Types of unemployment

There are several types of unemployment, each one defined in terms of cause
and severity.

Cyclical unemployment
Cyclical unemployment exists when individuals lose their jobs as a result of a
downturn in aggregate demand (AD). If the decline in aggregate demand is
persistent, and the unemployment long-term, it is called either demand
deficient,general, or Keynesian unemployment. For example, unemployment
levels of 3 million were reached in the UK in the last two recessions, between
1980 and 1982, and between 1990 and 1992. In the most recent recession of
2008-2010, unemployment levels rose to 2.4m in the last quarter of 2009, and
are likely to peak at over 2.5m during 2010.
(Source: ONS).

Demand deficient unemployment

This is caused by a lack of aggregate demand, with insufficient demand to
generate full employment.

Structural unemployment
Structural unemployment occurs when certain industries decline because of
long term changes in market conditions. For example, over the last 20 years
UK motor vehicle production has declined while car production in the Far East
has increased, creating structurally unemployed car workers.Globalisation is
an increasingly significant cause of structural unemployment in many
countries.

Regional unemployment
When structural unemployment affects local areas of an economy, it is called
regional unemployment. For example, unemployed coal miners in South
Wales and ship workers in the North East add to regional unemployment in
these areas.

Classical unemployment

Classical unemployment is caused when wages are too high. This

explanation of unemployment dominated economic theory before the 1930s,
when workers themselves were blamed for not accepting lower wages, or for
asking for too high wages. Classical unemployment is also called real
wageunemployment.

Seasonal unemployment
Seasonal unemployment exists because certain industries only produce or
distribute their products at certain times of the year. Industries where seasonal
unemployment is common include farming, tourism, and construction.

Frictional unemployment
Frictional unemployment, also called search unemployment, occurs when
workers lose their current job and are in the process of finding another one.
There may be little that can be done to reduce this type of unemployment,
other than provide better information to reduce the search time. This suggests
that full employment is impossible at any one time because some workers will
always be in the process of changing jobs.

Voluntary unemployment
Voluntary unemployment is defined as a situation when workers choose not to
work at the current equilibrium wage rate. For one reason or another, workers
may elect not to participate in the labour market. There are several reasons
for the existence of voluntary unemployment including excessively generous
welfare benefits and high rates of income tax. Voluntary unemployment is
likely to occur when the equilibrium wage rate is below the wage necessary to
encourage individuals to supply their labour.

The natural rate of unemployment

This is a term associated with new Classical and monetarist economists. It is

defined as the rate of unemployment that still exists when the labour market it
in equilibrium, and includes seasonal, frictional and voluntary unemployment.
The US economist Milton Friedman first used the concept to help explain the
connection between unemployment and inflation. Friedman argued that if
unemployment fell below the natural rate there would be an increase in the
rate of inflation.
The different types of unemployment can be illustrated through the AJ-LF
model.
See also: the Phillips Curve.
Over the last 30 years, employment in the service sector has increased to
over 70% of total employment, while employment in manufacturing has
decreased to under 20%. Since the 1940s employment in the primary sector,
including agriculture, has been less that 3% of the workforce.
Recent changes have created two speed economy, with a relatively buoyant
service sector and a declining manufacturing one.
The main reasons are:
1. Globalisation and the rise of new low cost overseas competitor
countries.
2. Increased competition within the domestic product market.
3. The increasing comparative advantage of the UK as an international
supplier of financial services.

Structural unemployment and labour

mobility

Labour immobility is likely to increase structural unemployment. This is

because those industries that are growing and need labour, often
called sunrise industries, are not necessarily able to employ the same workers
who have been displaced in the declining, sunset industries.
There are three types of labour immobility:

Geographical immobility
Geographical immobility occurs when workers are not willing or able to move
from region to region, or town to town. Geographical mobility is made worse
by immense house pricevariation between regions. It may be extremely
difficult for workers in Yorkshire to sell their home and buy an equivalent one
in London.
Other factors also contribute to geographical immobility, such as strong social
and family ties, and parents being unwilling to disrupt their childrens
education by changing schools. The stresses of moving home can also be a
deterrent to mobility for some.

Industrial immobility
Industrial immobility occurs when workers do not move between industries,
such as moving from employment in motor industry to employment in the
insurance industry. Industrial immobility has affected the UK, and many other
industrial countries, as the growth of service industries, and the decline of
manufacturing industries, has increased the need for mobility.

Occupational immobility
Occupational immobility occurs when workers find it difficult to change jobs
within an industry. For example, it may be very difficult for a doctor to retrain to
be a dentist.

Industrial and occupation immobility are most likely to happen when skills are
not transferable between industry and job.
Information failure also contributes to labour immobility because workers may
be immobile because they do not know where all the suitable jobs for them
are.
A resulting problem with labour market immobility is that it can create regional
unemployment, which is a type ofstructural unemployment. This means that
a change in the structure of industry leaves some people unable to respond
by changing job, industry, or location and as a result, they remain temporarily
or permanently unemployed.
Immobility can also lead to rising labour costs, as firms have to increase
wages to encourage workers to re-locate.

Labour market or government failure?

New Classical economists would tend to see structural unemployment as an
example of government failure. Labour markets do not clear, they argue,
because wages are not allowed to adjust effectively, and the price mechanism
is distorted. By removing distortions and imperfections in the labour market
workers would move more quickly from job to job.
For example, by keeping welfare benefits to a minimum there is an incentive
to retrain and look for paid work. Welfare benefits can trap individuals into a
life of unemployment because of the effects of moral hazard and the
disincentive effect it creates. This increases labour immobility, and hence
contributes to structural unemployment.
However, labour immobility can also be addressed from the perspective of
labour market failure. Training and re-training are regarded as merit goods,
where individuals under perceive the long term benefit to themselves. They

also fail to appreciate the positive externalities that training and re-training
generate for the wider community. This means that there is a significant role
for the state in providing free or subsidised training and retraining
programmes.
In addition, there is the potential situation of labour marketpoaching. Why
should a firm in the booming service sector provide free training to a displaced
worker from the manufacturing sector if the worker will leave for another job
shortly after training? Why should firms do any training at all if they believe
that workers will be poached by higher wages? The poacher can, of course,
afford to pay higher wages because of savings in training costs.