Understanding unemployment

What is unemployment?

Unemployment occurs when people are without work and actively seeking work. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labor force. During periods of recession, an economy usually experiences a relatively high unemployment rate.

Types of unemployment

Urban unemployment

Only 30 per cent population lives in urban areas. Therefore, the magnitude of urban unemployment is not high as that of rural unemployment exist in the urban areas.

Educated unemployment

Indian Universities and colleges have been producing lakhs of graduates every year. Education in India is not job oriented. Educated unemployed entails a waste of the country’s most valuable resources, the human capital.

Industrial unemployment

The Britishers totally destroyed the village based industries. The condition of artisians and farmers was not good. They migrated to the urban areas in search of jobs. But they could only increase the number of unemployed persons. In recent years many industries have been modernized. New and automation techniques of production have rendered many workers unemployed. It is called technological unemployment.

Industrial activities are increasing by the leaps and bounds, fluctuations in the business activities affect the level of employment. Industrial recession of 1966-68 rendered many workers unemployed. Recent power shortage in many states has slackened the industrial activity and increased the number of unemployed persons.

Rural unemployment

Seasonal unemployment

This is primarily confined to agriculture. Agriculture does not provide employment round the year. It is also known as perennial unemployment. Sowing and harvesting season ranges between five to seven months. For the rest of the period the cultivator has to remain idle. Experts believe than an Indian cultivator remains unemployed for five to six months. When the next sowing season starts he again goes back to cultivation. This is called seasonal unemployment.

Disguised unemployment’

People are engaged more than actually required for the production. The unemployment exists in agriculture sector. It is a common phenomenon in developing nations like India. Their marginal productivity is zero.

Other types of unemployment

Classical unemployment

Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level, causing the number of job-seekers to exceed the number of vacancies.

Many economists have argued that unemployment increases with increased governmental regulation. For example, minimum wage laws raise the cost of some low-skill laborers above market equilibrium, resulting in increased unemployment as people who wish to work at the going rate cannot (as the new and higher enforced wage is now greater than the value of their labor). Laws restricting layoffs may make businesses less likely to hire in the first place, as hiring becomes more risky.

However, this argument overly simplifies the relationship between wage rates and unemployment, ignoring numerous factors, which contribute to unemployment. Some, such as Murray Rothbard, suggest that even social taboos can prevent wages from falling to the market-clearing level.

In Out of Work: Unemployment and Government in the Twentieth-Century America, economists Richard Vedder and Lowell Gallaway argue that the empirical record of wages rates, productivity, and unemployment in American validates classical unemployment theory. Their data shows a strong correlation between adjusted real wage and unemployment in the United States from 1900 to 1990. However, they maintain that their data does not take into account exogenous events.

Cyclical unemployment

Cyclical, deficient-demand, or Keynesian unemployment, occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. Demand for most goods and services falls, less production is needed and consequently fewer workers are needed, wages are sticky and do not fall to meet the equilibrium level, and mass unemployment results. Its name is derived from the frequent shifts in the business cycle although unemployment can also be persistent as occurred during the Great Depression of the 1930s.

With cyclical unemployment, the number of unemployed workers is exceeding the number of job vacancies, so that even if full employment was attained and all open jobs were filled, some workers would still remain unemployed. Some associate cyclical unemployment with frictional unemployment because the factors that cause the friction are partially caused by cyclical variables. For example, a surprise decrease in the money supply may shock rational economic factors and suddenly inhibit aggregate demand.

Keynesian economists on the other hand see the lack of demand for jobs as potentially resolvable by government intervention. One suggested interventions involves deficit spending to boost employment and demand. Another intervention involves an expansionary monetary policy that increases the supply of money which should reduce interest rates which should lead to an increase in non-governmental spending.

Structural unemployment

Structural unemployment occurs when a labour market is unable to provide jobs for everyone who wants one because there is a mismatch between the skills of the unemployed workers and the skills needed for the available jobs. 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. 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, 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 labour 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 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 labour force but also the workers made redundant by increased labour productivity.

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. This results in substantial, permanent structural unemployment.

Frictional unemployment

Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. It is sometimes called search unemployment and can be voluntary based on the circumstances of the unemployed individual.

Frictional unemployment is always present in an economy, so the level of involuntary unemployment is properly the unemployment rate minus the rate of frictional unemployment, which means that increases or decreases in unemployment are normally under-represented in the simple statistics.

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, work-time, location, seasonal industries, attitude, taste, and a multitude of other factors. New entrants (such as graduating students) and re-entrants (such as former homemakers) can also suffer a spell of frictional unemployment.

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 through multiple means including providing education, advice, training, and assistance such as daycare centers.

The frictions in the labour market are sometimes illustrated graphically with a Beveridge curve, a downward-sloping, convex curve that shows a correlation between the unemployment rate on one axis and the vacancy rate on the other. Changes in the supply of or demand for labour cause movements along this curve. An increase (decrease) in labour market frictions will shift the curve outwards (inwards).