1. TYPES & CAUSES OF UNEMPLOYMENT
Lesson objectives:
Identify and describe the types and causes of unemployment.
Use diagrams to show types of unemployment
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2. Types of Unemployment Unemployment Created by Ms Zita Structural
Frictional
Cyclical
Seasonal
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3. Transitional unemployment due to people moving between jobs
Seasonal
Regular seasonal changes in employment / labour demand e.g. Tourism, retail, agriculture
Structural
Arises from the mismatch of skills and job opportunities as the pattern of labour demand changes – linked to labour immobility
Frictional
Transitional unemployment due to people moving between jobs
Cyclical
Caused by a fall in or persistent weakness of aggregate demand leading to a decline in GDP and jobs
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4. 1. Structural Unemployment
Occurs as a result of :
Changes in demand for particular types of labour skills – due to new technology
Changes in the structure of the economy – new growing industries Vs declining industries eg: agricultural sector declining in importance vs manufacturing growing
Changes in the geographical location of industries – due to relocation to other regions or countries – workers who cant relocate lose jobs.
labour markets rigidities
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5. What is Labour Market Rigidities?
Labour market rigidities - refer to factors that prevent the forces of D+S from operating in the labour market. These include:
minimum wage laws
Union activities and wage bargaining with employers
Employment protection laws
Generous unemployment benefits
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6. Type of Market Rigidity
Effect
minimum wage laws
Union activities
Employment protection laws
Unemployment benefits
Leads to higher than equilibrium wages causing unemployment
Increases costs for firms to hire workers because they must pay compensation and make firms cautious about hiring
Makes remaining unemployed more attractive and reduce incentive to work
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7. Structural Unemployment Diagram 1
Price Level
SRAS P1 P2
AD1
AD2
Q Q1
RGDP
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8. Changes D for particular labour skill or Changes in Geographical location of jobs
Diagram 1:
A fall in AD (in all or few industries or local industries that relocates) causes a fall in RGDP produced.
Employers fire or lay off workers with inappropriate skills or workers no longer needed due to relocation.
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9. Structural Unemployment Diagram 2
AS2
AS1 P2 P1 AD
Q Q1 Y
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10. Labour Market Rigidities
Diagram 2:
Labour market rigidities lead to an increase in the costs of production - Micro: supply shifts to left causing a fall in Q produced
Employers hire fewer workers – lead to unemployment
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11. Structural Unemployment Diagram 3
Price of labour = Wages
Excess S of labour / unemployment
S of labour Wm We
D for labour
QD Qe QS
Quantity of labour
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12. Minimum Wage Laws and Unions
Diagram 3:
Minimum wage laws and labour unions activities lead to higher than equilibrium wages and lower quantity of labour demanded.
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13. Types of Unemployment & Natural Rate of Unemployment (NARU)
The Natural Rate of Unemployment (NARU)– refers to the rate of unemployment which exist when the economy is at full employment - ie the only unemployed people are those who must be unemployed.
Subsequently we can therefore conclude that at full employment
NARU = Structural + Frictional + Seasonal unemployment
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14. Types of Unemployment & NARU
Notice there is no Cyclical Unemployment because every who is cyclically unemployed will have a job at full employment.
So when NARU falls we expect an INCREASE in the levels of potential output and a SHIFT in the LRAS curve to the right (both in Neo classical and Keynes models)
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15. Neo Classical Model LRAS 1 LRAS 2 Price Level Yp1 Yp2 Real GDP
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16. Keynesian Model LRAS 1 LRAS 2 Price Level Pl1 Yp1 Yp2 Real GDP
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17. Cyclical Unemployment
When an economy produces less than its potential output, cyclical unemployment becomes present in the economy.
Cyclical unemployment occurs during a downturn in the business cycle caused by a fall in aggregate demand (also known as demand deficient unemployment) leading the economy to experience a recessionary gap.
When AD falls – firms investment declines – output falls – firms hire fewer workers – hence cyclical unemployment rises.
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18. Created by Ms Zita

19. The 4 Types of Unemployment in relation to AD-AS Model
LRAS
Price Level
SRAS
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Real GDP Yp
Recessionary Gap
Potential GDP
Inflationary Gap

20. Cyclical Unemployment = 0 At Inflationary Gap:
At Recessionary Gap:
Unemployment > NARU and there is Cyclical Unemployment in addition to Structural + Seasonal + Frictional unemployment
At Potential GDP:
Unemployment = NARU Structural + Frictional + Seasonal Unemployment (NARU)
Cyclical Unemployment = 0
At Inflationary Gap:
Unemployment < NARU because a portion of the Structural, Seasonal and Frictional unemployed find temporary work.
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