• Course name: Macroeconomics: An Introduction
• Assignment No.: 1
• Essay Question: Discuss the various theories and types of
unemployment. Which theory is most relevant to your country or the
country you work in? Why?
• Word-count: 624
I. Introduction
Unemployment is a key topic in the studies of Macroeconomics and it is defined
as the inability of people to work for profit while they can and they want to work
(“Unemployment”). In general, there are two main approaches of theory
regarding the cause of unemployment, one being the classical theory and
another being the Keynesian theory. And unemployment is commonly
categorised into three types: frictional unemployment, cyclical unemployment
and structural unemployment. This essay will be divided into two sections.
Firstly, it will briefly explore the theories and types of unemployment; secondly,
it will attempt to analyse unemployment in China through the Keynesian theory.
II. Theories and Types of Unemployment
a. Theories of Unemployment
There are two main schools of thoughts on the cause of unemployment. For
classical economists, they maintain that a free market has the self-regulating
power to adjust the wage to keep workers’ labour and firms’ demand for labour
at the equilibrium point (Mulhearn & Vane 217). Thus, unemployment would
only occur if the market is not ‘free’ and there are outside interventions such as
minimum wage or business regulations imposed by the government (Goodwin
et al. 290).
On the other hand, the Keynesian theory argues that in reality, the labour
market would not clear at full employment because of the ‘downward rigidity’ of
money-wages (Viner 165), and that unemployment exists because there is
insufficient demand for labour, which is directly caused by insufficient aggregate
demand (Goodwin et al. 293).
b. Types of Unemployment
Unemployment is commonly categorised into three types. The first kind, called
frictional unemployment, happens when people change between jobs. It is least
worried by economists because it usually does not last for a long time and a 23% of frictional unemployment is inevitable (Goodwin et al. 283). The second
type, structural unemployment, occurs when there is a mismatch between
workers’ skills and market demand. Structural unemployment can have longlasting effects as it results from economic changes (Du 4). According to
Rissman (7), frictional and structural unemployment consist of natural
unemployment which is compatible with the inflation rate. Finally, there is
cyclical unemployment that occurs due to economic fluctuations, and more
specifically, due to economic recessions.
III. Unemployment in China
According to Chinese National Bureau of Statistics (NBS) (“China Statistical
Year Book 2019”), the unemployment rate in China in the past decade
maintained around 4%. However, the NBS figures include only urban citizens
aged between 16 to 45 (for women) and 50 (for men) who register as
unemployed (Sjöholm & Lundin 22; Ge 16). Therefore, the actual figure for
unemployment should be higher. Some scholars (Knight and Xue 103; Wang &
Sun 53) estimate the actual urban unemployment rate to be from 11% to 14%.
The Keynesian theory is found most relevant to explain the unemployment
phenomenon in China. One of the reasons that contribute to the unemployment
is the rise in labour wages accompanied by a decrease in manufacturing jobs.
Since late 2000s, the manufacturing companies in China have been shifting
production away from China to other countries and regions where labour costs
are cheaper. As the Keynesian theory points out, the ‘downward rigidity’ of
money-wages (Viner 165) would prevent the labour market to clear at full
employment by decreasing the wage to stimulate labour demand. Moreover,
the insufficient domestic consumption creates insufficient demand for goods
and services, and that could cause unemployment as suggested by the
Keynesian theory.
IV. Conclusion
Unemployment is an important topic in macroeconomics and there are two main
schools of theories that explain the cause of unemployment: the classical
approach and the Keynesian school. Also, unemployment is generally
categorised into three types: frictional unemployment, structural unemployment
and cyclical unemployment. For China, the Keynesian theory is most relevant
explaining the unemployment situation in the country.
Bibliography
“China Statistical Yearbook 2019.” Www.Stats.Gov.Cn, National Bureau of
Statistics of China, 2020, www.stats.gov.cn/tjsj/ndsj/2019/indexeh.htm.
Du, Jane. “Understanding China’s Structural Unemployment.” EAI Bulletin,
vol. 21(1), 2019, p. 4.
Ge, Wei. “China’s Urban Unemployment Challenge.” International Journal of
Business and Social Science, vol. 2, no. 4, 2011, pp. 16–31.
Goodwin, Neva, et al. Macroeconomics in Context. 3rd ed., Routledge, 2019.
Knight, John, and Jinjun Xue. “How High Is Urban Unemployment in
China?” Journal of Chinese Economic and Business Studies, vol. 4, no.
2, 2006, pp. 91–107. Crossref, doi:10.1080/14765280600736833.
Mulhearn, Chris, and Howard R. Vane. “Unemployment: Causes and
Cures.” Economics, 1999, pp. 201–21. Crossref, doi:10.1007/978-1349-14437-2_11.
Rissman, Ellen R. “What Is the Natural Rate of Unemployment.” Economic
Perspectives, vol. 10, no. Sep, 1986, pp. 3–17.
Sjöholm, Fredrik, and Nannan Lundin. “Will Science and Technology Solve
China’s Unemployment Problem?” Asian Economic Papers, vol. 9, no.
2, 2010, pp. 1–28. Crossref, doi:10.1162/asep_a_00013.
“Unemployment.” Oxford Reference,
www.oxfordreference.com/view/10.1093/acref/9780198759430.001.00
01/acref-9780198759430-e-3238?rskey=GVfN5w&result=1. Accessed
7 Mar. 2021.
Viner, Jacob. “Mr. Keynes on the Causes of Unemployment.” The Quarterly
Journal of Economics, vol. 51, no. 1, 1936, pp. 147–67.
Wang, Xiaoxia, and Wenkai Sun. “Discrepancy between Registered and
Actual Unemployment Rates in China: An Investigation in Provincial
Capital Cities.” China & World Economy, vol. 22, no. 4, 2014, pp. 40–
59. Crossref, doi:10.1111/j.1749-124x.2014.12074.x.