Macroeconomics: What are the Main Causes of Unemployment in an Economy?

Unemployment is present in every economy and measures how healthy an economy is. It is when workers who are able and willing to work don’t have jobs. It is quite impossible to reach zero unemployment no matter how high aggregate demand is because there is always ‘natural unemployment’ that would occur in most businesses booms. A country measure’s unemployment by taking the unemployment rate, which is the number of unemployed, expressed as a percentage of the labor force. (Labor force-the total number of people who do have jobs + people who are unemployed).

There are always people entering and others leaving unemployment. The difference between the number entering and the number leaving will determine if unemployment rise or falls. Although, different countries have different methods of measuring unemployment, which is by the results, is not always suitable to be compared.

The unemployment measured rate of a country is not always accurate as only those who are registered as unemployment will appear in the countries statistics in which they receive unemployment benefits in MEDC’s. LEDC’s don’t have benefits available, so the reliability of the statistics of unemployment rate isn’t accurate at all as they are many not registered as unemployed.

There are many reasons in which cause unemployment. Every economy has an ‘natural unemployment rate’ even when the market clears because the demand for labor and supply of labor is in equilibrium. The three ‘natural unemployment’ includes frictional, structural and seasonal unemployment.

Frictional unemployment is when workers are switching between jobs, finding the right job or employer finding the right worker and temporarily don’t have jobs. They are at a process of searching for a job and are at a process of searching, traveling, applications and interviews for the right job. This is present in every economy because there will always be people entering, re-entering the labor force. Many don’t even register as it is not eligible for unemployment benefit for six weeks. This is not really a problem as it is a consequence of growing and changing the economy.

Structural unemployment can result in a significant loss of jobs in certain industries. This is caused by the changes in the structure of demand in the economy, which is caused by an overall fall in demand for a product due to changes in technology, tastes in fashion, competition from foreign countries or exhaustion or depletion of mineral resources such as coal. The result of this should be working switch from declining to expanding companies but this is a problem, as workers don’t have the right skills. There could also be a structural change from moving industries to abroad and workers are unable to cope with prices abroad, which are expensive and difficult. Lastly, there could be a structural change in technological unemployment where human skills are replaced by machines, which cause a rise in unemployment An example is, in Britain shipbuilding, cotton textiles and motorcycle lost their importance in the economy and now oil production, financial and back series and electronics have growth. The economy is always advancing and Britain has gone from a secondary to tertiary process of goods and services, which includes more services and manufacturing.

Seasonal unemployment is dependent on weather and there is a busy season and slack season. These mainly have an effect on jobs such as agriculture, forestry, fishing and tourism in which their jobs are only effective on one season. Such as fishermen would work all day in summer days but stay home on dark, cold stormy nights during winter as its very hard fishing in winter. Another example is hotel workers and seaside landladies sign on as unemployed when the holiday season is over. Therefore there is more unemployment in rural areas where the weather affects agricultures, beach sites, and tourism.

These are together natural unemployment, and there will always be unemployment even if the labour market clears s the demand for labour and the supply of labour is in equilibrium. Labor market equilibrium is when the demand for labor and the supply of labour is in equilibrium and there will always still be natural unemployment caused by frictional, structural and seasonal unemployment. The labor market shows the aggregate demand for and aggregate supply of labour, which is the total demand, and supply of labor in the whole economy. In the diagram, on the vertical axis, is the average real wage rate, which is in terms of purchasing power, which is adjusted to inflation rate. The aggregate supply of workers slope upwards and demand slopes downwards. The labour market is in equilibrium at we where the demand for labor is equal to the supply for labor.

Also in the unemployment rate includes disabled and workers coming up to retirement age but it doesn’t rise much in the unemployment rate as it is constant and almost the same amount each year. However, when there is unemployment in additional to ‘natural unemployment’, this causes dis-equilibrium in the labour market. There are two causes of disequilibrium unemployment from two different perspectives, the classical approach (real wage) and demand deficient (cyclical).

The classical (real wage) unemployment is believed by labour unions driving real wages above the market-clearing rate. Classicists’ economist named ‘real wage’ unemployment “classical unemployment”. This situation is when wages are held above equilibrium level by labour unions instead of being allowed to fall to equilibrium rate where the market clears, there is full employment and is the equilibrium wage level. Unions have threatened to disrupt production and have the ability to force firms to pay higher wages than required in a free labour market. At the rate of higher real wages, it has caused demand for labour to fall and the supplies of labour to increase so many workers are unemployed.

Another reason this occurs from apart from labour unions or minimum wage, is when wages are determined in imperfect markets where it is spoken and unspoken between employers and workers which hold wages above market clearing rates. This cause is worse than the others as it is not always in control of the government to push the average real wage rate back to equilibrium level.

The other dis-equilibrium unemployment is cyclical (demand-deficient) unemployment, which is when there is a deficiency of aggregate demand for goods and services with a market, which is defectively operating. (Unemployment in which John Maynard Keynes suggested, in the 1930’s). Basically this type of disequilibrium is the result of two factors. The first is that there is a fall in demand for goods and services, which causes a fall in aggregate demand causing the demand for labour to decrease which increases unemployment. The second factor which causes unemployment is when labour markets don’t work smoothly and resists wage cuts. This occurs because wages tend to rise but resist falling because workers aren’t commodities and don’t allow this to happen. Wages can be reduced by inflation rate of price increasing but ‘Keynes’ argues that this happens slowly therefore there is unemployment as wages are always growing. This type of unemployment extends across the whole economy and industries.

There are many types of unemployment in an economy and there are many causes of this, which has been noted above. The consequences are social cost for the economy and many unsatisfied wants and loss by reducing aggregate income and inequality since the unemployed lost more than the employed.