Unemployment

Unemployment. People of working age who are willing AND able to work, ACTIVELY seeking employment, but cannot find a job.

Unemployment rate = (number unemployed ÷ labour force) × 100.

Labour force = employed + unemployed (NOT including those not seeking work — students, retirees, full-time carers).

Limitations of the measure:

• Doesn't count discouraged workers (stopped looking).
• Doesn't capture underemployment (part-time wanting full-time).
• Hidden unemployment in informal sector.
• Differences in definition across countries.

Types of unemployment:

Type	Cause	Example	Policy response
Cyclical (demand-deficient)	Insufficient AD in a recession	Mass layoffs in 2008 financial crisis	Boost AD (fiscal, monetary stimulus)
Structural	Skills mismatch — industries decline, jobs change location/skill	UK coal miners, US Rust Belt workers	Retraining, education, mobility
Frictional	People between jobs, new entrants searching	Recent graduates job-hunting	Improve job-search info; usually accepted as normal
Seasonal	Industry varies with seasons	Agricultural workers, ski instructors	Not really problematic; accepted
Real wage / classical (HL)	Wage above market-clearing level	Minimum wage above equilibrium	Allow flexible wages (controversial)

Natural rate of unemployment = frictional + structural + seasonal. Exists even at full employment; cannot be eliminated by demand management.

Cyclical unemployment is what AD/AS analysis focuses on — caused by AD shifts; remedied by stimulating AD.

Economic costs of unemployment:

• Lost output — economy below PPC / Yf; goods and services not produced.
• Lower tax revenue — fewer workers paying income tax.
• Higher benefit spending — unemployment insurance, welfare.
• Hysteresis — long-term unemployment erodes skills, makes re-employment harder, may reduce LRAS.
• Lower investment — firms invest less when demand is weak.

Social and personal costs:

• Poverty, debt, homelessness.
• Mental and physical health problems (depression, suicide risk).
• Family stress, breakdown.
• Loss of skills and confidence.
• Crime, social unrest.
• Inequality and social exclusion.

Long-term unemployment is particularly damaging. People out of work for 1+ year face:

• "Scarring" — earning less even after re-employment.
• Skills atrophy.
• Stigma in hiring.

This is why policymakers especially focus on rapid responses in recessions — preventing short-term unemployment from becoming entrenched.

Distribution. Unemployment falls disproportionately on:

• Young people (less experience, last hired first fired).
• Less-educated workers.
• Ethnic and racial minorities (in many countries).
• Some regions (e.g. former industrial areas).

Hysteresis vs natural rate. Once unemployment rises, it may stay high even when conditions improve — wages get stuck, skills erode, social norms shift. This is why proactive policy in recessions matters.