CHAPTER 43: Employment and Unemployment
Full employment is a situation where people who are economically active in the workforce and
are willing and able to work (at going wage rates) are able to find employment.
The unemployed are those who are in the workforce, but who are without jobs. In this context,
the unemployment rate is defined as the percentage of the labour force that is unemployed.
Unemployment Rate = (Unemployed/ Total Labour Force)
1-Equilibrium Unemployment (Or Natural Unemployment)
Equilibrium Unemployment is unemployment which exists when the aggregate demand for
labour equal the aggregate supply for labour. Those willing and able to work at the current
wage rate will have a job. However some people of labour force for some reason are not willing
to accept jobs at the current wage rate.
The causes of Equilibrium/Natural Unemployment
1- Frictional (search) Unemployment
It occurs during people leave their jobs, like resign voluntarily or made redundant, those are
temporarily unemployed while they are looking for a new job. Many qualified workers seeking
work are not able to find new jobs right away, usually because of a lack of complete information
about new job openings. Sometimes employers may be not offering their job to the first that
applied, as they will search for other candidates.
2- Seasonal Unemployment
Seasonal unemployment is when demand for workers fluctuates according to the time of the
year. For example for a fisherman cannot go to sea if there is rainy/monsoon season, a tourist
guide will only have work during school holidays or off-peak season and then farmers will be
unemployed during non-harvesting or monsoon/rainy months.
3- Structural Unemployment
It takes part when the structure of economy changes caused by expanding industries. This
unemployment takes part because of the change in the demand pattern, which is cause by a
change in taste, fashion or even competition from substitutes such as produced by other
domestic industries or from the imported alternatives. For example, there is no more use and
fashionable to wear the furs.
Technological Unemployment
It is a kind of structural unemployment that takes place when the technological advancements
resulted in the labour saving techniques that allow all the same level of output to be produced
with lesser units of labour.
Regional Unemployment
The structural unemployment which takes part within the particular region will be causing
regional unemployment. For example the decline in coal mining industry takes part it makes the
decline in the coal mining at the whole region.
Voluntary and involuntary unemployment: Voluntary unemployment occurs when someone
who is able to work is not willing to do so, even though suitable work is available. Most
, frictional unemployment is considered voluntary because one is looking for work rather than
taking any job available. Some economists claim that structural unemployment can often be
voluntary as those with specific skills may not be willing to take lower-skilled work.
Involuntary unemployment occurs when those who are able and willing to work at the going
wage rate cannot find work. The main form of this is demand deficient or cyclical
unemployment which is linked to the trade cycle and the lack of aggregate demand causing the
supply of workers wanting to work exceeding the demand for them. Some structural, especially
technological, unemployment may also be involuntary
The natural rate of unemployment is the rate of unemployment where real wages have found
their free market level and where the aggregate supply of labour is equal to the aggregate
demand for labour. At the natural rate, all those wanting to work at the current real wage rate
are employed and there is no involuntary unemployment.
Determinants
The factors that determine the natural rate of unemployment in a country at a particular time
are supply-side factors. They relate to the causes of voluntary, frictional and structural
unemployment. Supplyside factors include:
• the value of unemployment benefits relative to the value of low pay
• national minimum wage legislation
• the quality of education and training
• how workers are affected by periods of unemployment
• the quantity and quality of information about job vacancies and workers’
• the degree of labour mobility
• the flexibility of workers and firms.
To reduce the natural rate of unemployment, a government will seek to increase both the
willingness and ability of workers to work at the current wage rate. Among the policy tools it
may use are
•Widen the gap between low pay and unemployment benefit. This could be achieved by
cutting unemployment benefit and/or the basic rate of income tax.
• Remove any restrictions on the amount firms can pay their workers. A national minimum
wage might prevent firms from doing this.
• Improve education and training. A more skilled labour force is likely to find it easier to switch
from one job to another and so suffer less from structural unemployment. Training of the
unemployed can be important in overcoming the problem of hysteresis.
• Increase the quantity and quality of information about the job market. If firms know more
Full employment is a situation where people who are economically active in the workforce and
are willing and able to work (at going wage rates) are able to find employment.
The unemployed are those who are in the workforce, but who are without jobs. In this context,
the unemployment rate is defined as the percentage of the labour force that is unemployed.
Unemployment Rate = (Unemployed/ Total Labour Force)
1-Equilibrium Unemployment (Or Natural Unemployment)
Equilibrium Unemployment is unemployment which exists when the aggregate demand for
labour equal the aggregate supply for labour. Those willing and able to work at the current
wage rate will have a job. However some people of labour force for some reason are not willing
to accept jobs at the current wage rate.
The causes of Equilibrium/Natural Unemployment
1- Frictional (search) Unemployment
It occurs during people leave their jobs, like resign voluntarily or made redundant, those are
temporarily unemployed while they are looking for a new job. Many qualified workers seeking
work are not able to find new jobs right away, usually because of a lack of complete information
about new job openings. Sometimes employers may be not offering their job to the first that
applied, as they will search for other candidates.
2- Seasonal Unemployment
Seasonal unemployment is when demand for workers fluctuates according to the time of the
year. For example for a fisherman cannot go to sea if there is rainy/monsoon season, a tourist
guide will only have work during school holidays or off-peak season and then farmers will be
unemployed during non-harvesting or monsoon/rainy months.
3- Structural Unemployment
It takes part when the structure of economy changes caused by expanding industries. This
unemployment takes part because of the change in the demand pattern, which is cause by a
change in taste, fashion or even competition from substitutes such as produced by other
domestic industries or from the imported alternatives. For example, there is no more use and
fashionable to wear the furs.
Technological Unemployment
It is a kind of structural unemployment that takes place when the technological advancements
resulted in the labour saving techniques that allow all the same level of output to be produced
with lesser units of labour.
Regional Unemployment
The structural unemployment which takes part within the particular region will be causing
regional unemployment. For example the decline in coal mining industry takes part it makes the
decline in the coal mining at the whole region.
Voluntary and involuntary unemployment: Voluntary unemployment occurs when someone
who is able to work is not willing to do so, even though suitable work is available. Most
, frictional unemployment is considered voluntary because one is looking for work rather than
taking any job available. Some economists claim that structural unemployment can often be
voluntary as those with specific skills may not be willing to take lower-skilled work.
Involuntary unemployment occurs when those who are able and willing to work at the going
wage rate cannot find work. The main form of this is demand deficient or cyclical
unemployment which is linked to the trade cycle and the lack of aggregate demand causing the
supply of workers wanting to work exceeding the demand for them. Some structural, especially
technological, unemployment may also be involuntary
The natural rate of unemployment is the rate of unemployment where real wages have found
their free market level and where the aggregate supply of labour is equal to the aggregate
demand for labour. At the natural rate, all those wanting to work at the current real wage rate
are employed and there is no involuntary unemployment.
Determinants
The factors that determine the natural rate of unemployment in a country at a particular time
are supply-side factors. They relate to the causes of voluntary, frictional and structural
unemployment. Supplyside factors include:
• the value of unemployment benefits relative to the value of low pay
• national minimum wage legislation
• the quality of education and training
• how workers are affected by periods of unemployment
• the quantity and quality of information about job vacancies and workers’
• the degree of labour mobility
• the flexibility of workers and firms.
To reduce the natural rate of unemployment, a government will seek to increase both the
willingness and ability of workers to work at the current wage rate. Among the policy tools it
may use are
•Widen the gap between low pay and unemployment benefit. This could be achieved by
cutting unemployment benefit and/or the basic rate of income tax.
• Remove any restrictions on the amount firms can pay their workers. A national minimum
wage might prevent firms from doing this.
• Improve education and training. A more skilled labour force is likely to find it easier to switch
from one job to another and so suffer less from structural unemployment. Training of the
unemployed can be important in overcoming the problem of hysteresis.
• Increase the quantity and quality of information about the job market. If firms know more
