Types of Unemployment

Types of unemployment
ROHAN WICKREMASINGHE
Unemployment
 The
term unemployment refers to a situation
where a person actively searches for
employment but is unable to find work.
Unemployment is considered to be a key
measure of the health of the economy. The
most frequently used measure of
unemployment is the unemployment rate.
Unemployment
We can calculate a country's

unemployment rate using the following
formula: Number of unemployed in
labor force/Total labor force x 100.
Unemployment
 For example, imagine a small island country with a

population of 550,000 and a labor force of 500,000.
Assume that 29,000 people in the island's labor force are
unemployed. Let's do the math:
 29,000/500,000 x 100 = 5.8%
 Is this percentage good or bad? One way we can answer
this question is to figure out how close the current rate of
unemployment is to the natural rate of unemployment.
Unemployment
 Natural Rate of Unemployment

 The natural rate of unemployment is considered to be the lowest rate of
unemployment sustainable over a long period of time. The actual rate can be
at, above, or below the natural rate of unemployment. For example, an
economic recession can cause a major increase above the natural rate of
unemployment, while an economic boom may push unemployment down
below its natural rate. Keep in mind, however, that even the natural rate is
not truly constant over time. Major changes in the structure of the economy
and its labor market, such as a significant technological innovation, can affect
the natural rate. This could make a whole class of jobs obsolete with no new
substitute.
Unemployment
Unemployment
• Employed – includes people who are in a paid job for one hour or more in a
week.
• Unemployed – includes people who are not in a paid job, but who are actively
looking for work.
• Not in the labour force – includes people not in a paid job, and who are not
looking for work.This can include people who are studying, caring for children or
family members on a voluntary basis, retired, or who are permanently unable to
work.
Unemployment
• Labour force – the sum of employed and unemployed people.

• Unemployment rate – the percentage of people in the labour force that are
unemployed.
• Participation rate – the percentage of people in the working-age population
that are in the labour force.
 The unemployment rate is the most commonly used indicator for

understanding conditions in the labour market. The labour market
is the term used by economists when talking about the supply of
labour (from households) and demand for labour (by businesses
and other organisations). The unemployment rate can also provide
insights into how the economy is performing more generally,
making it an important factor in thinking about monetary policy.
 There are three main types of unemployment

– cyclical, structural and frictional
unemployment. In practice, these cannot be
measured directly, and they can often
overlap, but they provide a useful way of
thinking about unemployment.
 Cyclical Unemployment
 Cyclical unemployment occurs with changes in economic activity over the business cycle.
During an economic downturn, a shortfall of demand for goods and services results in a
lack of jobs being available for those who want to work. Businesses experiencing weaker
demand might reduce the amount of people they employ by laying off existing workers,
or hiring fewer new workers. As a result, people looking for work will also find it harder
to become employed. The opposite situation occurs when demand strengthens
 Structural Unemployment
 Structural unemployment occurs when there is a mismatch between the jobs that are
available and the people looking for work. This mismatch could be because jobseekers
don’t have the skills required to do the available jobs, or because the available jobs are a
long way from the jobseekers. Workers may become unemployed if they work in
industries that are declining in size or have skills that could be automated as a result of
large-scale technological advances. It may be difficult for them to find work in another
industry and they may need to develop new skills or move to a region that has
more opportunities.
 Frictional Unemployment
 Frictional unemployment occurs when people move between jobs in the labour market, as
well as when people transition into and out of the labour force. Movement of workers is
neccessary for a flexible labour market and helps achieve an efficient allocation of labour
across the economy. However, people may not find jobs immediately and need to invest
time and effort in searching for the right job. Businesses also spend time searching for
suitable candidates to fill job vacancies. As a result, people looking for jobs are not
matched immediately with vacancies and may experience a period of temporary
unemployment
 Voluntary unemployment
 Voluntary unemployment happens when a worker
decides to leave a job because it is no longer financially
compelling. An example is a worker whose take-home pay
is less than his or her cost of living.
Other Types of Unemployment
 Other Types of Unemployment

 There are some other types of unemployment that are also
important to consider. In particular, the underemployment
rate can be thought of as a complementary indicator to the
unemployment rate when thinking about conditions in the
labour market.
 Underemployment occurs when people are employed, but would

like and are available to work more hours. There are two categories
of underemployed people defined. First, part-time workers who
would prefer to work additional hours. Second, people who usually
work full time, but are currently working part-time hours.
Underemployment rates are generally higher among groups that
have a larger proportion of people working part time, such as
females, younger workers and older workers.
 Hidden unemployment occurs when people are not

counted as unemployed in the formal labour market
statistics, but would probably work if they had the
chance. For example, someone might have looked for
work for a long time, given up hope and stopped looking,
but still wish to work. (These people are sometimes
referred to as ‘discouraged workers’.)
 Seasonal unemployment occurs at different points over

the year because of seasonal patterns that affect jobs.
Some examples include ski instructors, fruit pickers and
holiday-related jobs. The ABS publishes seasonally
adjusted labour market statistics, which remove seasonal
patterns in the data
Unemployment
 Demand deficient unemployment occurs when there is insufficient demand

in the economy to maintain full employment.
• In a recession (a period of negative economic growth) consumers will be
buying fewer goods and services.
• Selling fewer goods, firms sell less and so reduce production.
• If firms are producing less, this leads to lower demand for workers – either
workers are fired, or a firm cuts back on employing new workers. In the worst
case scenario, the fall in demand may be so great a firm goes bankrupt, and
everyone is made redundant
Unemployment
Unemployment
 Problems of Demand Deficient Unemployment

• Negative multiplier effect. In many cases, a rise in demand deficient
unemployment can further depress aggregate demand and make the
recession worse. Rising unemployment leads to lower demand and lower
economic output, causing a further decline in demand for workers.
Furthermore, the rise in unemployment causes a decline in consumer
confidence as households worry that they may be made unemployed. It can
create a cycle of falling demand and rising unemployment.
Unemployment

Types of Unemployment

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Types of Unemployment

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Types of unemployment

We can calculate a country's

 For example, imagine a small island country with a

 Natural Rate of Unemployment

• Labour force – the sum of employed and unemployed people.

 The unemployment rate is the most commonly used indicator for

 There are three main types of unemployment

 Other Types of Unemployment

 Underemployment occurs when people are employed, but would

 Hidden unemployment occurs when people are not

 Seasonal unemployment occurs at different points over

 Demand deficient unemployment occurs when there is insufficient demand

 Problems of Demand Deficient Unemployment

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