Topic 2

Unemployment: Definition, Causes and Types of Unemployment

The definition of an unemployed person is someone of working age (16 and up), jobless, able
and available to work, and actively looking for a job. This means anyone without a job who is
reaching out to contacts about jobs or applying to positions.

This definition of unemployment is specific and rigid—it doesn’t just include “anyone who
doesn’t have a job.”

On the other hand, an employed person is very simply defined as someone with a job. A job
can include anything from doing full-time work to doing part-time work to being self-
employed.

 Both unemployed and employed people make up the “labor force,” or the subset of the
population that is both able and interested in working. Not included in the labor force
are citizens not looking for jobs—for example, a stay-at-home mom, a college student,
or a “discouraged worker” (someone who has stopped looking for work because they
believe no work is available).
 The level of unemployment in a country is measured as a percentage of the labor force.
By using a percentage, called the unemployment rate, analysts and economists can
automatically account for natural increases in population that would otherwise skew
unemployment and employment numbers.

The formula for finding the unemployment rate is:

Unemployment rate = (Unemployed workers / Total labor force) x 100

There are four main types of unemployment in an economy—frictional, structural, cyclical, and
seasonal—and each has a different cause.

1. Frictional unemployment. Frictional unemployment is caused by temporary transitions

in workers’ lives, such as when a worker moves to a new city and has to find a new job.
Frictional unemployment also includes people just entering the labor force, such as
freshly graduated college students. It is the most common cause of unemployment, and it
is always in effect in an economy.
2. Structural unemployment. Structural unemployment is caused by a mismatch in the
demographics of workers and the types of jobs available, either when there are jobs
 available that workers don’t have the skills for, or when there are workers available but
no jobs to fill. Structural unemployment is most obvious in industries undergoing
technological advancements. For example, in the farming industry, much of the work is
becoming mechanized, which means that fewer farmers are needed and many are let go.
When these farmers go to cities to find work, they may find no other similar jobs in
which to apply their skills.
3. Cyclical unemployment. Cyclical unemployment is caused by declining demand: when
there is not enough demand in an economy for goods and services, businesses cannot
offer jobs. According to Keynesian economics, cyclical unemployment is a natural result
of the business cycle in times of recession: if all consumers become fearful at once,
consumers will attempt to increase their savings at the same time, which means there will
be a decrease in spending, and businesses will not be able to employ all employable
workers.
4. Seasonal unemployment. Seasonal unemployment is caused by different industries or
parts of the labor market being available during different seasons. For instance,
unemployment goes up in the winter months, because many agricultural jobs end once
crops are harvested in the fall, and those workers are left to find new jobs.

Low unemployment is key to economic stability. High and long-term unemployment can
cause significant stress on a nation in three key areas:

 Individuals. Unemployed people have no ability to fulfill their financial obligations

and can become mentally stressed, ill, and even homeless.
 Economic efficiency. During times of high unemployment, many job seekers will
accept new jobs below their skill level, a situation called “underemployment,” which
translates to a loss of human capital for an economy’s labor market. Unemployed
workers will also significantly decrease their consumer spending, which is one of the
driving forces of economic growth. Without consumer spending, the economy will
slow dramatically.
 Socio-political stability. If unemployment remains high, citizen dissatisfaction can rise to the
point of widespread civil unrest.

Solving unemployment is a hotly debated topic, and no economists agree on one simple way to do it.
However, if unemployment rises noticeably, the government usually steps in with specific policies
designed to lower the total number of unemployed people.
1. Monetary policy. Monetary policy is financial influence implemented by a central. Monetary
policies usually come in the form of lower interest rates, which increase the total money
supply within an economy by allowing banks and businesses more access to loans—and
therefore, more accessible spending power.
2. Fiscal policy. If expansionary monetary policy doesn’t adequately lower the unemployment
rate, government agencies will turn to fiscal policy. Fiscal policy is fiscal stimulus
implemented by the national government, and fiscal policies include spending on
infrastructure, proposing tax cuts, increasing the minimum wage, or implementing
unemployment benefits (for instance, unemployment insurance). These methods are designed
to inject more demand into the private economy and strengthen economic activity.