Unemployment is often used as a measure of the health of the economy. The most frequently cited measure of unemployment is the unemployment rate. This is the number of unemployed persons divided by the number of people in the labour force.
Economists divide unemployment into a number of different categories, since defining types of unemployment more precisely sheds some light on why unemployment occurs and what can be done about it.
Types of Unemployment
The five major types of unemployment are given below:
It refers to unemployment that occurs when workers are not qualified for the jobs that are available. Workers in this case are often out of work for much longer periods of time and often require retraining. Structural unemployment can be a serious problem within an economy, particularly in cases where entire sectors (manufacturing, for instance) become obsolete.
Advances in technology and changes in market conditions often turn many skills obsolete; this typically increases the unemployment rate. For example, laborers who worked on cotton fields found their jobs obsolete with Eli Whitney‘s patenting of the cotton gin. Similarly, with the rise of computers, many jobs in manual book keeping have been replaced by highly efficient software. Workers who find themselves in this situation find that they need to acquire new skills in order to obtain a new job.
2. Cyclical Unemployment
It refers to unemployment that is a product of the business cycle. During recessions, for instance, there is often inadequate demand for labour and wages are typically slow to fall to a point where the demand and supply of labour are back in balance. It is a type that Keynesian economists focus on particularly, as they believe it happens when there is disequilibrium in the economy.
It is also often known as cyclical unemployment because it will vary with the trade cycle. When the economy is booming, there will be lots of demand and so firms will be employing large numbers of workers. Demand-deficient unemployment will at this stage of the cycle be fairly low. If the economy slows down, then demand will begin to fall.
3. Frictional Unemployment
When somebody loses their job (or chooses to leave it), they will have to look for another one. If they are lucky they find one quite quickly, but they may be unlucky and it may take some time. On average it will take everybody a reasonable period of time as they search for the right job. This creates unemployment while they look.
It results from imperfect information and the difficulties in matching qualified workers with jobs. A college graduate who is actively looking for work is one example. Frictional unemployment is almost impossible to avoid, as neither job-seekers nor employers can have perfect information or act instantaneously, and it is generally not seen as problematic to an economy.
4. Seasonal Unemployment
Seasonal unemployment is fairly self-explanatory. Seasonal unemployment is less severe than this, and tends to occur in certain industries. Industries that suffer particularly are:
- Hotel and catering
- Fruit picking
5. Under-employment or disguised unemployment
This is the type of unemployment which is never practically seen, but only experienced. Suppose a job which can be performed by just 10 worker, has in reality has 20 workers, then the excess 10 workers who are not actually required are said to be under employed or disguised unemployed. In other words, the surplus labor do not make any addition to the output. Technically, their marginal product is zero. Such a situation is called wider-employment or disguised unemployment.
While high unemployment is undesirable, full employment (meaning zero unemployment) is neither practical nor desirable. Generally there is a relationship between inflation and unemployment – the lower the rate of unemployment, the higher the rate of inflation. We will study this in the next topic “Philips Curve”