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Causes of Unemployment


In 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.



Among the main types of unemployment we can consider:

        Real wage unemployment

        Demand deficient unemployment

        Frictional unemployment

        Structural unemployment

        Hidden unemployment


Real Wage Unemployment

Real 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.


Demand Deficient Unemployment



Demand 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 profits.


Remember 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.


Although 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.


Frictional Unemployment

This 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.


Structural Unemployment

Structural 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 skills.


For 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 labour.


Structural 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 Kingdom.


Employment 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 unemployment.


Hidden Unemployment

Whatever 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.


An 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 required.


The 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.




E-mail Steve Margetts