Economists distinguish between five major kinds of unemployment, i.e., cyclical, frictional, structural, classical, and Marxian. (Another distinction, not discussed here, is between voluntary and involuntary unemployment.) Real-world unemployment may combine different types, while all five might exist at one time. The magnitude of each of these is difficult to measure, partly because they overlap and are thus hard to separate from each other. All but cyclical unemployment can be seen as existing at full employment, the level of employment and unemployment that represents the inflation barrier to demand-side growth.
Cyclical unemployment
This type of unemployment exists due to inadequate effective aggregate demand. It gets its name because it varies with the business cycle, though it can also be persistent, as during the Great Depression of the 1930s. Gross domestic product is not as high as potential output because of demand failure, due to (say) pessimistic business expectations which discourages private fixed investment spending. Low government spending or high taxes, underconsumption, or low exports net of imports may also have this result.
In this case, the number of unemployed workers exceeds the number of job vacancies, so that if even all open jobs were filled, some workers would remain unemployed. This kind of unemployment coincides with unused industrial capacity (unemployed capital goods). Keynesian economists see it as possibly being solved by government deficit spending or by expansionary monetary policy, which aims to increase non-governmental spending by lowering interest rates.
Frictional unemployment
This unemployment involves people being temporarily between jobs, searching for new ones; it is compatible with full employment. (It is sometimes called search unemployment and is seen as largely voluntary.) It arises because either employers fire workers or workers quit, usually because the individual characteristics of the workers do not fit the individual characteristics of the job (including matters of the employer's personal taste or the employee's inadequate work effort). Some employers — such as fast-food restaurants and other providers of McJobs in secondary labor markets — use management strategies that rely on rapid turnover of employees, so that frictional unemployment is normal in these sectors.
This type of unemployment coincides with an equal number of vacancies and cannot be solved using aggregate demand stimulation. The best way to lower this kind of unemployment is to provide more and better information to job-seekers and employers, perhaps through job-banks in centralized computers (as in some countries in Europe). In theory, an economy could also be shifted away from emphasizing jobs that have high turnover, perhaps by using tax incentives or worker-training programs.
But some frictional unemployment is beneficial, since it allows workers to get the jobs that fit their wants and skills best and the employers to find employees who promote profit goals the most. It is a small percentage of the unemployment, however, since workers can often search for new jobs while employed — and employers can seek new employees before firing current ones.
One kind of frictional unemployment is called wait unemployment: it refers to the effects of the existence of some sectors where employed workers are paid more than the market-clearing equilibrium wage. Not only does this restrict the amount of employment in the high-wage sector, but it attracts workers from other sectors who wait to try to get jobs there. The main problem with this theory is that such workers will likely "wait" while having jobs, so that they are not counted as unemployed. In Hollywood, for example, those who are waiting for acting jobs also wait on tables in restaurants for pay (while acting in "Equity Waiver" plays at night for no pay). However, these workers might be seen as underemployed (definition 1).
Structural unemployment
This involves a mismatch between the workers looking for jobs and the vacancies available. Even though the number of vacancies may be equal to the number of the unemployed, the unemployed workers lack the skills needed for the jobs — or are in the wrong part of the country or world to take the jobs offered. That is, it is very expensive to unite the workers with jobs. One possible example in the rich countries is the present combination of the shortage of nurses with an excess labor supply in Information Technology. Unemployed programmers cannot easily become nurses, because of the need for new specialized training, the willingness to switch into the available jobs, and the legal requirements of such professions.
Structural unemployment is a result of the dynamic changes of a capitalist economy (such as technological change and capital flight) — and the fact that labor markets can never be as fluid as (say) financial markets. Workers are "left behind" due to costs of training and moving (e.g., the cost of selling one's house in a depressed local economy), plus inefficiencies in the labor markets, such as racial discrimination.
Structural unemployment is hard to separate empirically from frictional unemployment, except to say that it lasts longer. It is also more painful. As with frictional unemployment, simple demand-side stimulus will not work to easily abolish this type of unemployment. Some sort of direct attack on the problems of the labor market — such as training programs, mobility subsidies, or anti-discrimination policies — seems required. These policies may be reinforced by the maintenance of high aggregate demand, so that the two types of policy are complementary.
Structural unemployment may also be encouraged to rise by persistent cyclical unemployment: if an economy suffers from long-lasting low aggregate demand, it means that many of the unemployed become disheartened, while finding their skills (including job-searching skills) become "rusty" and obsolete. Problems with debt may lead to homelessness and a fall into the vicious circle of poverty. This means that they may not fit the job vacancies that are created when the economy recovers. Some economists see this scenario as occurring under British Prime Minister Margaret Thatcher during the 1970s and 1980s. The implication is that sustained high demand may lower structural unemployment. However, it also may encourage inflation, so some kind of incomes policies (wage and price controls) may be needed, along with the kind of labor-market policies mentioned in the previous paragraph. (This theory of rising structural unemployment has been referred to as an example of path dependence or "hysteresis.")
Much technological unemployment (e.g. due to the replacement of workers by robots) might be counted as structural unemployment. Alternatively, technological unemployment might refer to the way in which steady increases in labor productivity mean that fewer workers are needed to produce the same level of output every year. The fact that aggregate demand can be raised to deal with this problem suggests that this problem is one of cyclical unemployment. As indicated by Okun's Law, the demand side must grow sufficiently quickly to absorb not only the growing labor force but also the workers made redundant by increased labor productivity. Otherwise, we see a jobless recovery such as those seen in the United States in both the early 1990s and the early 2000s.
Seasonal unemployment might be seen as a kind of structural unemployment, since it is a type of unemployment that is linked to certain kinds of jobs (construction work, migratory farm work). The most-cited official unemployment measures erase this kind of unemployment from the statistics using "seasonal adjustment" techniques.
Hidden unemployment
Hidden, or covered, unemployment is the unemployment of potential workers that is not reflected in official unemployment statistics, due to the way the statistics are collected. In many countries only those who have no work but are actively looking for work are counted as unemployed. Those who have given up looking for work are not officially counted among the unemployed, even though they are not employed. Because of hidden unemployment, official statistics often underestimate unemployment rates.
For a different meaning of hidden unemployment see Underemployment.
Classical unemployment
In this case, like that of cyclical unemployment, the number of job-seekers exceeds the number of vacancies. However, the problem here is not aggregage demand failure but instead the fact that real wages are too high relative to the market-equilibrium wage. In simple terms, institutions such as the minimum wage keep wages so high that employers do not want to hire all of the available workers because the cost would exceed the technologically-determined benefit of hiring them (the marginal product of labor).
The cure for this type of unemployment involves increasing the flexibility of wages, for example by abolishing minimum wages, labor unions, and the like, trying to make the labor market more like a financial market. Following this tradition, Professor Kim Swales of the University of Strathclyde has considered a Pigovian approach to helping unemployment that involves tax breaks on the value-added tax [1] [2].
Marxian unemployment
As Karl Marx noted (and Michal Kalecki emphasized), some unemployment — the reserve army of the unemployed — is normally needed in order to maintain work discipline in jobs, keep wages down, and protect business profitability. If profitability suffers a sustained depression, capitalists can and will punish people by imposing a recession via their control over investment decisions (a capital strike ). To the Marxian school, these strikes are rare, since in normal times the government, responding to pressure from their most important constituencies, will encourage recessions before profits are hurt.
To Marxists, this kind of unemployment cannot be abolished without overthrowing capitalism as an economic system and replacing it with democratic socialism — or running capitalism using a fascist state, under which profitability is protected by the systematic use of direct force.
As with cyclical and classical unemployment, with Marxian unemployment, the number of jobless exceeds the availability of vacancies. (It's the scarcity of jobs that gives unemployment such a motivational effect.) However, simple demand stimulus in the face of the capitalists' refusal to hire or invest simply encourages inflation: if profits are being squeezed, the only way to maintain high production is via rising prices.
Full Employment.
In theory, it is possible to abolish cyclical unemployment by increasing the aggregate demand for products and workers. However, eventually the economy hits an "inflation barrier" imposed by the four other (supply-side) kinds of unemployment to the extent that they exist.
Some economists posit the existence of a natural rate of unemployment or a NAIRU at full employment, which means that if the unemployment rate gets "too low," inflation will get worse and worse (accelerate) in the absence of wage and price controls (incomes policies). Others simply see the possibility of inflation rising as the unemployment rate falls. This is the famous Phillips curve.
One of the major problems with the NAIRU theory is that no-one knows exactly what the NAIRU is (while it clearly changes over time). The margin of error can be quite high relative to the actual unemployment rate, making it hard to use the NAIRU in policy.
Another, normative, definition of full employment might be called the ideal unemployment rate. It would exclude all types of unemployment that represent forms of inefficiency. This type of "full employment" unemployment would correspond to only frictional unemployment (excluding that part encouraging the McJobs management strategy) and would thus be very low. However, it would be impossible to attain this full-employment target using only demand-side Keynesian stimulus without getting below the NAIRU and suffering from accelerating inflation (absent incomes policies). Trainings programs aimed at fighting structural unemployment would help here.
To the extent that hidden unemployment exists, it implies that official unemployment statistics provide a poor guide to what unemployment rate coincides with "full employment".
See also
Last updated: 05-13-2005 07:56:04
