Unemployment

1. Different types of unemployment: Demand deficient or cyclical unemployment: Occurs when there is not enough aggregate demand in the economy for suppliers to expand output and employ everyone who wants to work. It is also known as cyclical as unemployment increases when the economy slumps and goes into recession, and decreases when output expands and the economy grows.

Structural unemployment: Occurs when the type of output produced by an economy changes. E.g. UK changing from a primary and secondary based economy to a tertiary and quaternary service based economy. Miners and factory workers are no longer needed in the new economy. The extent of it depends on the occupational or geographical mobility of the workforce, the technological advancements (robots replacing workers), and the regional health of a certain industry (if all of the coal mines in the north shut down, then the newly unemployed miners would have a tough time finding new jobs which their skills are relevant to).

Seasonal unemployment: Where temporary job contracts for certain times of the year like Christmas come to an end. Mainly happens in the tourism and hotel/catering industries.

Frictional/ Search unemployment: Occurs when people leave one job to find another one. It is mainly short term as the majority find a new job quickly. Imperfect information can occur when people dont find out about a new job which suits them. Job centers exist to reduce this.

Unemployment decreases as the productive potential of the economy increases. This is because overall aggregate supply is increased to meet the increase in aggregate demand. Firms, in order to increase output need to employ more labour so unemployment falls. If the demand for one product such as cars increases, then firms will need to employ more labour to expand their supply to meet the demand. Demand for fuel will also increase as cars and fuels are complements, so more oil will need to be extracted, which will increase the necessity for labour. Jobs are therefore created because of derived demand. During the economic cycle, if there is a slump, firms will wait to see whether the slump turns into a recession or if it is a minor blip. They delay the laying off of workers as a result. The natural rate of unemployment is the rate when the labour market is in equilibrium. This is the point where the benefit of employing more labour equals the cost of employing it. If this point were exceeded, then profits would fall as the extra cost of a unit of labour would outweigh the extra profit generated by employing that unit of labour.