Types and Causes of Unemployment( Cyclical, Structural, Frictional and More) Flashcards
(21 cards)
What are the two major categories of unemployment?
Disequilibrium Unemployment – when the labour market is not in equilibrium
Equilibrium Unemployment – unemployment that exists even when the labour market is in equilibrium (also called the Natural Rate of Unemployment)
What causes disequilibrium unemployment?
Disequilibrium unemployment happens when wages are above the market-clearing level, or there is a lack of demand in the economy.
What is cyclical (demand-deficient) unemployment?
Caused by a fall in aggregate demand (AD) during a recession
Firms sell less → reduce output → need fewer workers → unemployment rises
It’s called “cyclical” because it follows the economic cycle
How is cyclical unemployment shown on an AD/AS diagram?
AD shifts left (AD1 to AD2)
Real GDP falls (Y1 to Y2)
Price level drops (P1 to P2)
Result: higher unemployment due to lower demand for goods → lower demand for labour (derived demand)
What factors can cause a leftward shift in AD (fall in AD)?
Higher interest rates (discourage borrowing and spending)
Higher taxes (income or corporation tax)
Falling consumer or business confidence
Cuts in government spending
Stronger exchange rate (reduces exports)
How do Keynesian economists view disequilibrium unemployment?
They believe the labour market can remain stuck in disequilibrium due to sticky wages and prices, creating persistent excess supply (i.e. unemployment) even when demand falls.
What is real-wage unemployment?
Occurs when wages are set above the market equilibrium, creating excess supply of labour
Often caused by minimum wage laws, trade unions, or wage inflexibility
What happens on the labour market diagram when wages are too high?
Wages set above equilibrium → contraction in labour demand (firms hire less)
More workers willing to work at high wages → excess supply of labour
The gap between labour supplied and demanded = real-wage unemployment
What causes wages to be set above market equilibrium?
Government intervention: e.g. high minimum wage laws
Strong trade unions: push wages above equilibrium through bargaining power
Result: real-wage (classical) unemployment due to excess supply of labour
What is meant by the “Natural Rate of Unemployment”?
It is the level of unemployment that exists when the labour market is in equilibrium.
Not due to lack of demand
Even when all who are willing and able to work have jobs or are in transition, some unemployment still exists naturally
What are the three types of unemployment that make up the natural rate?
Structural Unemployment – Due to mismatches in skills or geographical immobility
Frictional Unemployment – When workers are between jobs or looking for a better one (often voluntary)
Seasonal Unemployment – Temporary unemployment due to seasonal changes in demand (e.g. ski instructors in summer)
What causes structural unemployment?
Occupational immobility: workers don’t have the skills for available jobs
Geographical immobility: workers can’t or won’t move to areas where jobs are available
Often caused by changes in the economy (e.g. decline of coal, rise of tech)
What causes structural unemployment?
It occurs due to a long-term change in the structure of the economy or industry, leading to a mismatch between workers’ skills or location and job opportunities.
What are the two types of labour immobility that cause structural unemployment?
Occupational Immobility – Workers’ skills do not match available jobs
Geographical Immobility – Workers are unwilling or unable to move to where jobs are available
What is occupational immobility and why does it happen?
Workers don’t have the skills needed for new jobs
Often caused by technological change or decline in old industries (e.g. coal, steel)
Example: Bank staff replaced by digital banking systems
What is geographical immobility and why does it happen?
Workers can’t or won’t physically move to job locations
Causes:
Family ties or preferences
Housing market issues
Poor infrastructure or transport links
What is comparative advantage and how can it lead to structural unemployment?
A country or firm has comparative advantage when it can produce a good or service at a lower opportunity cost than another
If foreign firms are more efficient, domestic industries may shrink, leading to structural unemployment in those sectors
How does losing comparative advantage cause structural unemployment?
If a foreign country becomes more efficient at producing a good, demand for the domestic industry falls
This leads to industry decline, closures, and long-term unemployment in affected sectors
Example: UK textile industry declining due to cheaper overseas production
How can modernisation lead to structural unemployment?
Existing industries may adopt new technologies or methods
Workers may lack the new skills needed to stay employed
This creates a skills gap unless retraining or reskilling occurs
How does economic transition from one sector to another cause unemployment?
Economies often shift from primary → secondary → tertiary sectors
New sectors require different skills
Workers in declining sectors may struggle to adapt or lack training
What role does education play in reducing structural unemployment?
A responsive education system should equip workers with relevant, modern skills
In many cases (especially in LICs), education is inaccessible or outdated
This worsens the mismatch between labour supply and demand
