Economics: Notes for Teachers Types of Unemployment Types of Unemployment Academic PowerPoint

Types of Unemployment Economists catergorise unemployment into different types. These are frictional, cyclical, structural, seasonal, hardcore and hidden unemployment. These are discussed on the following slides.

Frictional Unemployment The term frictional unemployment is applied to those who are between jobs. This can be as a result of changing jobs voluntarily or from the ongoing creation and destruction of jobs.

Frictional Unemployment Essentially, frictional unemployment is caused by frictions in the labour market which prevent the immediate matching of unemployed workers with unfilled job vacancies. Frictional unemployment is often greatest when the level of economic activity is high as people are more willing to leave their jobs to search for new employment.

Cyclical Unemployment Cyclical unemployment is derived from the demand for final goods and services and thus follows the ups and downs (fluctuations) of the business cycle. When the economy is expanding rapidly (i.e. upswing and boom periods), cyclical unemployment is low; when the economy is expanding slowly or contracting (i.e. downswing or recession), cyclical unemployment can be high.

Cyclical Unemployment Level of Economic Activity Boom Long term growth trend Downswing Upswing Recession Time

Cyclical Unemployment The reduction in demand for goods and services leads to a reduction in total output and ultimately results in a reduction in demand for the labour that produces those goods and services. Cyclical unemployment is considered serious by governments around the world who are charged with correcting flagging aggregate demand via appropriate economic policy.

Structural / Technological Unemployment Structural / technological unemployment occurs when there is a mis-match of available and required skills, often caused by the introduction of new technology or changes in the pattern of consumer demand.

Structural / Technological Unemployment Structural change and the introduction of new technology is necessary for firms to remain competitive in their industries. Firms can only survive in the long run if they introduce new and improved products and lower their production costs.

Structural / Technological Unemployment Historical examples of structural/technology unemployment include the industrial revolution, when innovations such as the steam engine and combine harvester replaced manual labour. Other recent examples include the substitution of labour for tasks which computers can perform e.g. Photocopiers v’s typists.

Structural / Technological Unemployment Although structural and technological change may cause unemployment in the short term, they also create new opportunities and new jobs in the medium to long term.

Seasonal Unemployment Seasonal unemployment results from the seasonal patterns of high and low activity in some industries, particularly in primary industry and tourism. Examples include fruit pickers, fishermen and ski instructors.

Hardcore Unemployment Hardcore unemployment is a result of some members of society who are unemployable because of physical or mental disability, e.g. age, health and attitudinal and behavioural characteristics

Hidden Unemployment Hidden unemployment is where there are people who wish to work, but are discouraged from looking for work due to a lack of job opportunities matching their skills and the high rate of unemployment.

Hidden Unemployment Those people classified as ‘hidden unemployed’ are not included in official unemployment figures, as they are not ‘actively looking for work’. Real rates of unemployment are therefore often higher than those stated in official figures.

Natural Rate of Unemployment As discussed in the previous topic, there is a ‘floor’ in the level of unemployment (known as the natural rate of unemployment). This is due to the existence of frictional, seasonal and hardcore unemployment. The natural rate of unemployment is sometimes called the non-accelerating inflation rate of unemployment (NAIRU).

Non-accelerating Inflation Rate of Unemployment (NAIRU) The Non-accelerating Inflation Rate of Unemployment is the level of unemployment consistent with a stable or non-accelerating inflation rate. Economists argue that at unemployment levels below the NAIRU, increases in demand do not reduce unemployment but instead increase inflation. The NAIRU is not a fixed figure and appears to increase following each major economic downturn. This phenomenon is known as hysteresis.

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