Types of Unemployment

4 Types of Unemploment

Cyclical Unemployment

• Cyclical unemployment has 3 names:
  • Cyclical unemployment
  • Demand deficient unemployment
  • Keynesian unemployment

• Unemployment occurs due to a recession or a reduction in aggregate demand.
• Assuming that the demand for labor correlates with the aggregate demand.

• The name cyclical comes from the fact that cyclical unemployment comes from a recession in the business cycle.

• In a job market graph, the ADL curve shifts to the left. The gap between the original quantity of workers and the new quantity of workers represents the unemployed workers from this change.
• Due to sticky wages, when calculating the amount of unemployed and the natural rate of unemployment , the wage levels will stay the same.

Reasons for Sticky Wages:

• Avoiding discontent and unmotivated workers
• Contracts and union power

Frictional Unemployment

• Frictional unemployment can be considered as a "transitional" unemployment as people are switching between occupations.
• Generally frictional unemployment isn't very problematic and mostly short-term.

• It includes:
  • People who are between jobs or recently removed from school.
  • People who are looking for a job that fits their skills and wants.

Season Unemployment

• Occurs when specific jobs are only offered periodically during certain times in the year.
  • For example ski resorts or tourist industries.

Structural Unemployment

• Occurs when there is a change in demand for particular skills in the labor market such as technological changes, geographical changes (globalization), changes in consumer taste, or changes in patterns of demand for particular skills.

• Can also occur when there is a change in the institutional framework of the economy.
  • laws governing the labor market (how difficult it is to lay off workers)
  • laws governing trade unions

Solutions to Unemployment

• As different types of unemployment have different causes, they also have different solutions.

Cyclical Unemployment

• The government needs to increase AD to combat the recession
• Demand side policies are used
  • Fiscal and monetary policies

Structural Unemployment

• The economy needs to implement policies aimed at:
  • Increasing education (supply side interventionist policy)
  • And flexibility in the labor market like:
    • lower unemployment benefits
    • no regulations around and hiring and firing (supply side marked-based)

• Interventionist approaches lead to opportunity costs.
• Market-based approaches lead to inequity.

Frictional Unemployment

• Can be solved by improving the flow of information and reducing benefits.
• Makes it easier to find jobs and creates a greater incentive to find a job as it is difficult to life off of unemployment benefits.

Seasonal Unemployment

• The economy needs to implement policies aimed at increasing education (supply side interventionist) and flexibility in the labor market and reduced benefits (supply side market-based).
• Similarly to structural unemployment:
  • Interventionist approaches lead to opportunity costs.
  • Market-based approaches lead to inequity.

General Unemployment

• An effective welfare system allows those who are unemployed to stay out of poverty and find new employment.
• Welfare systems can significantly boost the economy, as those in poverty are much more willing to spend after receiving money compared to those who already have money.