What is Unemployment

The official definition of unemployment is as follows:

Unemployment occurs when a person who is a participant of the labor force and is actively searching for employment is unable to find a job.

How is the unemployment rate measured?

Unemployment occurs when someone is willing and able to work but does not have a paid job. The unemployment rate is the percentage of people in the labour force who are unemployed. Consequently, measuring the unemployment rate requires identifying who is in the labour force. The labour force includes people who are either employed or unemployed. Figuring out who is employed or unemployed involves making practical judgements, such as how much paid work someone needs to undertake for them to be considered as having a job, as well as actually counting how many people have jobs or not.

What are the main types of unemployment?

There are three main types of unemployment – cyclical, structural and frictional unemployment. In practice, these cannot be measured directly, and they can often overlap, but they provide a useful way of thinking about unemployment.

• Cyclical Unemployment

Cyclical unemployment occurs with changes in economic activity over the business cycle.

During an economic downturn, a shortfall of demand for goods and services results in a lack of jobs being available for those who want to work. Businesses experiencing weaker demand might reduce the amount of people they employ by laying off existing workers, or hiring fewer new workers. As a result, people looking for work will also find it harder to become employed. The opposite situation occurs when demand strengthens.

Cyclical unemployment is often described as being medium term in nature (one to 12 months). Examples can be seen in the unemployment rate rising sharply with the early 1990s recession, declining to low levels by the mid 2000s before rising again around the time of the global financial crisis.

An increase in cyclical unemployment might suggest the economy is operating below its potential. With more people competing for jobs, businesses might offer lower wage increases, which would contribute to lower inflation. Policies that stimulate aggregate demand, such as expansionary monetary policy, can help reduce this type of unemployment (because businesses experiencing stronger demand are likely to employ more people).

• Structural Unemployment

Structural unemployment occurs when there is a mismatch between the jobs that are available and the people looking for work. This mismatch could be because jobseekers don’t have the skills required to do the available jobs, or because the available jobs are a long way from the jobseekers.

Workers may become unemployed if they work in industries that are declining in size or have skills that could be automated as a result of large-scale technological advances. It may be difficult for them to find work in another industry and they may need to develop new skills or move to a region that has more opportunities.

For example, there has been a noticeable decline in the share of people employed in routine manual jobs over recent decades with some of these jobs being automated because of advances in technology. The manufacturing industry is an example of an industry that has a high share of routine manual jobs and its size in the economy has declined (both in terms of production and employment).

Structural unemployment tends to be longer lasting than other types of unemployment. This is because it can take a number of years for workers to develop new skills or move to a different region to find a job that matches their skills. As a result, workers who are unemployed because of structural factors are more likely to face long-term unemployment (for more than 12 months).

In contrast to cyclical unemployment, structural unemployment exists even when economic conditions are good. In theory, this type of unemployment should not directly influence wages or inflation and is best addressed through policies that focus on skills and the supply of labour.

• Frictional Unemployment

Frictional unemployment occurs when people move between jobs in the labour market, as well as when people transition into and out of the labour force.

Movement of workers is neccessary for a flexible labour market and helps achieve an efficient allocation of labour across the economy. However, people may not find jobs immediately and need to invest time and effort in searching for the right job. Businesses also spend time searching for suitable candidates to fill job vacancies. As a result, people looking for jobs are not matched immediately with vacancies and may experience a period of temporary unemployment.

This type of unemployment is generally shorter term (less than one month). Frictional unemployment is likely to occur at all points of the business cycle and, like structual unemployment, may not influence wages or inflation.

These three types of unemployment are not independent of each other. For example, a period of high cyclical unemployment might lift structural unemployment. This could occur when people are unemployed for such a long period that their skills and productivity deteriorate, and they become seen as being less employable, reducing the probability that they will be hired in the future.

Other Types of Unemployment

There are some other types of unemployment that are also important to consider. In particular, the underemployment rate can be thought of as a complementary indicator to the unemployment rate when thinking about conditions in the labour market.

Underemployment occurs when people are employed, but would like and are available to work more hours. There are two categories of underemployed people defined by the ABS. First, part-time workers who would prefer to work additional hours. Second, people who usually work full time, but are currently working part-time hours. Underemployment rates are generally higher among groups that have a larger proportion of people working part time, such as females, younger workers and older workers.

Hidden unemployment occurs when people are not counted as unemployed in the formal ABS labour market statistics, but would probably work if they had the chance. For example, someone might have looked for work for a long time, given up hope and stopped looking, but still wish to work. (These people are sometimes referred to as ‘discouraged workers’.)

Seasonal unemployment occurs at different points over the year because of seasonal patterns that affect jobs. Some examples include ski instructors, fruit pickers and holiday-related jobs. The ABS publishes seasonally adjusted labour market statistics, which remove seasonal patterns in the data.

A quick list of policies to reduce unemployment

• Monetary policy – cutting interest rates to boost aggregate demand (AD)

• Fiscal policy – cutting taxes to boost AD.

• Education and training to help reduce structural unemployment.

• Geographical subsidies to encourage firms to invest in depressed areas.

• Lower minimum wage to reduce real wage unemployment.

• More flexible labour markets, to make it easier to hire and fire workers.

References… What is Unemployment ? – Definition of Unemployment Unemployment: Its Measurement and Types Policies for reducing unemployment14 June 2019 by Tejvan Pettinger

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