Unemployment
This a situation in which someone of working age is looking for a job and is unable to find one.
Unemployment rate = Number unemployed × 100
Labour force
1
Five types of unemployment
1.
2.
3.
4.
5.
Frictional/Search unemployment
Seasonal unemployment
Cyclical unemployment
Real wage unemployment
Structural/ Technological unemployment
1. Frictional unemployment- occurs when workers spend time searching for the jobs that
best suits their skills and tastes.
2. Seasonal unemployment- exists because specific types of jobs are only available at
certain times of the year.
3. Cyclical unemployment- occurs when there is insufficient demand for the goods in the
economy and so firms lay off workers. Cyclical unemployment is also called Keynesian
unemployment or demand-deficient unemployment.
4. Structural unemployment- occurs when the economy is transitioning from one type of
industry to another with lay-offs occurring in the declining industries.
5. Real wage unemployment- occurs when wages rise above the equilibrium level causing
of labour to be greater than the demand for labour. Trade unions can cause real wage
unemployment when they succeed in raising the wage rate above the equilibrium level.
At a wage above the equilibrium level, supply of labour exceeds the demand for labour.
The surplus labour is unemployed. In the diagram below, DL is the demand curve for
labour in the economy and SL is the supply curve of labour. The equilibrium wage rate is
at We. Trade unions, through negotiations and perhaps industrial action, succeed in
raising the wage rate to W1. At W1, the supply of labour exceeds the demand for labour.
XY workers are unemployed.
The diagram below shows real wage unemployment
NB: When persons are unemployed it means that there is less income in the economy. There is,
therefore, a fall in government revenue from taxation.
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Reflationary monetary policy will also expand aggregate demand in the
economy. Falling interest rates boost the spending of firms and individuals.
This increases aggregate demand in the economy. Firms will expand output
to meet the rising demand and so employ more workers.
Regulations and agreements with trade unions to avoid making
demands to increase the wage rate above the equilibrium wage rate will help
to reduce real-wage unemployment.
Please answer the following questions