Unemployment' Nature and Possible Causes | Free Essay Example

Unemployment’ Nature and Possible Causes

Words: 856
Topic: Business & Economics


Unemployment rate refers to the percentage of people within the available labour force who do have jobs and are actively looking for one (Boyes & Melvin, 2005). Unemployment rates cannot be reduced to zero, which means every economy has some level of unemployment. However, these unemployment rates are of different natures and each has different causes. Various measures have been suggested as remedies for reducing unemployment. However, without determining the type of unemployment and its causes it is difficult to determine suitable solutions that will reduce the situation. The types of unemployment and their causes are explained below (Hughes & Perlman, 1984)

Types of unemployment and their causes

Frictional unemployment is a temporary lack of a job as a result of normal turnover within the labour market. These include: People who have been fired or quit their jobs voluntarily yet thy have marketable skills and are looking for new employment. Young graduates who are searching for their first employment. Short unemployment periods between projects, such as in construction industries, whereby workers are laid off on temporary basis.

Some unemployment periods are also seasonal, such as at the end of harvesting season where more farm workers are jobless as they wait for the next farming season. This type of unemployment is caused by the transition time taken by an employee before getting to a new job. It also results from lack of information, whereby a job seeker cannot be immediately matched with a job vacancy. It can be reduced by using improved methods of sharing job information, by listing vacancies on the internet (Tucker, 2008).

Structural unemployment: whereby jobs trained for are not there, either for a long-term situation or permanently. It is a situation where the skills of the unemployed do not match the requirements for the jobs available. This can happen in three situations: first lack of education or skills to available jobs. For instance, when graduates come out of college with skills and find that what they learnt is no longer marketable.

Shift in demand due to changes in consumer tastes and preferences lead to unemployment of some workers. Those who were producing products whose demand has gone down will be laid off by their companies. Additionally, Introduction of the latest technology may render some workers jobless. This is because some of the jobs performed by them are now done by computers. Structural unemployment can be reduced by retraining for new jobs (Tucker, 2008).

The last type of unemployment is cyclical unemployment; where business cycle is the cause for lack of jobs and it happens during recession. Recession is characterized by a fall in real GDP, as a result companies are forced to close down and workers are laid off. A fall in GDP is caused by reduction in consumer spending, investment as well as reduction in government spending. However, when real GDP goes up unemployment rates also increases. Therefore, to prevent such sharp swings in the rates of unemployment, the government should put up macro economic policies that moderate this type of unemployment (Baumol & Blinder, 2009).

Keynesian or classical assumptions in relation to the types of unemployment

Keynesian theory can be used to explain frictional and cyclical unemployment. Keynes was of the opinion that unemployment results from difference between productive capacity and aggregate demand of any economy. Aggregate demand refers to the income available to businesses, the government and the consumer, to use in purchasing goods and services. Gross Domestic Product refers to goods that have actually been produced. Therefore, when productive capacity is more than demand, the producers will reduce their output. This leads them to lay off some workers for a while resulting in frictional unemployment (Janda, Berry & Goldman, 2008)

Classical theory explains that when demand for goods and services surpass productive capacity people will be willing to pay for more to get goods and services. This will drive the prices up resulting in inflation. The consumer’s purchasing power will go down as result. Workers will in return demand for higher wages which drives cost of production up. In the end some workers will be laid off to reduce costs. This explains cyclical unemployment. When the inflation is corrected normal situation resumes but the cycle can happen again. In order to reduce unemployment levels, the classical theory, roots for the reduction of wages which will in turn reduce the costs of production. As a result producers will produce cheaper goods and services. However, the Keynesian theorists say that, government monetary and fiscal policies should be used. These will reduce inflation and increase producers’ ability to produce cheaper goods (Blaug, 1997).


It is clear that there are different types of unemployment situations and each has its own causes and solutions. Theorists have also tried to explain the various unemployment situations; however, they differ in the causes and solutions for the situations. Any government is supposed to study the unemployment situation in its economy and derive appropriate measures that will help to minimize the effects of the situation. The unemployed individuals should also be able to determine their unemployment situations; hence they will be able to apply appropriate remedies.

References List

Baumol, W. J. and Blinder, A. S., (2009). Economics: Principles and Policy. Mason, OH: Cengage Learning.

Blaug, M., (1997). Economic theory in retrospect. Cambridge: Cambridge University Press.

Boyes, W. and Melvin, M., (2005). Economics. Boston, MA: Cengage Learning.

Hughes, J. J, and Perlman, R., (1984). The economics of unemployment: a comparative analysis of Britain and the United States. Cambridge University Press.

Janda, K., Berry, J. M. and Goldman, J., (2008). The Challenge of Democracy: American Government in a Global World. Boston, MA: Cengage Learning.

Tucker, I. B., (2008). Macroeconomics for Today. Mason, OH: Cengage Learning.