Understanding Unemployment: Types and Economic Impact

Understanding Unemployment

The term unemployment refers to the lack of work. An unemployed person is one who is part of the labor force seeking employment but without success. The constant movement of the working population, as a feature of modern economics, is one of the main reasons for unemployment, even when we are at full employment.

Types of Unemployment

There are several types of unemployment, the most significant being frictional and structural unemployment.

Frictional Unemployment

Frictional unemployment is caused by workers who invest time in finding employment. This type of unemployment is inevitable, as there is a constant process of job creation and destruction, along with a steady inflow of new workers into the labor market. When there is low unemployment, unemployment spells tend to be brief, making much of the general unemployment frictional in that situation. A small amount of this type of unemployment is natural and harmless.

Structural Unemployment

Structural unemployment occurs in a labor market where there are more job seekers than available jobs at full salary. The point at which supply and labor demand is consistent is the equilibrium wage for any job. Unemployment is the situation where the salary is chronically above the minimum wage. This is due to several factors, including the minimum wage, which is the lowest amount that can be paid by law. For many types of employment, the minimum wage does not impact because it is above it, but for others, it is a binding constraint.

Factors Contributing to Structural Unemployment

• Minimum Wage: There is a greater number of people who want to work than there are available jobs at the minimum wage, leading to structural unemployment.
• Unions: The actions of unions can have effects similar to the minimum wage. The wages received by union workers are elevated above the equilibrium wage, resulting in more people willing to work for these wages than available jobs.
• Efficiency Wages: Firms may contribute to structural unemployment by paying efficiency wages, which are above the equilibrium level, as an incentive for productivity.
• Public Policies: Structural unemployment can also be influenced by public policies and their effects.

Natural Rate of Unemployment

The natural rate of unemployment is the unemployment rate toward which the economy tends to gravitate. This rate is the sum of structural unemployment and frictional unemployment. Unemployment that deviates from this natural rate is referred to as cyclical unemployment.