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
Real wage (classical) 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.
Classical unemployment is thought to be the result of real wages being above their market clearing level leading to an excess supply of labour. Some economists believe that the introduction of the national minimum wage may create some classical unemployment in industries where average wage rates are closer to the NMW level and where international competition from low-labour cost producers is severe
Demand deficient (or cyclical) unemployment
Cyclical unemployment is involuntary unemployment due to a lack of aggregate demand for goods and services. This is also known as Keynesian "demand deficient" unemployment and is associated with the transition of the economy through the business cycle. When there is an economic recession we expect to see a rising level of unemployment because of plant closures and worker lay-offs. This is due to a fall in demand leading to a contraction in output across many industries.
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. This has certainly been the case in the Uk over recent years as the recovery of output from the early 1990s recession gathered momentum. Nine years of sustained economic growth has led to the lowest recorded unemployment levels since the end of 1985. Unemployment fell below one million (using the claimant count measure) in February 2001
Frictional unemployment is transitional unemployment due to people moving between jobs: For example, newly redundant workers or workers entering the labour market (such as university graduates) may take time to find appropriate jobs at wage rates they are prepared to accept. Many are unemployed for a short time whilst involved in job search. Imperfect information in the labour market may make frictional unemployment worse if the jobless are unaware of the available employment opportunities.
Some of the frictionally unemployed may opt not to accept jobs if they believe the tax and benefit system will reduce significantly the net increase in income from taking paid work. When this happens there are dis-incentives for the unemployed to accept work.
Structural unemployment occurs when people are made unemployed because of capital-labour substitution (which reduces the demand for labour) or when there is a long run decline in demand in their particular industry. Structural unemployment exists where there is a mismatch between their skills and the requirements of the new job opportunities. Many of the unemployed from heavy manufacturing industry (e.g. in coal, steel and heavy engineering) have found it difficult to gain re-employment without an investment in re-training. This problem is one of occupational immobility. The Labour Government's New Deal programme has focused attempts to reduce long-term unemployment by increasing the human capital of the unemployed and improving their employability in the eyes of potential employers.
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.
Working with Our Partners
Boston House | 214 High Street | Boston Spa | West Yorkshire | LS23 6AD | Tel +44 0844 800 0085 | Fax +44 01937 529236
Company Registration Number: 04489574 | VAT Reg No 816865400
tutor2u is proud to sponsor TABS Cricket Club and Collingham JFC as part of its programme of investment in local junior sport