Types and Causes of Unemployment (Cyclical, Structural, Frictional and more)

What are the two major groups of unemployment?

Disequilibrium unemployment and equilibrium unemployment (natural rate of unemployment).

What are the two types of disequilibrium unemployment?

Cyclical (demand-deficient) unemployment and real-wage (classical) unemployment.

What is cyclical unemployment?

Unemployment caused by a fall in aggregate demand (AD), leading to lower demand for goods and services, which reduces the derived demand for labour.

Why does a fall in AD increase cyclical unemployment?

Lower AD means firms sell less output, reducing revenue. To cut costs and maintain profit margins, firms lay off workers, increasing unemployment.

Why is cyclical unemployment also called demand-deficient unemployment?

It results from insufficient AD in the economy, making it directly linked to economic downturns such as recessions.

What factors can cause cyclical unemployment?

Higher interest rates, lower consumer or business confidence, cuts in government spending, stronger exchange rates, financial crises, and global events like pandemics.

Why do Keynesian economists argue that cyclical unemployment persists?

They believe wages are "sticky downwards," meaning wages do not fall to clear the labour market, leaving excess supply of labour (unemployment).

What is real-wage (classical) unemployment?

Unemployment caused when wages are forced above equilibrium, creating excess supply of labour (more workers willing to work than jobs available).

What causes real-wage unemployment?

Government-imposed minimum wages and strong trade unions negotiating higher wages can push wages above equilibrium, leading to excess supply of labour.

Why does real-wage unemployment fall under disequilibrium unemployment?

It occurs when the labour market fails to clear because wages do not adjust to reduce excess supply of labour.

What is equilibrium unemployment (natural rate of unemployment)?

Unemployment that exists even when the labour market is in equilibrium, meaning there are always some workers unemployed due to structural, frictional, or seasonal factors.

What are the three types of equilibrium unemployment?

Structural, frictional, and seasonal unemployment.

What is structural unemployment?

Unemployment caused by a long-term change in an industry that leads to a mismatch between workers' skills and job vacancies.

What are the two types of labour immobility in structural unemployment?

Occupational immobility (skills mismatch) and geographical immobility (inability to move for work).

What causes occupational immobility?

Workers lack the skills required for new job vacancies due to changes in technology, industry shifts, or outdated education systems.

What causes geographical immobility?

Workers are unable or unwilling to move due to family ties, housing costs, poor transport infrastructure, or cost-of-living differences.

What are examples of structural unemployment caused by technological advancement?

Automation in manufacturing, online banking reducing demand for branch workers, mechanization in farming, and online retail replacing in-store jobs.

How does loss of comparative advantage lead to structural unemployment?

If a country loses its ability to produce goods more efficiently than foreign competitors, industries decline, leading to job losses.

What historical example illustrates loss of comparative advantage?

In the 1970s-80s, the UK lost its manufacturing dominance to the Far East, leading to industrial decline and structural unemployment.

What is frictional unemployment?

Short-term unemployment when workers are between jobs, either voluntarily leaving for better opportunities or actively searching for work.

Why is frictional unemployment voluntary?

Workers are either quitting to find a better job or rejecting existing offers while searching for a more suitable position.

What is seasonal unemployment?

Unemployment caused by temporary changes in demand for labour due to seasonal shifts in industries like tourism, agriculture, and winter sports.

What are examples of seasonal unemployment?

Ski instructors losing jobs in summer, fruit pickers out of work in the off-season, and tourism workers unemployed in non-peak months.

Why does equilibrium unemployment always exist?

Even when the labour market is at equilibrium, there will always be some level of frictional, structural, and seasonal unemployment.