What Is Unemployment?

The term unemployment refers to a state “when a person is out of work or has been without a
job for a certain period.” Additionally, it also refers to a person who is searching for a job and
has not been able to secure one. This usually happens to most graduates. In many countries
many young people find it challenging to secure jobs after completion of a degree or diploma
education.
The definition of an unemployed person is someone of working age (16 and up), jobless, able
and available to work, and actively looking for a job. This means anyone without a job who is
reaching out to contacts about jobs or applying to positions.

This definition of unemployment is specific and rigid—it doesn’t just include “anyone who
doesn’t have a job.”
On the other hand, an employed person is very simply defined as someone with a job. A job can
include anything from doing full-time work to doing part-time work to being self-employed.
Both unemployed and employed people make up the “labour force,” or the subset of the
population that is both able and interested in working. Not included in the labour force are
citizens not looking for jobs—for example, a stay-at-home mom, a college student, or a
“discouraged worker” (someone who has stopped looking for work because they believe no
work is available).
unemployment is the macroeconomic problem that affects people most directly and severely.
For most people, the loss of a job means a reduced living standard and psychological distress. It
is no surprise that unemployment is a frequent topic of political debate and that politicians
often claim that their proposed policies would help create jobs.
Economists study unemployment to identify its causes and to help improve the public policies
that affect the unemployed. Some of these policies, such as job-training programs, help people
find employment. Others, such as unemployment insurance, alleviate some of the hardships
that the unemployed face. Still other policies affect the prevalence of unemployment
inadvertently. Laws mandating a high minimum wage, for instance, are widely thought to raise
unemployment among the least skilled and experienced members of the labour force.
Theories of unemployment
1.Keynesian and new Keynesian declare employment and aggregate demand is what determine
the real wage. Consequently real wage cannot be considered as a mechanism to adjust
employment anymore but labour demand does.

2.classic theory of unemployment affirms unemployment depends on the level real demand .
It occur when the real wage are fixed over the equilibrium level because of rigidities provoked
by minimum wage policies Union bargaining or effective salaries .

Types of Unemployment and Their Causes

There are three main types of unemployment in an economy—frictional, structural, cyclical,
and seasonal—and each has a different cause.
Frictional Unemployment
Frictional unemployment. Frictional unemployment is caused by temporary transitions in
workers’ lives, such as when a worker moves to a new city and has to find a new job. Frictional
unemployment also includes people just entering the labour force, such as freshly graduated
college students. It is the most common cause of unemployment, and it is always in effect in an
economy.
Job Search and Frictional Unemployment
One reason for unemployment is that it takes time to match workers and jobs. The equilibrium
model of the aggregate labour market assumes that all workers and all jobs are identical and,
therefore, that all workers are equally well suited for all jobs. If this were true and the labor
market were in equilibrium, then a job loss would not cause unemployment: a laid-off worker
would immediately find a new job at the market wage.
In fact, workers have different preferences and abilities, and jobs have different attributes.
Furthermore, the flow of information about job candidates and job vacancies is imperfect, and
the geographic mobility of workers is not instantaneous. For all these reasons, searching for an
appropriate job takes time and effort, and this tends to reduce the rate of job finding. Indeed,
because different jobs require different skills and pay different wages, unemployed workers
may not accept the first job offer they receive. The unemployment caused by the time it takes
workers to search for a job is called frictional unemployment.
Causes of Frictional Unemployment
Some frictional unemployment is inevitable in a changing economy. For many reasons, the
types of goods that firms and households demand vary over time. As the demand for goods
shifts, so does the demand for the labour that produces those goods. The invention of the
personal computer, for example, reduced the demand for typewriters and the demand for
labour by typewriter manufacturers. At the same time, it increased the demand for labour in
the electronics industry. Similarly, because different regions produce different goods, the
demand for labour may be rising in one part of the country and falling in another. An increase
in the price of oil may cause the demand for labour to rise in oil-producing states such as Texas,
but because expensive oil makes driving less attractive, it may decrease the demand for labour
in auto-producing states such as Michigan. Economists call a change in the composition of
demand among industries or regions a sectoral shift. Because sectoral shifts are always
occurring, and because it takes time for workers to change sectors, there is always frictional
unemployment.
Sectoral shifts are not the only cause of job separation and frictional unem- ployment. In
addition, workers find themselves unexpectedly out of work when their firms fail, when their
job performance is deemed unacceptable, or when their particular skills are no longer needed.
Workers also may quit their jobs to change careers or to move to different parts of the country.
Regardless of the cause of the job separation, it will take time and effort for the worker to find a
new job. As long as the supply and demand for labour among firms is changing, frictional
unemployment is unavoidable.
Seasonal unemployment is also included under frictional unemployment Seasonal
unemployment is caused by different industries or parts of the labour market being available
during different seasons. For instance, unemployment goes up in the winter months, because
many agricultural jobs end once crops are harvested in the fall, and those workers are left to
find new jobs.
The impact of unemployment can be felt by both the workers and the national economy and
can cause a ripple effect.
Structural unemployment
Structural unemployment. Structural unemployment is caused by a mismatch in the
demographics of workers and the types of jobs available, either when there are jobs available
that workers don’t have the skills for, or when there are workers available but no jobs to fill.
Structural unemployment is most obvious in industries undergoing technological
advancements. For example, in the farming industry, much of the work is becoming
mechanized, which means that fewer farmers are needed and many are let go. When these
farmers go to cities to find work, they may find no other similar jobs in which to apply their
skills.
Real-Wage Rigidity and Structural Unemployment
A second reason for unemployment is wage rigidity—the failure of wages to adjust to a level at
which labour supply equals labour demand. In the equilibrium model of the labour market, the
real wage adjusts to equilibrate labour supply and labour demand. Yet wages are not always
flexible. Sometimes the real wage is stuck above the market-clearing level.
When the real wage is above the level that equilibrates supply and demand, the quantity of
labor supplied exceeds the quantity demanded. Firms must in some way ration the scarce jobs
among workers. Real-wage rigidity reduces the rate of job finding and raises the level of
unemployment.
The unemployment resulting from wage rigidity and job rationing is some- times called
structural unemployment. Workers are unemployed not because they are actively searching for
the jobs that best suit their individual skills but because there is a fundamental mismatch
between the number of people who want to work and the number of jobs that are available. At
the going wage, the quantity of labour supplied exceeds the quantity of labour demanded, so
many workers are simply waiting for jobs to open up.
To understand wage rigidity and structural unemployment, we must examine why the labour
market does not clear. When the real wage exceeds the equilibrium level and the supply of
workers exceeds the demand, we might expect firms to lower the wages they pay. Structural
unemployment arises because firms fail to reduce wages despite an excess supply of labour.
We now turn to three causes of this wage rigidity: minimum-wage laws, the monopoly power of
unions, and efficiency wages.
Both frictional unemployment and structural unemployment are natural unemployment
because we cannot avoid them totally but we can reduce them little bit.
Cyclic Unemployment
Cyclical unemployment. Cyclical unemployment is caused by declining demand: when there is
not enough demand in an economy for goods and services, businesses cannot offer jobs.
According to Keynesian economics, cyclical unemployment is a natural result of the business
cycle in times of recession: if all consumers become fearful at once, consumers will attempt to
increase their savings at the same time, which means there will be a decrease in spending, and
businesses will not be able to employ all employable workers.
Causes of unemployment
Studies from Ethiopia indicate that the potential causes of unemployment in urban Ethiopia
include increasing number of youth labor force, the rising internal migration, literacy rate, poor
to modest macroeconomic performance, low level of job creation and low level of aggregate
demand in the economy
Effects of unemployment
Unemployment causes workers to suffer financial hardship that impacts families, relationships,
and communities. When it happens, consumer spending, which is one of an economy’s key
drivers of growth, goes down, leading to a recession or even a depression when left
unaddressed.
Unemployment results in reduced demand, consumption, and buying power, which in turn
causes lower profits for businesses and leads to budget cuts and workforce reductions. It
creates a cycle that goes on and on that is difficult to reverse without some type of
intervention.
What Are the Consequences of Unemployment in an Economy?
Low unemployment is key to economic stability. High and long-term unemployment can cause
significant stress on a nation in three key ar!eas:
Individuals. Unemployed people have no ability to fulfil their financial obligations and can
become mentally stressed, ill, and even homeless.
Economic efficiency. During times of high unemployment, many job seekers will accept new
jobs below their skill level, a situation called “underemployment,” which translates to a loss of
human capital for an economy’s labor market. Unemployed workers will also significantly
decrease their consumer spending, which is one of the driving forces of economic growth.
Without consumer spending, the economy will slow dramatically.
Socio-political stability. If unemployment remains high, citizen dissatisfaction can rise to the
point of widespread civil unrest.

It causes a waste of economic resources such as the productive labor force and affects the long
run growth potential of an economy.
Studies from Ethiopia indicate that the potential causes of unemployment in urban Ethiopia
include increasing number of youth labor force, the rising internal migration, literacy rate, poor
to modest macroeconomic performance, low level of job creation and low level of aggregate
demand in the economy
Possible Solutions for Unemployment
Nobel Prize-winning economist Paul Krugman teaches you the economic theories that drive
history, policy, and help explain the world around you.
Solving unemployment is a hotly debated topic, and no economists agree on one simple way to
do it. However, the government usually steps in with specific policies designed to lower the
total number of unemployed people.
1. Monetary policy is financial influence implemented by a central bank (in the U.S., this is the
Federal Reserve Bank or the Fed). Monetary policies usually come in the form of lower interest
rates, which increase the total money supply within an economy by allowing banks and
businesses more access to loans—and therefore, more accessible spending power.
2.Fiscal policy. If expansionary monetary policy doesn’t adequately lower the unemployment
rate, government agencies will turn to fiscal policy. Fiscal policy is fiscal stimulus implemented
by the national government, and fiscal policies include spending on infrastructure, proposing
tax cuts, increasing the minimum wage, or implementing unemployment benefits (for instance,
unemployment insurance). These methods are designed to inject more demand into the private
economy and strengthen economic activity.
One of the major problems of youth is unemployment, affecting youth from all walks of life in
this modern era. Unemployment (mainly as an urban phenomenon) and underemployment
continue to be serious social problems in Ethiopia despite some improvements in recent years.
With around 50 per cent of the urban men between age 15 and 30 unemployed, Ethiopia has
one of the highest unemployment rates worldwide .Clearly some young people are more
vulnerable than others, but in many ways a period of unemployment has become a normal part
of the transition from school to work. While youth unemployment has been well researched,
the majority of studies have focused on those living in urban areas. The study reveals that the
majority of youth (82 percent) search for job from 1 to 4 years. During the long period of
searching of job, unemployment increase the related problem also extended. According to the
assessed data 78 per cent of the total respondents pass their time by chewing chat smoking
cigarette, drinking alcoholic beverages and other related activities.69.23 percent of
respondents are users of drugs on result of unemployment. The Labour market institutions that
govern employment relations in Ethiopia are generally found to be weak. This weakness is
characterized by limitation of legal framework and lack of social dialogue among institutions.
Despite the recent encourage economic growth in Ethiopia, unemployment is high and remains
to be one of the socio economic problems in the country. In Ethiopia, there have been
significant increases in educational attainment; however, there has not been as much job
creation to provide employment opportunities to the newly educated job seekers. There is a
need to improve labour productivity of the employees in the sector by aligning formal
education programs to the practical skill needs of the country.

Calculating the Unemployment Rate

Labour! Force Participation Rate

The Labour Force Participation Rate shows the number of people in the labour force—defined as
the sum of employed and unemployed persons—as a share of the total working-age population,
which is the number of civilian, non-institutionalized people, age 16 and over. It is similar to the
employment-to-population ratio but different in one important aspect: it includes the numbers of
people with a job as well as the number actively looking for work.Remember that the
unemployed are those who are out of work and who are actively looking for a job. We can
calculate the unemployment rate by dividing the number of unemployed people by the total
number in the labour force, then multiplying by 100.

Those in the labour force can be divided into the employed and the unemployed. The
unemployment rate is not the percentage of the total adult population without jobs, but rather
the percentage of adults who are in the labour force but who do not have jobs:
Though many people care about the number of unemployed individuals, economists typically
focus on the unemployment rate, which corrects for the normal increase in the number of
people employed caused by increases in population and increases in the labour force relative to
the population. The unemployment rate is expressed as a percentage and calculated as follows:
Unemployment rate=Unemployed people ×100
Labour force
Rural and urban unemployment
Rural unemployment refers to unemployment that exists in rural areas. It is primarily a
phenomenon of the agricultural sector. It takes two forms.
a. Disguised unemployment: This is the phenomenon in which more people are engaged in an
activity than the number of persons required for that.For example, if an agricultural field
requires 6 labourers but 8 people are engaged in this activity, then the surplus two workers are
actually unemployed although they appear to be working. Hence, this is called disguised
unemployment.
 
b. Seasonal unemployment: Many agricultural labourers may not get employment during the
agriculturally lean season. Instead, their employment may be confined to the agricultural
season only when more workers are required for farm activities like sowing and reaping.
Urban unemployment refers to unemployment that exists in urban areas. It is primarily a
phenomenon of the industrial and services sector. It can exist in two forms.
a. Industrial unemployment: This occurs if the size of the organized industrial sector is not big
enough to employ all potential urban workers. As a result, many of these workers need to find
employment in the unorganized industrial sector.
b. Educated unemployment: This occurs when the size of the organized industrial or services
sector is not big enough to employ all the educated adult people in urban areas.

The difference is that in some areas urban unemployment is greater than rural because there is
high rural to urban migration while in some areas mostly in developed countries rural
unemployment is high because people who live in urban areas have many opportunities to seek
and to get job so the rural unemployment rate is high.

Long-term Unemployment vs. Short-term Unemployment

Unemployment that lasts longer than 27 weeks even if the individual has sought
employment in the last four weeks is called long-term unemployment. Its effects are far
worse than short-term unemployment for obvious reasons, and the following are noted
as some of its effects.

 Some 56% of the long-term unemployed reported a significant decrease in their net
worth.
 Financial problems are not the only effects of long-term unemployment as 46% of those
in such a state reported experiencing strained family relationships. The figure is
relatively higher than the 39% percent who weren’t unemployed for as long.
 Another 43% of the long-term unemployed reported a significant effect on their ability to
achieve their career goals.
 Sadly, long-term unemployment led to 38% of these individuals losing their self-respect
and 24% seeking professional help.

Unemployment is a serious social and economic issue that results in a tremendous

impact on everything but is often overlooked. A stronger system of assessing
unemployment should be put in place in order to determine its causes and how to
address it better.

Conclusion
Unemployment represents wasted resources. Unemployed workers have the poten- tial to
contribute to national income but are not doing so. Those searching for jobs to suit their skills
are happy when the search is over, and those waiting for jobs in firms that pay above-
equilibrium wages are happy when positions open up.
Unfortunately, neither frictional unemployment nor structural unemployment can be easily
reduced. The government cannot make job search instantaneous, and it cannot easily bring
wages closer to equilibrium levels. Zero unemployment is not a plausible goal for free-market
economies.
Yet public policy is not powerless in the fight to reduce unemployment. Job-training programs,
the unemployment-insurance system, the minimum wage, and the laws governing collective
bargaining are often topics of political debate. The policies we choose are likely to have
important effects on the economy’s natural rate of unemployment.
Summary
The natural rate of unemployment is the steady-state rate of unemployment. It depends on the
rate of job separation and the rate of job finding.
Because it takes time for workers to search for the job that best suits their individual skills and
tastes, some frictional unemployment is inevitable.Various government policies, such as
unemployment insurance, alter the amount of frictional unemployment.
Structural unemployment results when the real wage remains above the level that equilibrates
labour supply and labour demand. Minimum-wage legislation is one cause of wage rigidity.
Unions and the threat of unionization are another. Finally, efficiency-wage theories suggest
that, for various reasons, firms may find it profitable to keep wages high despite an excess
supply of labour.
Whether we conclude that most unemployment is short-term or long-term depends on how we
look at the data. Most spells of unemployment are short. Yet most weeks of unemployment are
attributable to the small number of long-term unemployed.