Types of unemployment

Frictional, structural and disequilibrium

Frictional unemployment

Temporarily unemployed whilst moving between jobs

Often measured by number of vacancies Includes geographical immobility (cost of

moving, family ties, lack of information) Includes occupational immobility

(discrimination, need for training) Includes seasonal unemployment

FRICTIONAL cont...The search theory of unemployment

Will a redundant worker take a lower paid job? Will consider living costs (mortgage

commitment?), status, working conditions, chance of better paid job becoming available

As time passes, a gradual reduction in 'aspirational wage' will take place

Either desired job is found (after search), desired job becomes available or accepts lower-paid job

This is classed as 'voluntary' unemployment

FRICTIONAL cont...Factors affecting search period

Redundancy pay Welfare benefits (replacement ratio – ratio

between in-work and out-of-work pay) Savings or family support Commitments (e.g. main income earner for

household?)

Structural Unemployment

Structural decline of industries (sunset industries) and growth of others (sunrise)

Due to international competition (e.g. cheap-labour economies)

Or due to changing consumer wants Or due to improving technology

(technological unemployment) Or due to depleting natural resources

STRUCTURAL cont...Impact

Regional unemployment (e.g. ship building, mining, textiles)

Changing jobs available (low to high value-added) Resisted (by unions and media) due to human

cost and national pride – 'our jobs going abroad', 'destruction of communities'

Largely beneficial in long run – real incomes rise and UK maintains competitive edge

Automation reduces need for labour whilst mechanisation means workers needed with higher skills

Disequilibrium Unemployment

The 'natural rate' of unemployment is where demand for labour equals supply of labour (equilibrium)

This is not the same as zero unemployment Frictional and structural unemployment

make up the natural rate Economy in disequilibrium when

AS labour exceeds AD labour Sticky wages prevent wages falling to clear market

DISEQUILIBRIUM version 1Classical or real-wage unemployment

Excessive wages cause supply to exceed demand

Classical economists believe that if the labour market is competitive then wage level will fall

Blame is cast on trade unions and restrictive legislation for firms

DISEQUILIBRIUM version 2Cyclical, Keynesian or demand-

deficient unemployment Deficient aggregate demand Based on Say's Law (19th century economist

Jean-Baptiste Say) “Supply creates its own demand” When an output is produced the factor incomes

are sufficient to create demand for additional output

Monetarists argue that monies are spent therefore demand-deficiency won't arise

Keynesians argue that money may be held therefore causing insufficient demand

Link with inflation We came across the Keynesian view that money can be

held rather than spent in relation to inflation also Monetarists assertion that people spend the money they

receive led to the belief that inflation was directly related to the money supply (MV=PT)

This same belief leads to the conclusion that demand will follow supply and demand-deficient unemployment does not exist

Keynes believed that people may hold their money therefore the link between M and P may not always hold

This same belief leads to the conclusion that Say's Law does no necessarily follow and there may be periods of increased supply failing to lead to increased demand