Embedded Files
Cyclical Unemployment
Cyclical Unemployment
Cyclical unemployment is caused by a decrease in the overall levels of economic activity in an economy. For example, a decrease in the levels of Aggregate Demand due to a fall in consumption due to lower consumer confidence. As a result of this AD decreases from AD1 to AD2, causing a decrease in the real GDP from Yfe to Y1, causing the economy to enter into a recessionary gap. Due to the lower levels of real output by firms, there is lower demand for workers and as such an increase in the unemployment rate as a result.
Therefore, when real GDP is lower than the potential in the economy, we can say the economy is experiencing Cyclical Unemployment, caused by lower levels of Economic Activity. As cyclical unemployment is caused by decreasing levels of Aggregate Demand, policies that can increase Aggregate Demand such as Fiscal and Monetary Policy can be used to reduce the levels of cyclical unemployment in an economy.
Cyclical unemployment occurs when the actual level of output is less than the potential. Therefore, unemployment is greater than the natural rate of unemployment
The Natural Rate of Unemployment
The Natural Rate of Unemployment
As we have previously mentioned, the Natural Rate of Unemployment (NRU) is the unemployment that occurs due to factors other than fluctuations in Aggregate Demand in an economy. Economists argue as to what exactly defines the Natural Rate of Unemployment, however this figure is often floated around 4-5% unemployment rate. Therefore, full employment is usually considered around this figure, as the figure represents the unemployment caused by Structural, Frictional or Seasonal unemployment. Therefore, the NRU is calculated by the sum of structural + frctional+ seasonal unemployment.
Below will discuss in detail what we consider Structural, Frictional and Seasonal Unemployment.
When actual output is less than the potential output, (therefore in a recessionary gap) the economy is experiencing the Natural Rate of Unemployment + Cyclical unemployment.
When the economy is operating at its potential, the economy is experiencing the Natural Rate of Unemployment.
When the actual output is greater than its potential (therefore in an inflationary gap) the economy is experiencing a reduction in its Natural Rate of Unemployment.
Structural Unemployment
Structural Unemployment
Diagram 1: Decrease in demand for a product
Diagram 2: Relocation of firms from one area
Structural unemployment represents unemployment caused by structural changes to an economy. This causes a change in the geographical location of jobs (if firms move relocate from one area to another), changes in the demand for particular skills of workers or due to Labour Market Rigidities.
Changes in the Demand for particular skills
Changes in the Demand for particular skills
As we have previously seen, the structure of an economy changes over time. As economies grow, new industries are created and old industries enter into decline. This decline could be due to the creation of more competitive firms internationally and therefore the good becomes cheaper to import and less viable to produce domestically. Entire industries could close due to policies such as free trade allowing for cheaper imports from abroad, with which a firm is unable to compete with and therefore the declining industry may demand lower numbers of workers, creating a mismatch between the skills people have in a particular area and the jobs available.
For example, if we look at diagram 1. Diagram 1 shows a decrease in demand for a coal due to long term changes in taste and preferences of fossile fuels. A decrease in demand for the good leads to a lower overall quantity demanded and supplied. (Q1 -> Q2). As a result, lower quantity produced requires lower levels of labour, creating structural unemployment.
If a firm or an entire industry was to relocate, then this would cause a decrease in the demand for labour for those particular jobs in the area they have relocated from. As such, the demand for labour decreases, leaving fewer people with the skills to be able to find a job. This is particularly common with firms that may outsource jobs from wealthier nations to developing economies, in order to reduce costs, due to the lower costs of labour in the developing economies.
If we look at diagram 2, we can see that as a result of the relocation of firms geographically, the demand for labour in a particular region decreases (Q1-> Q2) again creating structural unemployment.
All of the above create a mismatch of skills of the people living in an area and jobs, leading to structural unemployment.
Labour Market Rigidities
Labour Market Rigidities
As we have already discussed, labour market rigidities are factors that cause wages to become fixed or "rigid". These factors include:
Minimum Wage Legislation - Real Wage Inflexibility
Powerful Trade/Labour Unions
Employment Protection Laws
Unemployment Benefits that prevent people from seeking work
It is debated as to how much the above factors can lead to increasing levels of structural unemployment. Some would argue that stronger labour laws in countries in Europe such as Italy, Spain and France have caused higher levels of unemployment in these countries, as compared to countries with lower employment protection such as the UK or the US.
As we can see in the diagram to the right, some economists would argue that the imposition of a minimum wage creates unemployment due to firms being less willing to employ individuals at a higher wage of W1 but more individuals are willing to work for the same higher wage, creating an excess supply of labour (Qs>Qd) and therefore unemployment. This is often referred to as "real wage inflexibility" as policies such as national minimum wage may cause the labour market to become inflexible and therefore cannot always adjust to these changes.
A similar example is if new labour laws or powerful trade unions increase the wages for workers. This increases the cost of production for firms and as a result the supply for a particular market decreases (as cost of production is a non price determinant of supply). As a result, quantity produced decreases from Q1 to Q2, meaning the firm requires less labour, causing structural unemployment.
Diagram 3: Effects of a National Minimum Wage
Diagram 4: Increased costs of production due to labour laws or trade unions
Seasonal Unemployment
Seasonal Unemployment
Seasonal Unemployment is unemployment that occurs due to seasonal factors. For example, an agricultural worker (such as a coffee picker or olive picker) can only work for a certain time period of the year. This is due to the fact that they can only pick certain crops during the time of year those crops are ready to be harvested. Therefore, for the months of the year in which they are not working in agriculture, they may not be employed but this is due to the seasonal effects. As such, Seasonal Unemployment is part of the Natural Rate of Unemployment.
Other examples of Seasonal Unemployment include:
Ski Instructors working in the mountains only when it snows
Tour guides offering tours to summer vacationers
Life guards working in summer tourism areas
Retail staff employed to work over big celebration
Frictional Unemployment
Frictional Unemployment
Frictional unemployment occurs as a result of individuals who are unemployed but are waiting for or are "between" jobs. This may be as a result of the individual leaving one job and looking for another job that matches their skills and experience. This is why Frictional Unemployment is considered part of the natural rate of unemployment. Whilst the individual is unemployed, they are by their own choice by waiting for a job that best meets their skills and experience.
One way in which governments can reduce Frictional unemployment is by encouraging the flow of information between people looking for work and firms looking to hire. This may help individuals find work quicker.
Page updated
Google Sites
Report abuse