a modern economy unemployment has a variety of causes. Some of them relate to
the general level of economic activity, others are the result of a failure of
the labour market in an economy to work optimally.
the main types of unemployment we can consider:
Real wage unemployment
wage unemployment is a
form of dis-equilibrium unemployment
that occurs when real wages for
jobs are forced above the market clearing level.
Traditionally, trade unions and wages
councils are seen as the institutions causing this type of unemployment
although the importance of trade unions in the UK labour market has
diminished significantly over recent years and this has not stopped
unemployment reaching nearly three million twice in the last twenty years.
Deficient Unemployment is associated with an economic recession or a sharp
economic slowdown. It occurs due to a fall in the level of national output in
the economy causing firms to lay-off workers to reduce costs and protect
that labour as a factor input is a derived demand and a fall in the demand
for output will cause an inward shift in the demand for labour at each wage
level. This is a process known as labour-shedding.
demand deficient unemployment is usually associated with economic recessions
it can also exist in the long run when the economy is constantly run below
capacity. As the economy recovers from a downturn, we expect to see the
problem of cyclical unemployment decline.
type of unemployment reflects job turnover in the labour market. Even when
there are plenty of vacancies available, it takes time to search and find new
employment and workers will remain frictionally unemployed.
unemployment exists even when there are unfilled job vacancies due to a
mismatch between the skills of the registered unemployed and those required
by employers. People made redundant in one sector of the economy cannot
immediately take up jobs in other parts as they do not have the relevant
example, it would be hard for a redundant ship yard worker to instantly take
a job in a high-tech electronics business. Likewise workers laid-off in steel
manufacturing may have problems in finding re-employment in financial
services. This type of unemployment is linked to occupational immobility of
unemployment often occurs more heavily in certain regions because of the
long-run decline of traditional industries. For example the loss of
manufacturing jobs in the north-east of England, the closure of coal mines in
Scotland and Wales and the long-run decline of ship-building in the United
in these sectors contracts due to changes in the pattern of demand or methods
of production. The scale of the problem depends on the regional concentration
of the industry, the speed of changes in demand and the immobility of labour
both occupational and geographical. Simply raising the level of aggregate
demand in the economy will do little to alleviate the problem of structural
the published figures for unemployment, there are bound to be people who are
interested in taking paid work but who, for one reason or another, are not
classified as unemployed.
example of this is discouraged workers - people who have effectively given up
active search for jobs perhaps because they have been out of work for a long
time and have lost both the motivation to apply for jobs and also the skills
poverty trap can also act to increase hidden unemployment. Jobless workers
may not apply for jobs because of financial disincentives created by the
interaction of the income tax and state benefits system.