the unemployed. In this situation. In simple terms. official statistics often underestimate unemployment rates. the number of job-seekers exceeds the number of vacancies. real wages are higher than the market-equilibrium wage. or covered. like that of cyclical unemployment. The statistic also does not count the "underemployed" .Seasonal unemployment In this case. In many countries only those who have no work but are actively looking for work (and/or qualifying for social security benefits) are counted as unemployed.

Attitude towards employers Willingness to work Perception of employees Employee values Discriminating factors in the place of work (may include discrimination on the basis of age. racial conflicts and football hooliganism. Causes of unemployment are varied and it may be due to the following factors: • • • • • • • • • • • • Rapid changes in technology Recessions Inflation Disability Undulating business cycles Changes in tastes as well as alterations in the climatic conditions. Various attempts have been made to link unemployment to many social ills such as illhealth. (3) divisions in society increase. (5) Some local areas can develop a culture of despair. attempted and actual suicide. (4) the prospect of equality of opportunity decreases. marriage breakdown. .Causes and Effects of Unemployment In the set up of a modern market economy. premature death. Individuals are effected the most when there is high unemployment: (1) the employed feel less secure. there are many factors. class. ethnicity. color and race). child battering. This may in turn lead to decline in demand for certain services as well as products. Ability to look for employment Unemployment affects the development of the society in many ways. which contribute to unemployment. (2) workers are less willing to leave unsatisfactory jobs.

arguments at home. The 'normal' unemployment figure will vary from country to country.i. Increased borrowing by the government can have similar effects as the government takes more money than normally out of the financial markets. The jobless lose their self respect. thus having an upwards pressure on interest rates. less profits and more layoffs. This can become structural unemployment . To compound the problems. companies forced to lay people off). their families also suffer with them. any person who is unemployed could be doing something productive and thus contributing to the economy as a whole. The real evil is when unemployment reaches double figures (10% or more) and includes a large number of people who are unable to find a job for a long time. perhaps even excess borrowing prolonging the suffering even when another job is found. The main impact unemployment has on society and the economy is the productive power that it withholds . sense of achievement and. but is generally considered to be around 2-3% (of the workforce). So unemployment is basically always bad for the economy. income. the longer a person is unemployed the harder it becomes to find a job. even for as little as a week or a month. less revenues for companies. Homes and cars repossessed. which in turn may lead to increased unemployment (people spending less. Unemployment also has a direct cost to the government in the form of any unemployment benefits paid to the unemployed and in lost tax earnings. which results in higher cost for companies. This is because at any one point in time there will be individuals who are truly between jobs. The increased taxes suppress consumption. The long term unemployed can really suffer as employers are unwilling to take a chance on someone that no one else was willing to hire. This is a double whammy (additional cost and lost income) that can have serious consequences on the rest of the economy as the government is forced to fund unemployment benefits either from increased taxes or borrowing. it can never be zero. of course. We all suffer from unemployment . There is also an important impact on society and the economy as a whole. It is not just the individuals themselves that are hit. purpose.e. .a large number of people who become more or less unemployable.CONCLUSION Unemployment always hits individuals the hardest.whether employed or not. however.