Types and causes of unemployment

• Types of unemployment


  • Disequilibrium unemployment
  • Equilibrium unemployment (natural rate of unemployment)
• Cyclical unemployment


  Also known as demand deficient unemployment, occurs in a recession when there is a lack of aggregate demand in the economy
• How cyclical unemployment occurs

  1. Lower aggregate demand

  2. Lower demand for goods and services

  3. Lower derived demand for labor

  4. Firms cut costs by reducing workforce

  5. Increase in unemployment
• Factors that can cause a shift in aggregate demand to the left

  • Increase in interest rates
  • Fall in income tax or corporation tax
  • Fall in consumer/business confidence
  • Cut in government spending
  • Stronger exchange rate
  • Housing market crash
  • Financial crisis
  • Banking crisis
  • Global pandemic
  • Stock market crash
• Real wage unemployment


  Also known as classical unemployment, occurs when wages are forced above equilibrium in the labor market creating an excess supply of labor
• How real wage unemployment occurs

  1. Wages forced above equilibrium

  2. Firms less willing and able to employ

  3. Contraction of labor demand

  4. Workers very willing and able to work at high wages

  5. Expansion of labor supply

  6. Excess supply of labor = real wage unemployment
• Structural unemployment


  Immobility of labor due to a long-term change in the structure of an industry
• Structural unemployment


  • Occupational immobility: skills mismatch between workers and job vacancies
  • Geographical immobility: workers not willing or able to move to where job vacancies exist
• Causes of structural unemployment


  • Technological advancement automating jobs
  • Loss of comparative advantage to foreign countries
  • Transition of economy from one sector to another
  • Education system not keeping up with pace of change in skills needed
• Frictional unemployment


  Workers in between jobs, searching for a better job
• Seasonal unemployment


  Temporary fall in demand for workers due to seasonal changes
• There is always a natural rate of unemployment, even at equilibrium in the labor market