Types of Unemployment - Which Type is Typical? [Virtual Economy]


Unemployment Theories - Types of Unemployment - Which type is typical?

To help economists (and they often need help!) to analyse unemployment and why it happens, they often split unemployment into different types. To find out more about any particular type follow the links below:

Demand-deficient or cyclical unemployment

Demand-deficient unemployment occurs when there is not enough demand to employ all those who want to work. It is a type that Keynesian economists focus on particularly, as they believe it happens when there is a disequilibrium in the economy.

It is also often known as cyclical unemployment because it will vary with the trade cycle Look up Trade Cycle in glossary . When the economy is booming, there will be lots of demand and so firms will be employing large numbers of workers. Demand-deficient unemployment will at this stage of the cycle be fairly low. If the economy slows down, then demand will begin to fall. When this happens firms will begin to lay workers off as they do not need to produce so much. Demand-deficient unemployment rises. The behaviour of demand-deficient unemployment will exactly mirror the trade cycle.

If you look at the past behaviour of unemployment in the explanation section, you can clearly see its cyclical nature.

Seasonal unemployment

Seasonal unemployment is fairly self explanatory. Father Christmas tends to only be in demand for a short period of the year, and the rest of the year would certainly be classified as seasonally unemployed. Most other seasonal unemployment is less severe than this, and tends to occur in certain industries. Industries that suffer particularly are:

  • Hotel and catering
  • Tourism
  • Fruit picking
  • Father Christmases

The effects of seasonal unemployment are often highly regionalised. Areas such as Cornwall suffer a great deal from this type of unemployment.

Frictional or search unemployment

When somebody loses their job (or chooses to leave it), they will have to look for another one. If they are lucky they find one quite quickly, but they may be unlucky and it may take some time. On average it will take everybody a reasonable period of time as they search for the right job. This creates unemployment while they look. The more efficiently the job market is matching people to jobs, the lower this form of unemployment will be. However, if there is imperfect information and people don't get to hear of jobs available that may suit them then frictional unemployment will be higher.

The better the economy is doing, the lower this type of unemployment is likely to be. This is because people will usually be able to find jobs that suit them more quickly when the economy is doing well.

Structural unemployment

Structural unemployment occurs when the structure of industry changes. As an economy develops over time the type of industries may well change. This may be because people's tastes have changed or it may be because technology has moved on and the product or service is no longer in demand. In the UK many industries that were once major employers have now all but disappeared. Shipbuilding and mining are prime examples of this sort of trend, but there are also many more minor examples as well. The extent of structural unemployment will depend on various things:

  • mobility of labour - if people are able to quickly switch jobs from a declining industry to a rapidly growing one, then there will be less structural unemployment.
  • the pace of change in the economy - the faster the changes taking place in people's tastes and demand and supply, the more structural unemployment there may be as industry has to adapt more quickly to change.
  • the regional structure of industry - if industries that are dying are heavily concentrated in one area, then this may make it much more difficult for people to find new jobs. Both the shipbuilding and mining industries were heavily concentrated and some areas have taken many years to adapt and reduce the level of structural unemployment.

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