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Causes and effects of unemployment

Causes of unemployment 

Frictional unemployment 
Voluntary or transitional unemployment due to people moving between jobs involved in the job search. 

Structural unemployment 
Unemployment that occurs when demand for workers in a particular sector falls, and the transfer of workers from these sectors to sectors where demand is picking up is very difficult due to the different skills required. For example, taxi drivers who have been laid off due to the rise of self-driving cars (this process is known as capital-labour substitution) do not have the skills to fill vacancies in the software engineering sector. There is a mismatch between the skills required in the contracting and expanding sectors. So lack of skills for available jobs or other structural changes in the economy like deindustrialisation that causes redundancies. 

Cyclical unemployment 
Involuntary unemployment that occurs due to a lack of demand for workers because of lack of aggregate demand. When due to a lack of AD known as 'demand-deficient unemployment'. Often arises in a period of recession. 

Classical unemployment 
When wages are set above their market clearing level. So there are is excess demand for the wages at this price, and the excess are the unemployed. Due to firms being able to hire less workers than are seeking employment at a set wage. 

Voluntary unemployment 
When benefits are set relatively high compared to low-paid jobs, so people have incentive to be unemployed and simply claim benefits. 

Consequences of unemployment 

An economy with unemployment is working beneath full capacity on the PPF, and so isn't making the best use of available resources. If the unemployed were employed, they would be increasing productivity in the economy. So unemployment leads to a loss of potential output and a reduction in allocative efficiency, as well as a loss of potential economic growth. 

 Unemployment also wastes the resources invested in training and education. 

 The longer someone is unemployed, the more skill and motivation they lose, and the less attractive they are to potential employers. This is known as the hysteresis effect. 

 During periods of high unemployment, the government is forced to spend more on benefits and other welfare payments, while it loses tax revenue at the same time. At these times, consumer confidence also falls, so more money is leaked out of the circular flow of incomes as there is a greater propensity to save. 

 There are also social costs associated with rising unemployment such as higher crime and divorce rates as well as falling real incomes and worsening inequalities of both wealth and income. 

 Possible benefits of unemployment 

Lower inflation rates - as more people are looking for jobs, the bargaining power of workers is dampened as firms have such a large pool to choose from. Therefore, wages can be set lower, meaning that consumers have less disposable income and inflation is lower. 

 Environmental gain - as consumption and production slow, the pressure on non-renewable resources is reduced, as are carbon emissions. 

 Available workers - there is always a pool of available workers ready to take up new jobs as they become available. NB: depends on the workers' geographical and occupational mobility. 

 Entrepreneurship opportunities - some of the unemployed are free to change career path, think up new ideas or start a business. This leads to more productivity. 


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