Unemployment occurs when a person is available and willing to work but currently without work. The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed. The unemployment rate is also used in economic studies and economic indices such as the United States' Conference Board's Index of Leading Indicators as a measure of the state of macroeconomics.
Most economic schools of thought agree that the cause of involuntary unemployment is that wages are above the market clearing rate. However, there are disagreements as to why this would be the case: economists argue that in a downturn, wages stay high because they are naturally 'sticky', whilst others argue that minimum wages and union activity keep them high.
Keynesian economics emphasizes unemployment resulting from insufficient effective demand for goods and services in the economy (cyclical unemployment). Others point to structural problems and inefficiencies inherent in labour markets (structural unemployment). Classical or neoclassical economics tends to reject these explanations, and focuses more on rigidities imposed on the labor market from the outside, such as minimum wage laws, taxes, and other regulations that may discourage the hiring of workers (classical unemployment). Yet others see unemployment as largely due to voluntary choices by the unemployed (frictional unemployment). Alternatively, some blame unemployment on disruptive technologies or globalisation.
There is also disagreement on how exactly to measure unemployment. Different countries experience different levels of unemployment; traditionally, the USA experiences lower unemployment levels than countries in the European Union, although there is variant there, with countries like the UK and Denmark outperforming Italy and France and it also changes over time (e.g. the Great depression) throughout economic cycles.
Involuntary unemployment
In The General Theory , Keynes argued that neo-classical economic theory did not apply during recessions because of oversaving and private investor timidity. In consequence, people could be thrown out of work involuntarily and not be able to find acceptable new employment.
This conflict between the neoclassical and Keynesian theories has had strong influence on government policy. The tendency for government is to curtail and eliminate unemployment through increases in benefits and government jobs, and to encourage the job-seeker to both consider new careers and relocation to another city.
Involuntary unemployment does not exist in agrarian societies nor is it formally recognized to exist in underdeveloped but urban societies, such as the mega-cities of Africa and of India/Pakistan. In such societies, a suddenly unemployed person must meet their survival needs either by getting a new job at any price, becoming an entrepreneur, or joining the underground economy of the hustler.
Involuntary unemployment is discussed from the narrative standpoint in stories by Ehrenreich, the narrative sociology of Bourdieu, and novels of social suffering such as John Steinbeck's The Grapes of Wrath .
Solutions
Societies try a number of different measures to get as many people as possible into work. However, attempts to reduce the level of unemployment beyond the Natural rate of unemployment generally fail, resulting only in less output and more inflation.
Demand side
According to classical economic theory, markets reach equilibrium where supply equals demand; everyone who wants to sell at the market price can. Those who do not want to sell at this price do not; in the labour market this is classical unemployment. Increases in the demand for labour will move the economy along the demand curve, increasing wages and employment. The demand for labour in an economy is derived from the demand for goods and services. As such, if the demand for goods and services in the economy increases, the demand for labour will increase, increasing employment and wages. Monetary policy and fiscal policy can both be used to increase short-term growth in the economy, increasing the demand for labour and decreasing unemployment.
Supply side
However, the labour market is not efficient: it doesn't clear. Minimum wages and union activity keep wages from falling, which means too many people want to sell their labour at the going price but cannot. Supply-side policies can solve this by making the labour market more flexible. These include removing the minimum wage and reducing the power of unions. Other supply side policies include education to make workers more attractive to employers.
Supply side reforms also increase long-term growth. This increased supply of goods and services requires more workers, increasing employment. It is argued that supply side policies, which include cutting taxes on businesses and reducing regulation, create jobs and reduce unemployment.
Types of unemployment
Though there have been several definitions of voluntary and involuntary unemployment in the economics literature, a simple distinction is often applied. Voluntary unemployment is attributed to the individual's decisions, whereas involuntary unemployment exists because of the socio-economic environment (including the market structure, government intervention, and the level of aggregate demand) in which individuals operate. In these terms, much or most of frictional unemployment is voluntary, since it reflects individual search behavior.
On the other hand, cyclical unemployment, structural unemployment, and classical(natural) unemployment, are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by the unemployed in the past, while classical (natural)unemployment may result from the legislative and economic choices made by labor unions and/or political parties. So in practice, the distinction between voluntary and involuntary unemployment is hard to draw. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers even when wages are allowed to adjust, so that even if all vacancies were to be filled, there would be unemployed workers. This is the case of cyclical unemployment, for which macroeconomic forces lead to microeconomic unemployment. See also: unemployment types
Frictional unemployment
Frictional unemployment occurs when a worker moves from one job to another. While he searches for a job he is experiencing frictional unemployment. This applies for fresh graduates looking for employment as well. This is an example of a productive part of the economy, increasing both the worker's long term welfare and economic efficiency, and is also a type of voluntary unemployment. It is a result of imperfect information in the labor market, because if job seekers knew that they would be employed for a particular job vacancy, almost no time would be lost in getting a new job, eliminating this form of unemployment.
Frictional unemployment is always present in an economy, so the level of involuntary unemployment is properly the unemployment rate minus the rate of frictional unemployment, which means that increases or decreases in unemployment are normally under-represented in the simple statistics.
Classical unemployment
Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level. Libertarian economists like F.A. Hayek argued that unemployment increases the more the government intervenes into the economy to try to improve the conditions of those with jobs. For example, minimum wages raise the cost of labourers with few skills to above the market equilibrium, resulting in people who wish to work at the going rate but cannot as wage enforced is greater than their value as workers becoming unemployed. They believed that laws restricting layoffs made businesses less likely to hire in the first place, as hiring becomes more risky, leaving many young people unemployed and unable to find work.
Some, such as Murray Rothbard, suggest that even social taboos can prevent wages from falling to the market clearing level.
Cyclical or Keynesian unemployment
Cyclical or Keynesian unemployment, also known as demand deficient unemployment, occurs when there is not enough aggregate demand in the economy. This is caused by a business cycle recession, and wages not falling to meet the equilibrium level
Structural unemployment
Structural unemployment is caused by a mismatch between jobs offered by employees and potential workers. This may pertain to geographical location, skill variation, and many other factors. If such a mismatch exists, frictional unemployment is likely to be more significant as well. - For example, in the late 1990s there was a tech bubble, creating demand for computer specialists. In 2000–2001 this bubble collapsed. A housing bubble soon formed, creating demand for real estate workers, and many computer workers had to retrain to find employment.
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