Unemployment happens when individuals who are capable and willing to work at the current wage rates are not able to acquire jobs. When there are few available jobs in an economy and yet the labor force of that economy is growing, then unemployment is inevitable. The three main types of unemployment include:
- Structural unemployment
- Frictional unemployment
- Cyclical unemployment
Structural unemployment happens when there is no demand for a particular type of worker. It occurs because there is a mismatch between the expertise of the individuals and what the employers want. Advanced technology may also cause this kind of unemployment because individuals lack skills in operating machinery and this renders them obsolete.
Frictional unemployment happens when workers change jobs or are transitioning from one job to another. The mismatch can be in relation to location, skills, or payment. This unemployment is voluntary and is based on the value a worker accords to his work and salary. New entrants and/or re-entrants into the labor force but yet to find a job also fall into this category of unemployment.
Cyclical unemployment depends on cycles that occur because of economic growth and decline. If a country goes into recession, many people lose their jobs. The aggregate demand for jobs is higher than its supply because fewer goods and services are produced. Hence, fewer workers are needed.
This occurs when there exist those who out of their freewill are refusing to work either because the existing wage rate is not up to their standard or because they prefer staying unemployed.
Measures of Unemployment
Unemployment rate: this is a widely used measure of unemployment. It tries to access and measure the amount of people who do not have a job but are willing to work at the existing wage rate by using statistical computation or estimation. The unemployment rate is a percentage of the total labor force. All the type of unemployment identified here individually forms a fraction of the unemployment rate. Data for measurement can be collected using different methods e.g., the use of a household survey to identify the unemployed, the use of the population ratio of those within the age of workable labor force, making an estimation on the basis of the employed and economic output etc.
Overall payroll employment and the productivity indicators: Monitoring the payroll structure of businesses can be used as a measure of unemployment. When the payroll shrinks/contracts or reduces, it is an indication that the economy is experiencing a decline in growth and productivity whereas, a payroll expansion or recovery is an indication of economic boom evident in a reduction in the unemployment rate.
Reading 17 LOS 17d:
Describe types of unemployment and compare measures of unemployment