Download Frictional unemployment

Types of Unemployment
Economists distinguish between various types of unemployment, including cyclical
unemployment, frictional unemployment, structural unemployment and classical
unemployment.[1] Some additional types of unemployment that are occasionally mentioned are
seasonal unemployment, hardcore unemployment, and hidden unemployment. Real-world
unemployment may combine different types. The magnitude of each of these is difficult to
measure, partly because they overlap.
Contents
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1 Cyclical unemployment
2 Frictional unemployment
o 2.1 Examples
3 Structural unemployment
4 Classical unemployment
5 Hidden unemployment
6 Full employment
7 References
8 See also
Cyclical unemployment
This refers to unemployment that rises during economic downturns and falls when the economy
improves. Keynesians argue that this type of unemployment exists due to inadequate effective
aggregate demand. It gets its name because it varies with the business cycle, though it can also
be persistent, as during the Great Depression of the 1930s.
Some consider this type of unemployment one type of frictional unemployment in which factors
causing the friction are partially caused by some cyclical variables. For example, a surprise
decrease in the money supply may shock participants in society.
In this case, the number of unemployed workers exceeds the number of job vacancies, so that if
even all open jobs were filled, some workers would remain unemployed. This kind of
unemployment coincides with unused industrial capacity (unemployed capital goods). Keynesian
economists see it as possibly being solved by government deficit spending or by expansionary
monetary policy, which aims to increase non-governmental spending by lowering interest rates.
Classical economics rejects the conception of cyclical unemployment, seeing the attainment of
full employment of resources and potential output as the normal state of affairs. However, it
accepts the theory to some extent as full employment can never be reached.[citation needed]
Frictional unemployment
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Main articles: Search theory and Matching theory (macroeconomics)
This unemployment involves people in the midst of transiting between jobs, searching for new
ones; it is compatible with full employment. It is sometimes called search unemployment and
can be voluntary. New entrants (such as graduating students) and re-entrants (such as former
homemakers) can also suffer a spell of frictional unemployment.
Frictional unemployment exists because both jobs and workers are heterogeneous, and a
mismatch can result between the characteristics of supply and demand. Such a mismatch can be
related to skills, payment, worktime, location, attitude, taste, and a multitude of other factors.
Workers as well as employers accept a certain level of imperfection, risk or compromise, but
usually not right away; they will invest some time and effort to find a better match. This is in fact
beneficial to the economy since it results in a better allocation of resources. However, if the
search takes too long and mismatches are too frequent, the economy suffers, since some work
will not get done. Therefore, governments will seek ways to reduce unnecessary frictional
unemployment.
Policies to reduce frictional unemployment include:
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educational advice;
schooling and training facilities;
information on available jobs and workers;
combating prejudice (against certain workers, jobs or locations);
incentives and regulations (e.g. when the frictionally unemployed receive benefits);
relocation of industries and services;
facilities to increase availability and flexibility (e.g. daycare centers);
aid or grants to overcome a specific obstacle (e.g. if a handicapped worker is employed);
reduction of the gap between gross and net wages (e.g. by taxing consumption instead).
Frictional unemployment coincides with an equal number of vacancies. Numerically, it is
therefore maximal when the labor market is in equilibrium. When for instance demand far
exceeds supply, the frictionally unemployed will be few as they will get many job offers.
The frictions in the labor market are sometimes illustrated graphically with a Beveridge curve, a
downward-sloping, convex curve that shows a fixed relationship between the unemployment rate
on one axis and the vacancy rate on the other. Changes in the supply of or demand for labor
cause movements along this curve. An increase (decrease) in labor market frictions will shift the
curve outwards (inwards).
Examples
One kind of frictional unemployment is called wait unemployment: it refers to the effects of the
existence of some sectors where employed workers are paid more than the market-clearing
equilibrium wage. Not only does this restrict the amount of employment in the high-wage sector,
but it attracts workers from other sectors who wait to try to get jobs there. The main problem
with this theory is that such workers will likely "wait" while having jobs, so that they are not
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counted as unemployed. In Hollywood, for example, those who are waiting for acting jobs also
wait on tables in restaurants for pay (while acting in "Equity Waiver" plays at night for no pay).
However, these workers might be seen as underemployed (definition 1).
Another type of frictional unemployment is seasonal unemployment, where specific industries
or occupations are characterized by seasonal work which may lead to unemployment. Examples
include workers employed during farm harvest times or those working Winter jobs on the ski
slopes or Summer jobs such as life-guarding at outdoor pools and agricultural labor.
Structural unemployment
Main article: Structural unemployment
Structural unemployment involves a mismatch between the sufficiently skilled workers looking
for jobs and the vacancies available. Even though the number of vacancies may be equal to the
number of the unemployed, the unemployed workers lack the skills needed for the jobs — or are
in the wrong part of the country or world to take the jobs offered. It is a mismatch of skills and
opportunities due to the structure of the economy changing. That is, it is very expensive to unite
the workers with jobs. One possible example in the rich countries is the present combination of
the shortage of nurses with an excess labor supply in Information Technology. Unemployed
programmers cannot easily become nurses, because of the need for new specialized training, the
willingness to switch into the available jobs, and the legal requirements of such professions.
Structural unemployment is a result of the dynamics of the labor market and the fact that these
can never be as flexible as, e.g., financial markets. Workers are "left behind" due to costs of
training and moving (e.g., the cost of selling one's house in a depressed local economy), plus
inefficiencies in the labor markets, such as discrimination or monopoly power.
Structural unemployment is hard to separate empirically from frictional unemployment, except to
say that it lasts longer. As with frictional unemployment, simple demand-side stimulus will not
work to easily abolish this type of unemployment.
Structural unemployment may also be encouraged to rise by persistent cyclical unemployment: if
an economy suffers from long-lasting low aggregate demand, it means that many of the
unemployed become disheartened, while their skills (including job-searching skills) become
"rusty" and obsolete. Problems with debt may lead to homelessness and a fall into the vicious
circle of poverty. This means that they may not fit the job vacancies that are created when the
economy recovers. Some economists see this scenario as occurring under British Prime Minister
Margaret Thatcher during the 1970s and 1980s. The implication is that sustained high demand
may lower structural unemployment. This theory of persistence in structural unemployment has
been referred to as an example of path dependence or "hysteresis."
Much technological unemployment (e.g. due to the replacement of workers by machines) might
be counted as structural unemployment. Alternatively, technological unemployment might refer
to the way in which steady increases in labor productivity mean that fewer workers are needed to
produce the same level of output every year. The fact that aggregate demand can be raised to
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deal with this problem suggests that this problem is instead one of cyclical unemployment. As
indicated by Okun's Law, the demand side must grow sufficiently quickly to absorb not only the
growing labor force but also the workers made redundant by increased labor productivity.
Otherwise, we see a jobless recovery such as those seen in the United States in both the early
1990s and the early 2000s.
Seasonal unemployment may be seen as a kind of structural unemployment, since it is a type of
unemployment that is linked to certain kinds of jobs (construction work, migratory farm work).
The most-cited official unemployment measures erase this kind of unemployment from the
statistics using "seasonal adjustment" techniques.
Classical unemployment
In this case, like that of cyclical unemployment, the number of job-seekers exceeds the number
of vacancies. However, the problem here is not aggregate demand failure. In this situation, real
wages are higher than the market-equilibrium wage. In simple terms, institutions such as "the
minimum wage" deter employers from hiring all of the available workers, because the cost
would exceed the technologically-determined benefit of hiring them (the marginal product of
labor). Some economists theorize that this type of unemployment can be reduced by increasing
the flexibility of wages (e.g., abolishing minimum wages or employee protection), to make the
labor market more like a financial market.[citation needed]
Hidden unemployment
Hidden, or covered, unemployment is the unemployment of potential workers that is not
reflected in official unemployment statistics, due to the way the statistics are collected. In many
countries only those who have no work but are actively looking for work (and/or qualifying for
social security benefits) are counted as unemployed. Those who have given up looking for work
(and sometimes those who are on Government "retraining" programmes) are not officially
counted among the unemployed, even though they are not employed. The same applies to those
who have taken early retirement to avoid being laid off, but would prefer to be working. The
statistic also does not count the "underemployed" - those with part time or seasonal jobs who
would rather have full time jobs. Because of hidden unemployment, official statistics often
underestimate unemployment rates.
Full employment
Main article: Full employment
In theory, it is possible to abolish cyclical unemployment by increasing the aggregate demand for
products and workers. However, eventually the economy hits an "inflation barrier" imposed by
the four other (supply-side) kinds of unemployment to the extent that they exist.
Some economists see the inflation barrier as corresponding to the natural rate of unemployment.
The "natural" rate of unemployment is defined as the rate of unemployment that exists when the
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labor market is in equilibrium and there is pressure for neither rising inflation rates nor falling
inflation rates. More scientifically, this rate is sometimes referred to as the NAIRU or the NonAccelerating Inflation Rate of Unemployment
No matter what its name, this means that if the unemployment rate gets "too low," inflation will
get worse and worse (accelerate) in the absence of wage and price controls (incomes policies).
Others simply see the possibility of inflation rising as the unemployment rate falls. This is the
famous Phillips curve.
One of the major problems with the NAIRU theory is that no-one knows exactly what the
NAIRU is (while it clearly changes over time). The margin of error can be quite high relative to
the actual unemployment rate, making it hard to use the NAIRU in policy-making.
Another, normative, definition of full employment might be called the ideal unemployment rate.
It would exclude all types of unemployment that represent forms of inefficiency. This type of
"full employment" unemployment would correspond to only frictional unemployment (excluding
that part encouraging the McJobs management strategy) and would thus be very low. However, it
would be impossible to attain this full-employment target using only demand-side Keynesian
stimulus without getting below the NAIRU and suffering from accelerating inflation (absent
incomes policies). Training programs aimed at fighting structural unemployment would help
here.
To the extent that hidden unemployment exists, it implies that official unemployment statistics
provide a poor guide to what unemployment rate coincides with "full employment".
References
1. ^ Sullivan, arthur; Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle
River, New Jersey 07458: Pearson Prentice Hall. pp. 330. ISBN 0-13-063085-3.
http://www.pearsonschool.com/index.cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolution
Id=6724&PMDbCategoryId=&PMDbProgramId=12881&level=4.
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