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Types and causes of Unemployment

Disequilibrium Unemployment

Cyclical or Demand Deficient unemployment

Cyclical unemployment exists when individuals lose their jobs as a result of a fall in aggregate demand (AD). The fall in AD, in the economy, results in the fall in real output and thus unemployment. It is called also known as demand deficient or Keynesian unemployment

Cyclical unemployment through a diagram

As we can see in the AD/AS diagram, the fall in AD to AD1 will result in a fall in the Real output (Y1).

This will force the firms to reduce their output and hence reduce their workforce from ADL to ADL1. However, due to ‘wage stickiness’ it is less likely that real wages will fall (as seen in the labour diagram). Therefore, the wages instead of coming down to W1 will remain at We. This will create a surplus situation where the aggregate demand for labour will be at ‘a’ and the aggregate supply of labour will be ‘b’.

cyclical unemployment

Wage stickiness: The firms may not be able to reduce the wages may be as a result of the following reasons:

  • They don’t want to create discontent among the workers by reducing their wages
  • Trade unions may not allow the wages to go down.
  • Labour contract may deter the firms to reduce the wages.

Equilibrium Unemployment

Structural unemployment

Structural unemployment occurs when certain industries decline because of long term changes in market conditions. These structural changes in the economy might lead to fall in demand for certain sectors of the economy. This is usually common in developing countries where primary sector generally reduces in size and secondary sector and tertiary sector might gain more importance. Change in technology is also one of the major reasons for structural unemployment, whereby certain kind of jobs become obsolete. Changes in consumer taste or preference may also be a cause of structural unemployment

Structural unemployment may worsen if there is 

  • Occupational immobility occurs when there are barriers to the mobility of labour between different industries and occupations.
  • Geographical immobility exists when there are barriers to people moving from one area to another to find work.

Frictional Unemployment

Frictional unemployment occurs when people leave their jobs and are unemployed while they are looking for a new job, or just having a break from working.

Seasonal Unemployment

Unemployment attributable to relatively regular and predictable declines in particular industries or occupations over the course of a year, often corresponding with the climatic seasons. 

Equilibrium unemployment through a diagram

Here, we can see what is called equilibrium unemployment represented by the arrows between point a and point b. Equilibrium unemployment is the term which means the situation is that the labor market is in equilibrium but there are still people who are not at work (represented by the arrows between points a and b.)

This is what would realistically be considered as full employment, since there will always be people who are unwilling or unable to take available jobs, causing the official rate of unemployment (calclated by) to be above zero, which is not a realistic reachable goal.

equilibrium unemployment

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