Unemployment


Unemployment is the state not being in paid employment or self-employment but currently available for work. Unemployment is measured by the unemployment rate, which is the number of people who are unemployed as a percentage of the labour force during the reference period.
Unemployment can have many sources, such as the following below:
Unemployment and the status of the economy can be influenced by a country through, for example, fiscal policy. Furthermore, the monetary authority of a country, such as the central bank, can influence the availability and cost for money through its monetary policy.
In addition to theories of unemployment, a few categorisations of unemployment are used for more precisely modelling the effects of unemployment within the economic system. Some of the main types of unemployment include structural unemployment, frictional unemployment, cyclical unemployment, involuntary unemployment and classical unemployment. Structural unemployment focuses on foundational problems in the economy and inefficiencies inherent in labor markets, including a mismatch between the supply and demand of laborers with necessary skill sets. Structural arguments emphasize causes and solutions related to disruptive technologies and globalization. Discussions of frictional unemployment focus on voluntary decisions to work based on individuals' valuation of their own work and how that compares to current wage rates added to the time and effort required to find a job. Causes and solutions for frictional unemployment often address job entry threshold and wage rates.
According to the UN's International Labour Organization, there were 172 million people worldwide without work in 2018.
Because of the difficulty in measuring the unemployment rate by, for example, using surveys or through registered unemployed citizens, statistical figures such as the employment-to-population ratio might be more suitable for evaluating the status of the workforce and the economy if they were based on people who are registered, for example, as taxpayers.

Definitions, types, and theories

The state of being without any work yet looking for work is called unemployment. Economists distinguish between various overlapping types of and theories of unemployment, including [|cyclical or Keynesian unemployment], frictional unemployment, structural unemployment and classical unemployment definition. Some additional types of unemployment that are occasionally mentioned are seasonal unemployment, hardcore unemployment, and hidden unemployment.
Though there have been several definitions of "voluntary" and "involuntary unemployment" in the economics literature, a simple distinction is often applied. Voluntary unemployment is attributed to the individual's decisions, but involuntary unemployment exists because of the socio-economic environment in which individuals operate. In these terms, much or most of frictional unemployment is voluntary since it reflects individual search behavior. Voluntary unemployment includes workers who reject low-wage jobs, but involuntary unemployment includes workers fired because of an economic crisis, industrial decline, company bankruptcy, or organizational restructuring.
On the other hand, cyclical unemployment, structural unemployment, and classical unemployment are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by the unemployed in the past, and classical unemployment may result from the legislative and economic choices made by labour unions or political parties.
The clearest cases of involuntary unemployment are those with fewer job vacancies than unemployed workers even when wages are allowed to adjust and so even if all vacancies were to be filled, some unemployed workers would still remain. That happens with cyclical unemployment, as macroeconomic forces cause microeconomic unemployment, which can boomerang back and exacerbate those macroeconomic forces.

Real wage unemployment

Classical, natural, or real-wage unemployment, occurs when real wages for a job are set above the market-clearing level, causing the number of job-seekers to exceed the number of vacancies. On the other hand, most economists argue that as wages fall below a livable wage, many choose to drop out of the labour market and no longer seek employment. That is especially true in countries in which low-income families are supported through public welfare systems. In such cases, wages would have to be high enough to motivate people to choose employment over what they receive through public welfare. Wages below a livable wage are likely to result in lower labor market participation in the above-stated scenario. In addition, consumption of goods and services is the primary driver of increased demand for labor. Higher wages lead to workers having more income available to consume goods and services. Therefore, higher wages increase general consumption and as a result demand for labor increases and unemployment decreases.
Many economists have argued that unemployment increases with increased governmental regulation. For example, minimum wage laws raise the cost of some low-skill laborers above market equilibrium, resulting in increased unemployment as people who wish to work at the going rate cannot. Laws restricting layoffs may make businesses less likely to hire in the first place, as hiring becomes more risky.
However, that argument overly simplifies the relationship between wage rates and unemployment by ignoring numerous factors that contribute to unemployment. Some, such as Murray Rothbard, suggest that even social taboos can prevent wages from falling to the market-clearing level.
In Out of Work: Unemployment and Government in the Twentieth-Century America, economists Richard Vedder and Lowell Gallaway argue that the empirical record of wages rates, productivity, and unemployment in America validates classical unemployment theory. Their data shows a strong correlation between adjusted real wage and unemployment in the United States from 1900 to 1990. However, they maintain that their data does not take into account exogenous events.

Cyclical unemployment

Cyclical, deficient-demand, or Keynesian unemployment occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. Demand for most goods and services falls, less production is needed and consequently, fewer workers are needed, wages are sticky and do not fall to meet the equilibrium level, and unemployment results. Its name is derived from the frequent ups and downs in the business cycle, but unemployment can also be persistent, such as during the Great Depression.
With cyclical unemployment, the number of unemployed workers exceeds the number of job vacancies and so even if all open jobs were filled, some workers would still remain unemployed. Some associate cyclical unemployment with frictional unemployment because the factors that cause the friction are partially caused by cyclical variables. For example, a surprise decrease in the money supply may suddenly inhibit aggregate demand and thus inhibit labor demand.
Keynesian economists, on the other hand, see the lack of supply of jobs as potentially resolvable by government intervention. One suggested intervention involves deficit spending to boost employment and goods demand. Another intervention involves an expansionary monetary policy to increase the supply of money, which should reduce interest rates, which, in turn, should lead to an increase in non-governmental spending.

Full employment

In demands based theory, it is possible to abolish cyclical unemployment by increasing the aggregate demand for products and workers. However, the economy eventually hits an "inflation barrier" that is imposed by the four other kinds of unemployment to the extent that they exist. Historical experience suggests that low unemployment affects inflation in the short term but not the long term. In the long term, the velocity of money supply measures such as the MZM velocity is far more predictive of inflation than low unemployment.
Some demand theory economists see the inflation barrier as corresponding to the natural rate of unemployment. The "natural" rate of unemployment is defined as the rate of unemployment that exists when the labour market is in equilibrium, and there is pressure for neither rising inflation rates nor falling inflation rates. An alternative technical term for that rate is the NAIRU, the Non-Accelerating Inflation Rate of Unemployment. Whatever its name, demand theory holds that if the unemployment rate gets "too low", inflation will accelerate in the absence of wage and price controls.
One of the major problems with the NAIRU theory is that no one knows exactly what the NAIRU is, and it clearly changes over time. The margin of error can be quite high relative to the actual unemployment rate, making it hard to use the NAIRU in policy-making.
Another, normative, definition of full employment might be called the ideal unemployment rate. It would exclude all types of unemployment that represent forms of inefficiency. This type of "full employment" unemployment would correspond to only frictional unemployment and so would be very low. However, it would be impossible to attain this full-employment target using only demand-side Keynesian stimulus without getting below the NAIRU and causing accelerating inflation. Training programs aimed at fighting structural unemployment would help here.
To the extent that hidden unemployment exists, it implies that official unemployment statistics provide a poor guide to what unemployment rate coincides with "full employment".