Understanding Unemployment and the Labor Market
B3. Unemployment
Unemployment is the situation faced by workers who are in a position where they do not find paid work. The population is divided into active or inactive. The active population is the set of individuals in a society who are of working age and able to work, and who either have or want a paid job. The workforce is made up of the employed and the unemployed. In Spain, the working-age population is between 16 and 65 years old. The inactive population comprises minors, the disabled, pensioners, students, and people working at home for their families. It also includes those who are not actively seeking employment, or workers who, due to the futility of their efforts, have ceased to be registered in the employment offices.
Details of Employment
The unemployment rate is the proportion of unemployed workers with respect to the total active population. The labor force participation rate is the percentage of the working population regarding the total population.
- Activity Rate = (Active Population / Total Population) x 100
- Unemployment Rate = (Unemployed / Labor Force) x 100
In Spain:
- The employment offices consider unemployed workers to be those included in their files waiting for a job. The statistic produced is called “registered unemployment.”
- The National Institute of Statistics (INE) carries out a monthly labor force survey (LFS); the results declared are called “surveyed unemployment.”
In both cases, underemployment is not recorded, which includes any person working a minimum of one hour per week. Moreover, in Spain, there are many employees in the informal economy, which is constituted by economic activities that avoid their legal obligations.
Characteristics of the Labor Market in Spain
The Spanish labor market is characterized by a lower activity rate than the EU-15 average. From the perspective of labor use, the employment rate is especially relevant; this is the percentage of the population employed over the population between 16 and 65.
Employment Rate = (Employed / Working Age Population) x 100
Types of Unemployment
In the neoclassical interpretation, there are two different types of unemployment:
- Voluntary Unemployment: People who are not willing to work for wages they consider too low.
- Involuntary Unemployment: Due to some external factor, such as minimum wage policy. If wages do not fall, companies do not hire more workers; they prefer unemployment and introduce machinery to increase production.
The existence of some level of permanent involuntary unemployment is explained by the following concepts:
- Frictional Unemployment: This situation is motivated by the job search process. For example, workers who leave their jobs to seek better ones and take time to find them.
- Structural Unemployment: It is caused by imbalances between the location of supply and demand and between the qualifications offered and those demanded. For example, newly created jobs require skills that are difficult for unemployed workers to acquire.
- Seasonal Unemployment: Jobs that are seasonal, where workers become unemployed when the season ends. For example, grape harvesting, hotels, restaurants.
- Cyclical Unemployment: In times of recession, factories are closed, and jobs are lost. People become unemployed because of the descending cycle. For example, a business closing.
Natural Rate of Unemployment
The natural rate of unemployment is the inevitable unemployment rate, since a certain number of unemployed workers remain unemployed for frictional or structural reasons. This rate varies across countries and time periods.
Keynesian Formulation of the Labor Market and Unemployment
In this model, the main cause of unemployment is the failure of aggregate demand. Keynesians reject the labor market’s capacity to adjust to new situations by changing wages. If there is a decrease in wages, unemployment will be produced.