Meaning of unemployment
Unemployed are the people of working age group who do not have work to do and are actively seeking for work.
We have to note here that not all the people who are not working are counted as unemployed. For anyone to be counted as unemployed, he or she has to have the ability to work and must be willing to work and are actually searching for a job. Unemployment is measured as a percentage of total available workforce.
Types/causes of unemployment
Demand deficient unemployment
Falling demand for goods and services can have a downward multiplier effect on output, employment and incomes.
If the demand for a particular good falls, the firms that produce that particular good will be force to reduce output. In this case, the firm may have to lay-off workers to reduce losses.
If falling demand happens for the entire economy, which means the aggregate demand for goods and services falls, the negative effect will be seen on the whole economy. This often happens in a recession. If unemployment increases due to falling aggregate demand in a recession, it is called cyclical unemployment. Therefore cyclical unemployment is a type of demand deficient unemployment.
This type of unemployment arises from long-term changes in the structure of the economy. For example, changes in the taste of the people may lead to an entire industry to be closed down. Once those industries are closed down, the workers may not have skill to get a job from another industry.
For example, new technology (nuclear power) could make coal mines close down leaving many coal miners unemployed.
When structural unemployment happens due to the introduction of new technologies, it is often referred as ‘technological unemployment’.
Real Wage Unemployment / Classical Unemployment
This occurs when wages are artificially kept above the equilibrium. For example, powerful trades unions or minimum wages could lead to wages above the equilibrium leading to excess supply of labour (this assumes labour markets are competitive) Keynesian analysis suggests a fall in AD can lead to real wage unemployment as wages are sticky downwards and a fall in AD does not lead to wages clearing.
Frictional unemployment is seen as the least serious of all the unemployment types. Frictional unemployment occurs when workers leave their current job to find better jobs or when the school leavers take some time trying to find work.
Some goods have seasonal supply. For example, some agricultural produce can be grown only during certain weather conditions. Other goods and services may have seasonal demand, which means they are demanded only during certain periods of the year. When those goods and services are out of season, the workers who are employed in the industry may become unemployed.
The consequences of unemployment
Having people who are willing but unable to work is a waste of resources. A country is therefore not maximizing its output so living standards and international competitiveness is lower than what it ought to be.
Lost tax revenue
Unemployment will result in lower revenue gained from income tax. The potential tax revenue could be spent on improving healthcare or education. Such spending would increase the productivity of the country and the general living standards.
Government spending on benefits
Spending on job seeker’s allowance will go up the more people there are that are unemployed. This represents a larger opportunity cost which could limit the spending on key areas such as health.
Pressure on other forms of government spending
Greater unemployment may also lead to more crime or mental health problems, which requires more government spending to solve.
Costs to the unemployed
The unemployed may suffer from social disadvantages and will suffer from loss of income. There may be increased arguments within households and/or a sense of worthlessness and aimlessness. Children of the unemployed will struggle at school because they may not be adequately provided with the resources as good as other kids whose parents are employed.
This is unemployment causing unemployment. The longer someone is unemployed, the more likely that employers will see them as unemployable. This is because staying out of work for a long time indicates that they may not be good workers. Also, as someone stays away from work for a long time, he/she may not be able to keep in touch with the emerging technology and methods of work.
Negative multiplier effects
The closure of a local factory with the loss of hundreds of jobs can have a large negative multiplier effect on both the local and regional economy. One person’s spending is another’s income so to lose well-paid jobs can lead to a drop in demand for local services, downward pressure on house prices and ‘second-round employment effects’ for businesses supplying the factor or plant that closed down.
The government loses out because of a fall in tax revenues and higher spending on welfare payments for families with people out of work. The result can be an increase in the budget deficit which then increases the risk that the government will have to raise taxation or scale back plans for public spending on public and merit goods.
Next topic: Gross Domestic Product(GDP)