Types of unemployment?

Introduction

This page looks at the different types of unemployment - cyclical, classical / real wage unemployment, frictional seasonal and structural unemployment. An important discussion point is the issue of voluntary unemployment? Where do they fit into our unemployment types - frictional perhaps? Or do those people not count as unemployed at all?

Enquiry question

What are the different types of unemployment existing in any economy?

Lesson time: 50 minutes

Lesson objectives:

Describe, using examples, the meaning of frictional, structural, seasonal and cyclical (demand-deficient) unemployment. Distinguish between the causes of frictional, structural, seasonal and cyclical (demand-deficient) unemployment.

Teacher notes:

1. Beginning activity - begin with the opening presentation and then discuss this as a class. (Allow 10 minutes in total)

2. Processes - technical vocabulary - the students can learn the background information from the opening video and the questions on the first activity, plus the list of key terms. Allow 20 minutes.

3. Application of theory - activities 2 and 3 develop the theory, looking at some solutions for the different types of unemployment. (10 minutes)

4. Final activity - activity 4 contains a paper one style question (10 minutes)

Beginning activity

Watch the following presentation and then provide your own examples of unemployed workers in your city?

Available at: Unemployment

Key terms:

Seasonal unemployment - an unemployed person, employed for part of the year, e.g. a ski instructor or waiter in a tourist resort.

Frictional unemployment - worker who is in between jobs and therefore only unemployed temporarily. This person may have lost their job or have graduated college and has begun the task of looking for work. This would also apply to contract workers whose contracts have expired or those workers who have found work and are waiting for that job to start.

Structural unemployment - long term unemployment caused as a result of a fall in the demand for a particular type of labour occurring as a result of the changing structure of an economy due to changes in the demand/supply and/or technology. It occurs when there is a mismatch between the skills of unemployed workers and the jobs available or as a result of rigidities in the labour market.

Real wage unemployment - unemployment caused by workers being unwilling or unable to accept paid employment. The wage offered is insufficient to maintain the standard of living that a worker desires. This type of unemployment is common in high wages economies, where a combination of generous unemployment benefits and a high cost of living make it difficult for some workers to accept a low wage position.

Cyclical unemployment - a person unemployed because of a downturn in the economic cycle (a recession). Once the economy has returned to its natural rate of unemployment then the worker is likely to find work, given their qualifications, skills and experience.

The natural rate of unemployment - this consists of the level of frictional and structural unemployment present in the economy. Such a level of unemployment is natural because even the healthiest of economies will have workers starting and leaving positions, looking for better jobs as well as some industries in decline as well as other new industries emerging.

The activities on this worksheet are available as a worksheet in PDF form at: Unemployment types

Activity 1: Types of unemployment

Watch the following short video and then answer the questions which follow:

(1) Describe the following types of unemployment?

A fifty year old man with a successful career as a gas exploitation engineer. He has chosen to taken voluntary retirement as there are no suitable jobs in the area where he lives. The reserves of gas have dried up and he has no desire to move elsewhere where suitable jobs are available.

Structural unemployment

A student leaves university with a First class degree in information technology. There are a number of positions open to her but she decides to take a 3 month backpacking holiday in Thailand before taking up her new position.

Frictional unemployment

A farmer who is declared medically unfit to work due to a disability that prevents him from strenuous physical work.

Structural unemployment

A computer engineer whose business collapses during the financial crisis of 2008 / 2009

Cyclical unemployment

A footballer in a lower division club whose season has finished. The new season starts in four months time and he is not paid during the close season.

Seasonal unemployment

A designer of beautiful designer clothing whose business is affected by the slow down in the world economy.

Cyclical unemployment

A computer engineer, paid on a contract basis, whose employment contract comes to an end.

Frictional unemployment

A young women has been out of work for a long period of time and has no formal school qualifications. The only work available is part-time and pays her no more than she receives in unemployment benefits.

Real wage unemployment

(2) Complete the following sentence, the relationship between GDP and __________________ unemployment is inversely correlated.

cyclical

(3) Explain possible measures that a government might employ to reduce the high rate of unemployment among certain ethic groups as well as the high rates of unemployment among the young.

This is obviously a long and difficult question, but from an economic viewpoint policies that might be effective include subsidised or free training/re-education programmes as well as greater restrictions on out of work benefits to incentivise more people to accept low paid work, rather than rely on benefits.

Activity 2: The natural rate of unemployment

(a) The table describes some of the measures that a government might employ to reduce the unemployment rate in the economy. By each one explain the type of unemployment that the measure is designed to tackle.

Policy	How will it work	Type of unemployment
The creation of job centres and recruitment agencies	Facilitates greater sharing of information about job vacancies within an economy.	All but primarily frictional
Re-education and retraining schemes aimed at the unemployed	Help address the skills gaps within the unemployed.	Structural
Expansionary fiscal and monetary policies	Boosting AD to close a recessionary gap in the economy.	Cyclical
Policies aimed at reducing the bargaining power of trade unions and professional associations.	Increases the level of labour market flexibility by preventing those organisations from restricting the supply of labour into certain professions.	Real wage
Provision of socialised housing for new workers to an area of low unemployment.	Improves the geographical mobility of the labour force, by helping unemployed workers to relocate to other parts of the country where the available jobs are.	Structural
Reducing the level or restricting access to out of work benefits	Encourages more workers to take a low paid job, rather than remain on unemployment benefit.	Real wage unemployment

Activity 3: The correlation between GDP per capita and the rate of unemployment

Study the information in the table below and answer the following questions:

Is there a correlation between GDP per capita and the rate of unemployment?
If not, what else may account for the differences between unemployment rates in selected countries?

Unemployment rate in selected countries (2021)

Country	Number of unemployed people as a % of the labour force	GDP per capita (PPP)
Greece	28%	$ 29,799
Spain	26%	$ 40,100
South Africa	26%	$ 12,482
Ireland	13.5%	$ 86,700
France	10.2%	$ 46,184
Turkey	9.3%	$ 28,424
USA	7.3%	$ 68,309
Mexico	4.9%	$ 19,704
Malaysia	3.1%	$ 28,364

There would appear to be little correlation between the two variables. Instead, differences in unemployment rates can be explained by a combination of the following measures:

Differences in real wage unemployment levels because of different minimum wage levels in different nations, as well as different access to out of work benefits between different nations. For example a number of European countries, with high levels of GDP per capita, also have high levels of unemployment, in part as a result of generous unemployment benefits and a high level of minimum wage. This effectively discourages some individuals from accepting low paid employment.
Different ways of recording unemployment statistics between different nations.
Countries may be at different points in their fiscal cycle. In other words some nations may be in recession and have high rates of cyclical unemployment while other nations may be at the full employment level.
Some nations have more flexible labour markets than others. As a general rule the UK and USA have greater levels of labour market flexibility than a number of EU nations. They also have generally lower levels of unemployment.

Activity 4: Link to the assessment in paper one

(a) Illustrate using a diagram the difference between structural and cyclical / demand-deficient unemployment. [10 marks]

Command term: Illustrate

The command term illustrate requires responses to use appropriate diagrams to demonstrate the difference between the two types of unemployment.

Responses should include the following in any response:

A definition of both structural and demand-deficient unemployment. Responses should note that cyclical / demand deficit unemployment is caused by a lack of aggregate demand in the economy, where as structural unemployment can be caused by a lack of geographical and / or occupational mobility in the labour market.

A diagram(s) illustrating both types of unemployment. The cyclical unemployment diagram (to the left), should show a deflationary / recessionary gap resulting from a fall in demand in the economy. Alternatively responses could include a PPF diagram with a point clearly marked inside the PPF curve, indicating that the economy is producing below its full employment level.

A structural unemployment diagram should include a fall in demand for certain kinds of labour, illustrated on diagram 2 by a fall in the number of workers in that industry from Q1 to Q2.

Examples of some of the causes of structural unemployment e.g. the decline of some industries due to competition from low wage economies, greater automation or a change in consumption patterns e.t.c.

Responses should also include a recognition that cyclical unemployment is likely to be temporary while structural unemployment may end up permanent without appropriate government action.

An explanation that cyclical unemployment occurs in a recession where as structural unemployment will occur even when the economy is in equilibrium.

(b) Using world examples, evaluate the view that the use of supply-side policies is the most effective method of reducing unemployment in the economy. [15 marks]

Command term: Evaluate

Key term: Unemployment, supply side policies, demand side policies

The command term evaluate requires a response which compares the effectiveness of supply side policies, in comparison with alternative policies (demand side policies) in reducing unemployment.

Real world examples might include a range of nations that have used demand and supply side policies to reduce unemployment levels, with varying degrees of success. For example, following the financial crisis of 2007-9, the USA government adopted a policy of expansionary demand side policies and saw sharp falls in cyclical unemployment, while Japan, over the same period did the same but their economy remains stuck in a recessionary cycle - and with significant higher national debt levels as a result. Examples of nations that have used supply side policies to reduce levels of structural unemployment include the UK and USA throughout the 1980 and 1990s.

Responses should include the following:

Examples of supply-side policies that may be used to reduce long term unemployment include measures to improve the nation's infrastructure, investments in human capital as well as increased spending on research and development.

A recognition that supply side measures, unlike demand side policies, are effective in reducing structural unemployment rates, by providing new jobs for workers whose previous skills have become redundant or providing those workers with new skills so that they can compete in the modern jobs market.

Responses should also include an AD/AS diagram illustrating a right shift in the AS curve or an outward shift in the PPF curve, following an increase in aggregate supply in the economy. This is illustrated In diagram one by a growth in productive capacity and real GDP rising from Y1 to Y2, creating more job opportunities as a result of supply side policies.

A recognition that another advantage of supply side policies is that are more likely than other job creation policies at reducing unemployment in the long run, but do not provide a short term fix, sometimes making them less popular with governments.

A recognition that supply side measures, like all economic policies also have some disadvantage e.g. time-lags and the costs associated with large scale investment and government training projects. Another disadvantage is that supply-side policies aimed at increased labour market flexibility or a reduction in access to unemployment benefits may also come at a social cost in terms of a reduction in labour protection or employment security.

In the interests of balance responses should then consider alternative job creation policies, e.g. demand side policies.

An explanation that expansionary demand-side policies can be effective in raising the level of national income / economic growth by increasing one or more of either C, G, I or X. This in turn reduces cyclical unemployment by increasing the demand for labour. Illustrated by diagram two showing a rise in real GDP from Y1 − Y2.

Examples of different monetary and fiscal demand-side policies that may increase either consumption, government spending, investment or net exports.

A discussion of the weaknesses of demand-side policies in reducing unemployment. For example, time-lags, inflationary pressure, higher levels of government debt, increased import levels or crowding out.

A recognition that another significant weakness of demand side policies is that they are only effective in reducing cyclical unemployment levels. Demand side measures are not effective, for example, in reducing levels of equilibrium unemployment.

Relevant real world examples might include fast growing economies such as China, South Korea and Singapore e.t.c. that have successfully employed supply side measures to reduce unemployment levels. Similarly, nations such as UK, USA and Germany have maintained very low levels of unemployment in part a result of labour market de-regulation and cuts to out of work benefits.

IBDP Economics - Student pages

INTHINKING REVISION SITES

www.StudyIB.net