This article defines unemployment and talks about how to measure unemployment.
It analyzes why different types of unemployment exist and outlines the causes of unemployment explaining the processes with Average Demand (AD) and Average Supply (AS) curves.
Finally, it describes the pattern of unemployment in the UK in recent years.
Ways to measure unemployment
Unemployment is defined as the number of people of working age out of work, not including full time students.
In the UK, unemployment is measured using two main methods:
- The claimant count. The claimant count has been used in the UK until 1997, the year a labor government came to power under Prime Minister Tony Blair. The claimant count measures all those people who register as being unemployed in order to receive benefits such as Job Seekers Allowance.
- Labor force survey. Labor force survey has been used since 1998, a government survey of the population to identify those who are unemployed.
Types of unemployment
There are various types of unemployment; they can be classified as:
- Classical unemployment.
- Cyclical unemployment.
- Structural unemployment.
- Seasonal unemployment.
- Frictional unemployment.
Let’s take a look at those different types of unemployment in details.
1. Classical unemployment
Classical unemployment is sometimes referred to as ‘real wage unemployment’. A labor market is where people sell their time, skills, experience and abilities for wages, salaries and other benefits – they are the suppliers. Firms who wish to employ individuals in positions are demanding labor. Therefore the laws of supply and demand govern labor markets.
Classical unemployment exits when the wage rate is above the market price for labor. This means there is a surplus of labor, too much for the current price, so unemployment exists. People refuse to accept lower wages or they cannot do so, so wages are described as being ‘sticky downwards’. Sticky wages refers to wages being unable to decrease. This may be because of legislation in the form of a minimum wage.
Alternatively, it could be that trade unions refuse to allow a wage decrease or have successfully bargained for higher wages. Another reason for ‘sticky’ wages in a country is unemployment benefits, which stop individuals from accepting lower salaries as it is more beneficial to not work at all, i.e. benefits act as a disincentive to work.
The level of wages at W1 would provide equilibrium. All those wishing to find work would be employed. However, wages are at W2, so unemployment exists between Q2 and Q3
2. Cyclical unemployment
Unemployment rises and falls in relation to the business cycle. Therefore, cyclical unemployment exists when the economy is in recession. Aggregate demand within the economy falls and has an effect on the demand for labor.
Naturally the opposite should occur when the economy is in growth, aggregate demand should increase. Businesses are investing, people and governments are spending, thus the demand for labor will increase during boom times.
Lower demand for labor caused by a recession will cause the demand for labor to shift inward to the left, represented by the shift D1 to D2. If wages do not fall from W1 to W2, unemployment will be created from Q2 to Q1.
3. Structural unemployment
Structural unemployment occurs when the demand for labor is less than its supply in a particular industry or region. Structural unemployment was a huge problem in the UK in many heavy industries such as steel production, coal mining and ship-building.
Regional structural employment can be attributed to the North East of England which was the center for many of these industries. Structural unemployment is a big problem since it often has an effect on industries which are people’s ‘way of life’, those industries which are culturally very important for an area. It can also leave people unemployed with skills that are unneeded by other industries.
Regardless of these problems, structural unemployment has been less of a burden to economies since labor is more mobile nowadays than it used to be. More people have cars, public transport is more frequent, and people are also more willing to move away from their hometowns than in previous generations.
4. Seasonal unemployment
Tour guides, fruit pickers and even construction workers may be forced out of work once contracts expire or demand for their abilities decreases. Seasonal unemployment tends to rise in the winter and fall in the summer. Workers in such industries can work in another industry until the new season begins.
5. Frictional unemployment
Refers to short-term unemployment, comprising people who are moving between jobs. Most people who lose their jobs will quickly find a new employer. Frictional unemployment occurs because:
- People are between jobs when they choose to look for a new one.
- People move home.
- People dislike their existing job and wish to find a new one.
- Existing companies close.
These people have skills wanted by the market and will normally remain unemployed for only a short time. Therefore, frictional unemployment is not seen as a problem, in fact some movement of labor within the economy is seen as beneficial for a more efficient economy. New jobs equal to new skills, experiences and ideas. The amount of time people spend unemployed depends on factors such as:
- Welfare payments.
- Redundancy pay.
- Information and assistance on available jobs.
- Quality of skills and experience possessed by the individual.
Summary
Unemployment occurs for several reasons such as recession, high labor costs or seasonal work, dissatisfaction with job or business closure, decline of an industry or region. It can also be exacerbated by trade union activity, minimum wages and welfare payment rates.
