The types of unemployment and what distinguishes them

Overview

Frictional unemployment and explain why some of it is unavoidable, structural unemployment and identify what causes it and cyclical unemployment and explain the mechanism that produces it.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What distinguishes voluntary from involuntary unemployment?

   Model answer

   Voluntary unemployment describes people who are not willing to accept work at the wage currently on offer, perhaps because they judge the wage too low relative to the alternatives available to them, so they remain out of work by choice at that wage. Involuntary unemployment describes people who would accept work at the going wage but cannot find an employer willing to hire them. The test is whether a job at the current wage is available and refused, or wanted and unobtainable.

2. 2

   Why does the distinction between voluntary and involuntary unemployment matter for choosing a policy?

   Model answer

   Involuntary unemployment means there are fewer jobs than people willing to fill them at the going wage, so the remedy involves creating demand for labour or removing whatever prevents the wage from clearing the market. Voluntary unemployment means jobs exist at a wage some people decline, so the remedy involves altering the incentive to accept work or raising the productivity that would justify a higher wage. Applying a demand stimulus to voluntary unemployment produces inflation rather than jobs, so the diagnosis determines whether the policy can work at all.

3. 3

   Define frictional unemployment and explain why some of it is unavoidable.

   Model answer

   Frictional unemployment is the short-term joblessness of people moving between jobs, including new entrants to the labour market searching for their first position. It is unavoidable because information is imperfect and matching takes time: a worker does not instantly know which vacancies exist and an employer does not instantly know which applicant is suitable, so a gap between leaving one job and starting the next is inherent in a labour market where people are free to move.

4. 4

   Why is a certain amount of frictional unemployment considered beneficial rather than purely a cost?

   Model answer

   The time spent searching allows a worker to find a job matching their skills rather than accepting the first thing available, and a better match means higher productivity for the rest of the employment relationship. A labour market with no search time would be one in which nobody could move to a more suitable employer, which would trap labour in low-productivity uses. The benefit only holds while search periods are short, since a prolonged search represents lost output with no offsetting gain in match quality.

5. 5

   Define structural unemployment and identify what causes it.

   Model answer

   Structural unemployment arises from a mismatch between the skills, occupations or locations of the unemployed and the requirements of the available vacancies, so the jobs and the workers exist simultaneously but cannot be brought together. It is caused by lasting changes in the pattern of demand or in technology, which destroy jobs in some industries while creating them in others requiring different skills, and by the immobility that prevents workers moving between them. It persists because retraining and relocation take years, and it does not disappear when demand recovers.

6. 6

   Distinguish occupational immobility from geographical immobility, giving the barrier that causes each.

   Model answer

   Occupational immobility is the inability to move between types of work, caused by the skills, qualifications or experience required in the expanding occupation that the worker does not have, and which cannot be acquired quickly. Geographical immobility is the inability to move between areas, caused chiefly by the cost and availability of housing where the vacancies are, and reinforced by family ties, the cost of moving and differences in local services. Both convert what would be temporary displacement into lasting structural unemployment, and both require different remedies: training for the first, housing and relocation support for the second.

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