TYPES & CAUSES OF UNEMPLOYMENT Lesson objectives: Identify and describe the types and causes of unemployment. Use diagrams to show types of unemployment Created by Ms Zita

Types of Unemployment Unemployment Created by Ms Zita Structural Frictional Cyclical Seasonal Created by Ms Zita

Transitional unemployment due to people moving between jobs Seasonal Regular seasonal changes in employment / labour demand e.g. Tourism, retail, agriculture Structural Arises from the mismatch of skills and job opportunities as the pattern of labour demand changes – linked to labour immobility Frictional Transitional unemployment due to people moving between jobs Cyclical Caused by a fall in or persistent weakness of aggregate demand leading to a decline in GDP and jobs Created by Ms Zita

1. Structural Unemployment Occurs as a result of : Changes in demand for particular types of labour skills – due to new technology Changes in the structure of the economy – new growing industries Vs declining industries eg: agricultural sector declining in importance vs manufacturing growing Changes in the geographical location of industries – due to relocation to other regions or countries – workers who cant relocate lose jobs. labour markets rigidities Created by Ms Zita

What is Labour Market Rigidities? Labour market rigidities - refer to factors that prevent the forces of D+S from operating in the labour market. These include: minimum wage laws Union activities and wage bargaining with employers Employment protection laws Generous unemployment benefits Created by Ms Zita

Type of Market Rigidity Effect minimum wage laws Union activities Employment protection laws Unemployment benefits Leads to higher than equilibrium wages causing unemployment Increases costs for firms to hire workers because they must pay compensation and make firms cautious about hiring Makes remaining unemployed more attractive and reduce incentive to work Created by Ms Zita

Structural Unemployment Diagram 1 Price Level SRAS P1 P2 AD1 AD2 Q2 Q1 RGDP Created by Ms Zita

Changes D for particular labour skill or Changes in Geographical location of jobs Diagram 1: A fall in AD (in all or few industries or local industries that relocates) causes a fall in RGDP produced. Employers fire or lay off workers with inappropriate skills or workers no longer needed due to relocation. Created by Ms Zita

Structural Unemployment Diagram 2 AS2 AS1 P2 P1 AD Q2 Q1 Y Created by Ms Zita

Labour Market Rigidities Diagram 2: Labour market rigidities lead to an increase in the costs of production - Micro: supply shifts to left causing a fall in Q produced Employers hire fewer workers – lead to unemployment Created by Ms Zita

Structural Unemployment Diagram 3 Price of labour = Wages Excess S of labour / unemployment S of labour Wm We D for labour QD Qe QS Quantity of labour Created by Ms Zita

Minimum Wage Laws and Unions Diagram 3: Minimum wage laws and labour unions activities lead to higher than equilibrium wages and lower quantity of labour demanded. Created by Ms Zita

Types of Unemployment & Natural Rate of Unemployment (NARU) The Natural Rate of Unemployment (NARU)– refers to the rate of unemployment which exist when the economy is at full employment - ie the only unemployed people are those who must be unemployed. Subsequently we can therefore conclude that at full employment NARU = Structural + Frictional + Seasonal unemployment Created by Ms Zita 2012

Types of Unemployment & NARU Notice there is no Cyclical Unemployment because every who is cyclically unemployed will have a job at full employment. So when NARU falls we expect an INCREASE in the levels of potential output and a SHIFT in the LRAS curve to the right (both in Neo classical and Keynes models) Created by Ms Zita

Neo Classical Model LRAS 1 LRAS 2 Price Level Yp1 Yp2 Real GDP Created by Ms Zita

Keynesian Model LRAS 1 LRAS 2 Price Level Pl1 Yp1 Yp2 Real GDP Created by Ms Zita

Cyclical Unemployment When an economy produces less than its potential output, cyclical unemployment becomes present in the economy. Cyclical unemployment occurs during a downturn in the business cycle caused by a fall in aggregate demand (also known as demand deficient unemployment) leading the economy to experience a recessionary gap. When AD falls – firms investment declines – output falls – firms hire fewer workers – hence cyclical unemployment rises. Created by Ms Zita

Created by Ms Zita

The 4 Types of Unemployment in relation to AD-AS Model LRAS Price Level SRAS Created by Ms Zita AD Real GDP Yp Recessionary Gap Potential GDP Inflationary Gap

Cyclical Unemployment = 0 At Inflationary Gap: At Recessionary Gap: Unemployment > NARU and there is Cyclical Unemployment in addition to Structural + Seasonal + Frictional unemployment At Potential GDP: Unemployment = NARU Structural + Frictional + Seasonal Unemployment (NARU) Cyclical Unemployment = 0 At Inflationary Gap: Unemployment < NARU because a portion of the Structural, Seasonal and Frictional unemployed find temporary work. Created by Ms Zita