Unemployment

Simply put, unemployment is a situation in which an individual in an economy is looking for a job and can't find
one. That said, economists divide unemployment into a number of different categories, since defining types of
unemployment more precisely sheds some light on why unemployment occurs and what can be done about it. It
is basically difference between quantity of labour supply (Ls) and quantity of labour demand (Ld). Therefore,
unemployment can be defined as the quantity of labour supplied exceeds the quantity of labour demanded (Ls-
Ld) > 0.

Types of Unemployment
1. Voluntary versus Involuntary Unemployment
At a very basic level, unemployment can be broken down into voluntary unemployment- unemployment due to
people willingly leaving previous jobs and now looking for new ones- and involuntary unemployment-
unemployment due to people getting laid off or fired from their previous jobs and needing to find work elsewhere.
Not surprisingly, economists generally view involuntary unemployment as a larger problem than voluntary
unemployment since voluntary unemployment likely reflects utility-maximizing household choices.

2. Frictional Unemployment
The easiest type of unemployment to explain is known as frictional unemployment. Frictional unemployment is
unemployment that occurs because it takes workers some time to move from one job to another. While it may be
the case that some workers find new jobs before they leave their old ones, a lot of workers leave or lose their
jobs before they have other work lined up. In these cases, a worker must look around for a job that it is a good fit
for his/her, and this process takes some time. During this time, the individual is considered to be unemployed, but
unemployment due to frictional unemployment is usually thought to last only short periods of time and not is
specifically problematic from an economic standpoint. This is particularly true now that technology is helping both
workers and companies make the job search process more efficient. Frictional unemployment can also occur
when students move into the work force for the first time, when an individual moves to a new city and needs to
find work, and when women re-enter the work force after having children.

3. Cyclical Unemployment
It's probably not surprising that unemployment is higher during recessions and depressions and lower during
periods of high economic growth. Because of this, economists have coined the term cyclical unemployment to
describe the unemployment associated with business cycles occurring in the economy. Cyclical
unemployment occurs during recessions because, when demand for goods and services in an economy falls,
some companies respond by cutting production and laying off workers rather than by reducing wages and prices.
When this happens, there are more workers in an economy than there are available jobs, and unemployment
must result. As an economy recovers from a recession or depression, cyclical unemployment tends to naturally
disappear. As a result, economists usually focus on addressing the root causes of the economic downturns
themselves rather than think directly about how to correct cyclical unemployment in and of itself.

Note: The term business cycle (or economic cycle) refers to economy-wide fluctuations in production, trade
and economic activity in general over several months or years in an economy organized on free-enterprise
principles. The business cycle is the upward and downward movements of levels of GDP (gross domestic
product) and refers to the period of expansions and contractions in the level of economic activities (business
fluctuations) around its long-term growth trend. Basically business cycle gives us an idea about fluctuations over
a time period and it shows that how we can differentiate between a trend line of GDP and business cycles. These
fluctuations occur around a long-term growth trend, and typically involve shifts over time between periods of
relatively rapid economic growth (an expansion or recovery), and periods of relative stagnation or decline (a
contraction or recession). Business cycles are usually measured by considering the growth rate of real gross
domestic product. Despite being termed cycles, these fluctuations in economic activity can prove unpredictable.




Business cycle consists of mainly three terms. They are ----

Peak / Boom The highest point of a fluctuation. Each peak indicating, economy is operating close to fall
capacity, high degree of utilization of factors of production.
Recession / Contraction An overall decline in economic activity mainly observed as slowdown in output and
employment.
Recovery / Expansion The phase of a business when output and employment are moving back their lowest
points towards normal levels

4. Structural Unemployment
Structural unemployment is a form of unemployment where, at a given wage, the quantity of labour supplied
exceeds the quantity of labour demanded, because there is a fundamental mismatch between the number of
people who want to work and the number of jobs that are available. In this case, the unemployed workers may
lack the skills needed for the jobs due to structural changes in firms/companies/industries.

5. Seasonal unemployment
Seasonal unemployment is unemployment due to changes in the season - such as a lack of demand for
department store Santa Clauses in January. Seasonal unemployment is a form of structural unemployment, as
the structure of the economy changes from month to month; rate of unemployment can be affected. Certain
industries can be affected they are Catering and leisure, Construction, Retailing, Tourism, and Agriculture.