A person is considered to be unemployed if he doesn’t currently doesn’t have a job and is actively searching for one. The distinction that someone is actively seeking a job is important otherwise they are not counted in the labor force. The unemployment rate, which is a measure of unemployment in the economy, is the number of unemployed people over the total labor force. Monetarists would focus on supply side policies, trying to reduce the rate of inflation to boost employment.
Types of Unemployment
This type is dependent on seasons, such as hiring extra people during the holiday season when more people are required. Seasonal unemployment is completely unavoidable, however, firms could retain workers beyond that time period.
This refers to people who are in between jobs. These people are switching jobs or looking for new ones. This type, while temporary, is also caused by failing firms, poor job performance, or obsolete skills. Governments can minimize frictional unemployment by making the process in between quitting and getting hired quicker and more efficient.
This type relies on the business cycle. This typically occurs when people lose their job during a downturn or a fall in Aggregate Demand since there is a lack of demand to keep employing the same number of people. During a recession, employment will be low and conversely during a boom period employment will be high. An expansionary demand policy can help reduce the effects of cyclical unemployment.
This is a long-term type of unemployment that occurs because advancements in technologies. Globalization is a significant cause of structural unemployment in many countries. For example: due to email, people send fewer letters every year, so the post office has to fire more people. To combat this, the government can have programs to train people for upcoming industries, create pension plans that take better care of people after they retire, provide subsidies or make the firing process more expensive.
Costs of Unemployment
Individuals and families lose a source of income. Those who are unemployed, may find it harder to find jobs in the future. There is a fall in the standard of living as unemployment increases in an economy, more people start buying inferior goods because they have lower incomes.
Fall in GDP
An decrease in employment leads to a loss of output as fewer people will be able to produce goods and services. The economy will produce below or within its own production possibility frontier. The country is not running at full capacity.
The government collects lower tax revenues as fewer people are working and earning a taxable income.
When the employment rate falls, there are more people unemployed who apply for welfare benefits. This results in an increase in government spending will increase as the government has to hand out more benefits.
There may be private costs to society because of increased alcohol and drug problems associated with an increase in unemployment. Studies have shown that there maybe an increase in crime rates too. People who are unemployed will also suffer a loss of confidence in their ability. Many people who become unemployed will also suffer stress related illnesses and depression.
Firms face lower wage cost as the size and availability of the labor force increases. More people are willing to get jobs at lower rates. Many firms may also have to also spend more resources on training new employees because they have been out of work for so long or lack the skills required in their new jobs. Training new employees uses up a firm’s time and resources.