What is Unemployment?

Unemployment is a term referring to individuals who are employable and seeking a job
but is unable to find a job. Unemployment is defined as a situation where someone of
working age is not able to get a job but would like to be in full-time employment.
Furthermore, it is those people in the workforce or pool of people who are available for
work that does not have a job. The most frequent measure of unemployment is the
unemployment rate, which is the number of unemployed people divided by the number
of people in the labor force. Unemployment is often used as a measure of the health of
the economy.

Unemployment is a key economic indicator because it signals the (in) ability of workers
to readily obtain gainful work to contribute to the productive output of the economy.
More unemployed workers mean less total economic production will take place than
might have otherwise. And unlike idle capital, unemployed workers will still need to
maintain at least subsistence consumption during their period of unemployment. This
means the economy with high unemployment has lower output without a proportional
decline in the need for basic consumption. High, persistent unemployment can signal
serious distress in an economy and even lead to social and political upheaval.

Types of unemployment

There are several types of unemployment, each one defined in terms of cause and
severity.

 Cyclical unemployment.
 Structural unemployment.
 Voluntary unemployment.
 Frictional unemployment.
 Classical unemployment.
 Seasonal unemployment.
 Regional unemployment.

Cyclical Unemployment: Cyclical unemployment exists when individuals lose their

jobs as a result of a downturn in aggregate demand (AD). If the decline in aggregate
demand is persistent, and the unemployment long-term, it is called either demand
deficient, general, or Keynesian unemployment.

It occurs in a recession or period of very low growth. If there is insufficient aggregate

demand, firms will cut back on output. If they cut back on output, then they will employ
fewer workers. Firms will either cut back on recruitment or lay off workers. The deeper
the recession, the more demand deficient unemployment there will be. This is often the
biggest cause of unemployment, especially in a downturn.

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Structural unemployment: Structural unemployment happens when the skills set of
a worker does not match the skills demands of the job available or if the worker cannot
reach the geographical location of the job. An example is a teaching job that requires
relocation to China, but the worker cannot secure a work visa due to certain visa
restrictions. It can also happen when there is a technological change in the
organization, such as workflow automation. This is unemployment due to inefficiencies
in the labour market. It may occur due to a mismatch of skills or geographical location.
For example, structural unemployment could be due to:

 Occupational immobility. There may be skilled jobs available, but many workers
may not have the relevant skills. Sometimes firms can struggle to recruit during
periods of high unemployment. This is due to occupational immobility.
 Geographical immobility. Jobs may be available in London, but, unemployed
workers may not be able to move there due to difficulties in getting housing
e.t.c.
 Technological change. If an economy goes through technological change, some
industries will decline. This is likely to lead to structural unemployment. For
example, new technology (nuclear power) could make coal mines close down
leaving many coal miners unemployed.

Voluntary unemployment: Voluntary unemployment is defined as a situation when

workers choose not to work at the current equilibrium wage rate. For one reason or
another, workers may elect not to participate in the labour market. There are several
reasons for the existence of voluntary unemployment including excessively generous
welfare benefits and high rates of income tax. Voluntary unemployment is likely to
occur when the equilibrium wage rate is below the wage necessary to encourage
individuals to supply their labour.

On the other hand, voluntary unemployment happens when a worker decides to leave a
job because it is no longer financially fulfilling. An example is a worker whose take-
home pay is less than his cost of living. This occurs when workers choose not to take a
job at the going wage rate. For example, if benefits offer a similar take-home pay to
(wage – tax), the unemployed may feel there is no incentive to take a job. Reasons for
voluntary unemployment may include

 Generous unemployment benefits, which make accepting a job less attractive.

 High marginal tax rates, which reduce effective take-home pay.
 Unemployed hoping to find a job more suited to skills/qualifications.
 Some jobs are seen as ‘demeaning’ or too tedious. For example, fruit
picking/security guard.

Note: If a mother left work to bring up a child or if someone went into higher
education, they are not working but would not be classed as unemployed as they are
not actively seeking employment.

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 unemployment: Frictional unemployment, also called search
Frictional
unemployment, occurs when workers lose their current job and are in the process of
finding another one. There may be little that can be done to reduce this type of
unemployment, other than provide better information to reduce the search time. This
suggests that full employment is impossible at any one time because some workers
will always be in the process of changing jobs.

Classical unemployment: Classical unemployment is caused when wages are ‘too’

high. This explanation of unemployment dominated economic theory before the 1930s,
when workers themselves were blamed for not accepting lower wages, or for asking for
too high wages. Classical unemployment is also called real wage unemployment.

Causes of classical unemployment

 Powerful trade unions which bargain for wages above the equilibrium.
 Minimum wages that create a legal minimum for wages.
 Deflation and ‘sticky wages’. Deflation is a period of falling prices. If there are
falling prices, to maintain full employment, it may be necessary to cut wages.
However, workers and firms often avoid nominal wage cuts for the psychological
cost. Therefore, during a period of deflation, classical unemployment is more
likely to occur.

Classical economists stress the importance of this type of unemployment. They argue
that if wages were more flexible, then most unemployment could be solved

Seasonal unemployment: Seasonal unemployment exists because certain industries

only produce or distribute their products at certain times of the year. Industries where
seasonal unemployment is common include farming, tourism, and construction.

Regional unemployment: When structural unemployment affects local areas of an

economy, it is called ‘regional’ unemployment. For example, unemployed coal miners in
South Wales and ship workers in the North East add to regional unemployment in these
areas.

Measuring Unemployment
Measuring unemployment accurately is made difficult because of imperfect knowledge.
Not all instances of unemployment are recorded, and some records of unemployment
may not be accurate. Because the unemployed are eligible for benefits, some
individuals may work, but not disclose it, and claim benefit. Conversely, many
unemployed may not bother to inform the authorities, and this unemployment goes
unrecorded.

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The unemployment rate is reported as the percentage of the labor force that is counted
as unemployed. Mathematically, the unemployment rate is as follows:

Unemployment rate = (Numbers of unemployed / labor force) x 100%

To understand how the unemployment rate is calculated we can use an example. In

this example 12.6 million people are employed and 0.7 million people are unemployed.
The size of the labour force is calculated as the sum of these groups. With the
unemployment rate being the percentage of people in the labour force who are
unemployed, using the numbers in our example and the equation below, the
unemployment rate is calculated as 5.3 per cent.

People are considered unemployed when they are:

1. Aged between 15 and 64 and therefore fall into the “economically active”
segment of the population,
2. Available for work, and
3. Actively seeking a job.

People who choose to stay at home, are full-time students, or are ill and unable to
work, are not counted as unemployed. In Nigeria, a benchmark of 40 hours per week
was adopted in 2001 by the National Consultative Committee on Statistics. This means
that people were only counted as “employed” if they have worked 40 hours or more in
the week preceding the labour force survey.

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Take the first quarter of 2015. A total of 55.7 million people (75.9% of the labour force)
was counted as employed and 5.5 million people (7.5%) as unemployed. The last figure
appears low mostly because a further 12.2 million people (16.6%) who would have
been deemed “unemployed” under the old stringent benchmark are now classified as
“underemployed”.

NBS says the economically active or working-age population increases from 111.1
million in Q3, 2017 to 115.5 million in Q3, 2018. Nigeria’s unemployment rate rose to
23.1% of the workforce by the end of September 2018, up from 18.1% in 2017.

In the United States, the government uses surveys, census counts, and the number of
unemployment insurance claims to track unemployment. The US Census conducts a
monthly survey on behalf of the Bureau of Labor Statistics called the Current Population
Survey (CPS) in order to produce the primary estimate of nation’s unemployment rate.
This survey has been done every month since 1940. The sample consists of about
60,000 eligible households, translating to about 110,000 people each month. The
survey changes one-fourth of the households in the sample so that no household is
represented for more than four consecutive months in order to strengthen the reliability
of the estimates.

Causes of unemployment
Unemployment is caused by various reasons that come from both the demand side, or
employer, and the supply side, or the worker.

From the demand side, unemployment may be caused by high interest rates, global
recession, and financial crisis. From the supply side, frictional unemployment and
structural employment play a great role.

Effects of unemployment
The impact of unemployment can be felt by both the workers and the national economy
and can create a ripple effect.

Unemployment causes workers to suffer financial difficulties that may lead to emotional
destruction. 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 lowered purchasing power, which, in turn,
causes lowered profits for businesses and leads to budget cuts and workforce
reduction. It creates a cycle that goes on and on and on. Everyone loses in the end.

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