Types of Unemployment (Which Is the Worst)
Sometimes, companies and business are forced to lay off employees because of a number of reasons – restructuring, downsizing, or even when the company goes out of business. If you have ever been laid off for one reason or the other, you have experienced some type of unemployment.
Economists measure different types of unemployment to help them determine the health of an economy and help governments and businesses navigate changes in the economy.
In this article, we are going to look at the different types of unemployment. Before we look at the different types of unemployment, however, let’s start by understanding what unemployment is.
WHAT IS UNEMPLOYMENT?
Unemployment refers to a situation where a person of working age who is looking for work is unable to find employment. According to the Bureau of Labor Statistics, for someone to be termed as unemployed, they have to meet these three conditions:
- They do not have any job, not even a temporary or part-time job.
- They are currently available for work.
- They have actively searched for a job in the past four weeks.
According to these conditions set by the BLS, people who have stopped looking for work are not regarded as unemployed. They are not even counted as part of the labor force. If, for example, an unemployed person wins some money through the lottery and stops looking for work as they enjoy their new found wealth, that person is not considered as unemployed.
Actively looking for work means that a person has either contacted an employer, a recruiter, or even friends and relatives in relation to finding work, submitted resumes or sent out job applications, answered job advertisements, and so on.
Someone who has used passive job search methods, such as attending job training courses, is not considered to be actively looking for work, since such methods do not have the potential to help this person get the attention of potential employers.
The unemployment rate is calculated by dividing the number of unemployed persons by the total number of people forming the labor force.
Now that we understand what unemployment is and how it is calculated, we can move on to the different types of unemployment.
Frictional unemployment, also referred to as search unemployment, is a type of unemployment that occurs due to normal turnover in the labor market, as people who have left their jobs go through the motions of finding another job. In the course of the year, it is inevitable that some workers will change jobs.
Once they do, it will take some time for these workers to learn about new job opportunities, apply for these jobs, go for interviews and get hired. People going through this process are said to be frictionally unemployed.
Let’s assume that Annette, who lives and works Nevada, is getting married to Phil, who works in North Carolina. After their wedding, Annette might decide to leave her job in Nevada and find a new job in North Carolina, where she will be closer to her husband. During this period, as Annette looks for a new job in North Carolina having left her old job, Annette is said to be frictionally unemployed. Similarly, if another person, Melvin, feels unsatisfied with his current job and decides to quit and look for another job, he will be said to be frictionally unemployed during the period between the two jobs.
Frictional unemployment also occurs as people who have not been previously employed go through the process of finding work. For instance, if Peggy has just graduated from University and started her job search, it might take her a couple of months before she finds employment. In the period she is actively searching for a job, Peggy is also frictionally unemployed. Similarly, mothers who are returning to the workforce postpartum are also said to be frictionally unemployed.
Frictional unemployment stems from economic frictions arising from redeployment of labor. This redeployment may be due to changes in employee demands for employment or changes in employer’s demand for different types of labor. For instance, if the demand for some goods or services changes, employees who were specialized in the production of these goods or provision of these services will need some time to move to a different line of work.
Frictional unemployment occurs not because there is decreased demand for labor, but rather due to difficulties in getting labor and opportunities together. Frictional unemployment is temporary and is considered a natural part of the job search process. Actually, frictional unemployment is beneficial to the economy to some extent, since it makes it possible for workers to move to jobs where they can maximize their productivity.
There is not much that can be done to reduce frictional unemployment. However, the situation can be improved through measures that improve the mobility of labor, such as provision of information about job openings, provision of information on how workers can improve their job search, improvement in transportation facilities, use of employment exchanges to provide employment assistance, and so on.
Structural unemployment occurs in situations where long term changes in the economy and market conditions create a mismatch between the skills needed by employers and the skills that workers possess. Structural unemployment can also be defined as long term unemployment brought about by a decline in demand for production in certain industries or changes in the production process, leading to reduction in labor requirements or even disinvestment in that particular industry.
In some cases, structural unemployment can be a result of geographical reasons, such as in situations where workers may live in areas that are too far away from places where jobs are available. Structural unemployment can also be made worse by some extraneous factors such as government policy, competition and technology.
A good example of structural unemployment is the massive loss of well-paying manufacturing jobs over the last three decades in the United States, caused by a migration of production jobs to Asian countries like China, due to lower production costs in these countries. This shift causes workers who were employed in the manufacturing industry in the United States to be structurally unemployed. In this case, the cause of structural unemployment is globalization.
Structural unemployment is the most common type of unemployment. It is also the worst type of unemployment. Since it is caused by forces other than the business cycle, it is more permanent in nature compared to other types of unemployment. Its effects can last for decades.
Structural unemployment is also harder to correct and may need radical changes for the situation to be rectified. Workers who are structurally unemployed are either forced to learn a new skill or move to regions where their specific skill set is still in demands, both of which are difficult for many workers.
While some governmental policies may be put in place to reduce structural unemployment, their effect is usually minimal, since the market is no longer in need of the skills of the structurally unemployed group.
Alex works at an auto factory. If the economy goes into a recession today, less and less people will spend their money buying cars. With the decreased demand for cars, there will be less work to do at the factory, and in a bid to maintain profit margins, the auto maker might be forced to lay off Alex. In this case, Alex will have experienced cyclic unemployment. Once the economy strengthens, more people will start buying cars, there will be more work to be done at the factory, and Alex will probably be rehired.
Cyclical unemployment occurs as a result of the contraction phase of the business cycle. This phase is characterized by a dramatic decrease in the aggregate demand for goods and services, which in turn forces businesses to lay off employees in order to minimize costs. This kind of unemployment is referred to as cyclical because it is related to the business cycle. Over time, the economy goes through many ups and downs. During periods of contraction, workers get laid off in large numbers in what is known as downsizing.
Once the economy enters the expansion phase, workers get rehired in large numbers. Cyclical unemployment can also be referred to as demand-deficient unemployment, since it is caused by a deficiency in demand or purchasing power. Cyclical unemployment is a major cause of high unemployment. Since it is caused by a decrease in general demand, cyclical unemployment affects all industries simultaneously.
Cyclical unemployment can lead to a downward spiral of unemployment. Workers who have been laid off due to decreased demand now have less disposable income to spend on things they need, which lowers demand and business revenue even further, resulting in more workers being laid off. If no intervention is made, this downward spiral continues until the supply of labor decreases enough to match the decreased demand. This can lead to very high levels of unemployment.
This is what happened during after the stock market crash of 1929. The government failed to intervene, causing a downward spiral of unemployment and decreased demand that led to the Great Depression, which lasted a decade and raised the unemployment rate to 25%. It was demand for military equipment resulting from the start of World War II that finally lifted the economy from the Great Depression.
Cyclical unemployment can also lead to structural unemployment. In a bid to minimize costs and maintain profit margins, businesses which have already laid off workers due to an economic downtown might implement some changes in their production process. Once the economy re-enters the expansion phase, workers who had been laid off might need new skills in order to be rehired. Those unwilling to go back to school and learn new skills end up being structurally unemployed, since their former skills are no longer required.
What then should be done to prevent the self-fulfilling downward spiral of cyclical unemployment? The solution is to implement measures that will increase total expenditure in the economy, which will in turn drive up the effective demand. This can be done through expansive monetary policies and fiscal policies such as deficit financing. Fortunately, since cyclical unemployment follows the phases of the business cycle, it cannot be a permanent phenomenon.
People often confuse seasonal unemployment with cyclical unemployment, owing to the fact that both of them occur at certain times and not others. There is a difference between the two. Whereas cyclical unemployment is tied to the business cycle, seasonal unemployment is tied to regular changes in the season. For instance, ice cream vendors are seasonally unemployed during winter, since there is minimal demand for ice cream.
Ski instructors, on the other hand, become seasonally unemployed in summer, since most of the skiing happens during winter. Workers who harvest crops are also seasonally unemployed in between harvests.
Seasonal unemployment is caused by a seasonal pattern of demand or due to the fact that some industries only produce or distribute their products seasonally. As a result, these industries hire high numbers of workers in peak season and lay many of them off during off-peak seasons. Seasonal unemployment is mainly common in industries such as farming, construction, entertainment, fishing, and tourism.
It’s good to note that the Bureau of Labor Statistics does not keep track of seasonal unemployment. Instead, they make adjustments to their estimates to factor in such seasonal variables.
In January 2018, a union representing workers in the oil sands extractions industry made a public outcry against one the biggest companies in the industry. The company was in the process of implementing autonomous ore-hauling trucks, a move that would see over 400 workers laid off by the company. If the company succeeded in the implementation of the driverless trucks and the subsequent laying off of workers, these employees would have experienced technological unemployment.
Technological unemployment is a type of unemployment that occurs in situations where workers lose their jobs due to technological improvement. Companies are always looking for ways of minimizing costs or making production more efficient.
This might happen through the introduction of new machinery, introduction of labor-saving devices, improvement of production methods, and so on. When this happens, it is inevitable that some workers will lose their jobs as a result. Technological unemployment can be termed as a subset of structural unemployment. The laid off workers lose their jobs since their skills are no longer needed in the market.
In developed countries, technological unemployment is usually a temporary phenomenon. The introduction of more capital promotes creation of many allied industries and leads to diversification of activities, creating new job opportunities that absorb the workers who became unemployed due to technological change. For instance, when the tractor was introduced, it displaced a great number of workers who were working in farms.
As demand for tractors rose, many of those who had lost their jobs in the farms found work in factories assembling and repairing tractors. Similarly, the introduction of unmanned military drones reduced the demand for military pilots, but it increased the demand for drone controllers and analysts to make sense of the information collected by drones. Since most technology in developed countries is at advanced stages, their economies do not experience any sudden shifts due to technology either, thus minimizing the impact of technological unemployment.
In underdeveloped countries, technological change is a much bigger problem. Introduction of new technology leads to displacement of huge portions of the labor force, yet the creation of allied industries is minimal, so few jobs are created to absorb the unemployed workers. The solution to technological unemployment is to ensure the large scale creation of new jobs in other fields.
This type of unemployment is also referred to as induced unemployment or real wage unemployment. This type of unemployment occurs in situations where wages are higher than the laws of supply and demand can support. Since companies have to pay more per employee, they can only afford a few employees, forcing them to lay off the other employees.
In some cases, classical unemployment can even force businesses to do away with some positions. Classical unemployment is caused by one of the following situations:
- Powerful trade unions negotiate for salaries and benefits that are above the market equilibrium.
- The government comes up with legal minimum wages that are higher than the market equilibrium.
- Wages set by long term contracts exceed the equilibrium due to recession, forcing a company to lay off some workers to maintain the wages set by the contract.
To make it easier to understand, let’s use an example. Let us assume that a business is willing to pay $30,000 to its salespeople. The business knows that the revenue brought by each salesperson is above $30,000, therefore the business can still remain profitable at this wage rate.
At the same time, the union for salespeople within the area has negotiated for salaries of $40,000 per year, and no unemployed worker in the area is willing to work as a salesperson for less than $40,000.
In this case, the real wages unemployed workers in the area are willing to accept is higher that the wages the company is ready to pay. Consequently, the business will refrain from hiring salespeople, leading to an instance of classical unemployment.
In some industries, workers are employed to perform contractual jobs on a day-to-day basis. Once the contract – which is usually short term in nature – terminates, the worker becomes unemployed and has to find another job elsewhere or get into a new contract with the same firm if they have some more work.
Such a worker is said to be experiencing casual unemployment until they find another job. In other words, casual unemployment is the inevitable time delay when a casual worker is in between two jobs.
Casual unemployment is common in industries where workers are hired on short term contract basis, such as agriculture and construction industries. Casual unemployment also happens in situations where some extra workers are required to perform a one-off job.
For instance, in a dockyard, extra workers might be hired to help with loading or unloading. Once the task is done, the extra workers are let go and they become casually unemployed. The same happens in times of events such as weddings and parties.
A caterer providing services in a wedding might hire extra workers to help serve food at the wedding. Once the wedding is over, these extra workers become casually unemployed. Casual unemployment is also common in the film industry where junior actors are hired on a casual basis.
This is a broad category of unemployment which covers some of the other types of unemployment discussed above. Natural unemployment is defined as the lowest rate of unemployment that an economy can support. Even when an economy is at its healthiest, it is inevitable that there will be some level of unemployment. It is impossible for 100% of the labor force to be employed. Natural unemployment can therefore be considered as a baseline below which the levels of unemployment cannot decline.
Natural unemployment is termed as ‘natural’ because it is caused by other factors that are independent of the state of the economy. No economic or market fix can be made to eliminate natural unemployment. Since unemployment rates cannot fall below the natural unemployment rate, an economy that has reached this point is said to be at full employment. Natural unemployment may be due to frictional, structural or classical unemployment.
Economists consider a natural unemployment rate of around 4% to be an indicator of a healthy economy. The lowest natural unemployment rate ever experienced in the United States was 2.5%, in May 1953.
Take a situation where a family in an urban setting owns a business that can be effectively run by 5 people. Unable to find employment in any other place, all the 8 members of the family decide to work in the family business. While it might seem like all the members of this family are employed, three of them are actually unemployed. The work they do does not in any way improve the productivity of the family business. If anything, they might end up hampering productivity.
Also referred to as hidden unemployment, disguised unemployment is a form of unemployment where it may seem that some people are employed, when in fact they are not. Disguised unemployment occurs in situations where there is overemployment or where employees are working in a redundant manner. With surplus manpower employed, the marginal productivity of some individuals falls to zero.
Even if such employees are removed, the level of output does not get affected. This kind of unemployment is termed as disguised unemployment because the individuals who are disguisedly unemployed are not counted in official unemployment statistics, yet their employment provides little value to the economy in terms of productivity.
Disguised unemployment is common in developing countries where increasing populations result in a surplus in the labor force.
Unemployment occurs when people of working age who are willing to work cannot find any jobs. Unemployment is a natural part of the job search process; it is impossible for 100% of a country’s labor force to be employed. The different types of unemployment are frictional, structural, cyclical, seasonal, technological, classical, casual, natural and disguised unemployment.
As you might have noticed from this article, many types of unemployment occur as a result of immobility of labor.
Unemployment is divided into different types to help economists understand the economy and come up with strategies to lower the rate of unemployment. The goal of any economy is to achieve full employment.
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