Understanding Unemployment: Types, Effects, and Theories

Posted on Dec 9, 2024 in Economy

Types of Unemployment

  • Cyclical Unemployment: Occurs when workers and production factors are idle because the economy’s spending during certain periods is insufficient to employ all resources.
  • Seasonal Unemployment: Caused by seasonal changes in labor demand at different times of the year. For example, at the end of summer, many people contracted to work in restaurants and hotels are forced temporarily to seek another job or become unemployed.
  • Frictional Unemployment: Associated with the normal functioning of the labor market. It arises when workers leave their jobs to find better ones, because some companies go through a crisis, or because new members of the workforce spend some time looking for work.
  • Structural Unemployment: Occurs when job vacancies are not filled because the characteristics of the unemployed differ from those required for the vacancies. It is often linked to technological changes (e.g., a miner). It is more lasting than frictional unemployment.

Effects of Unemployment

Unemployment has economic and social effects.

Economic Effects

  • Decrease in Actual Production: Unemployment represents a poor allocation of resources. If the entire population could work, the country’s total production would be higher. As not all available resources are exploited, production falls below the production possibilities frontier.
  • Decrease in Demand: The income level of individuals decreases when they become unemployed. As a result of unemployment and declining income, there is a fall in aggregate demand.
  • Increased Public Deficit: If unemployment increases, the public sector will face greater expenses for unemployment benefits, and at the same time, taxes on labor are reduced, so the deficit increases.

The effects of unemployment on the individual are palliated by unemployment insurance. However, it does not prevent all negative consequences. The amount of unemployment benefits is usually lower than the normal salary, and not all unemployed people are eligible.

Social Effects

  • Negative Psychological Effects: Work is not only a means to achieve income that allows for the survival of individuals. Throughout history, work has become a factor in self-esteem and social presentation. Therefore, the unemployed may feel socially undervalued. This feeling can lead to conditions such as depression.
  • Discriminatory Effects: Unemployment does not affect all individuals the same way; it discriminates by age, gender, or ethnicity. It is a more serious problem in the case of women and individuals over fifty years old.

The seriousness of unemployment is due in part to the fact that there are usually some identifiable groups of people who are unemployed for a long time. Long-term unemployment, i.e., unemployment equal to or greater than six months, has much more serious consequences for an individual and their family than short-term unemployment.

Active Population, Inactive Population, and Unemployment

  • Potentially Active Population: Comprises individuals over 16, i.e., all people who are legally able to work.
  • Active Population: Includes those who supply labor for the production of goods and services (employed) and those who are available and make the necessary arrangements to join such production (unemployed). The active population is the “labor supply”, i.e., the employed and unemployed make up the set of labor force providers in the labor market.
  • Inactive Population: Population 16 years or older who cannot be considered either employed or unemployed. This includes several groups:
    • Housewives without remuneration
    • Retired or early retirees
    • Students
    • Individuals unable to work
    • Other situations (those who do not work by choice)

Explanatory Theories of Unemployment

  • Classical: The explanation of unemployment above frictional unemployment must be based on imperfections and labor market rigidities, particularly the desire of workers to receive salaries above the equilibrium wage. From a classical perspective, unemployment above the frictional level is due to an inadequate wage policy, i.e., wages are higher than the equilibrium level. Therefore, unemployment is considered voluntary. When wages are higher than the equilibrium wage, companies require a lower amount of labor than at equilibrium.
  • Keynesian: Unemployment is not due to the behavior of wages but to the insufficient level of aggregate demand; therefore, unemployment is involuntary. Increasing employment requires increasing total spending in the economy (aggregate demand). Keynesians take as a reference the work of J. M. Keynes and, in the presence of widespread unemployment, are also keen to resort to a policy of demand expansion. The downside of such expansionary demand policies is that while they increase production and employment, they also increase the general level of prices.