SummaryInflation and unemployment are probably two of the most used economic indicators of how well a country is doing. Both are to be carefully measured, in order for governments to be able to keep them under control. In this LP we learn about what these two concepts are, and how to tackle them.
Unemployment refers to the situation of a jobless worker. The unemployment rate measures the number of unemployed workers as a percentage of the labour force. Massive unemployment levels are the result of situations of economic crisis followed by depressions, and are the result of a large economic readjustment studied in business cycles theory. During the Great Depression, 1929-1939, unemployment insurance benefits were introduced in the U.S. in order to reduce the consequences of high unemployment levels. This measure was introduced to prevent workers’ misery, and as a way of maintaining effective demand, as stated by the Keynesians’ fiscal policy proposals.
Unemployment can be divided into different types depending on its cause and depending if it is involuntary or voluntary:
Classical unemployment is explained as the situation that exists in the labour market when the number of people able and willing to work at the prevailing wage levels exceeds the number of vacancies available. In simple words, demand and supply do not meet. This occurs when real wages are higher than those corresponding to equilibrium at full employment levels. This type of unemployment was explained by the Classical school (hence its name) as those cases in which certain imperfections prevent unemployed people from reducing their aspirations to lower their wages so that firms will believe it is interesting to create new jobs and hire people.
Frictional unemployment, also referred to as searching unemployment, happens when a person is temporarily unemployed between jobs. This is the unemployment in its theoretical lowest possible level. It occurs even in full employment conditions because a considerable number of people are moving from one job to another. The only way to reduce this kind of unemployment is for economic institutions to make information more available.
Structural unemployment occurs when people are unable to find jobs in which their skills can be useful because their skills are no longer demanded, and thus creating an excess of labour supply generally at well-defined locations. As structural unemployment is not caused as a result of a general decline in demand, it cannot be softened with reflationary type measures, but instead ad hoc economic policies are needed. These types of policy include retraining of workers and reallocation of industries. The main difference between structural and frictional unemployment relies on the time horizon, as the former is a long lasting phenomenon while the latter a short term one.
Seasonal unemployment is generally of short duration and it is generated on a regular basis as a result of the different seasonal activities through the year, especially regarding agriculture activities and tourism.
Disguised unemployment is not actually unemployment. It refers to a characteristic situation of countries that are both underdeveloped economically and highly bureaucratized, in which there is a high number of workers with low levels of productivity that would be employed if the country had a better organisation or better technology levels.
Voluntary unemployment consists of workers that are jobless as they are reluctant to work due to economic, sociological or psychological reasons.