Notes Unemployment

i)

Frictional Unemployment
The function of labour market is to match available jobs with available workers. If all jobs and workers were the same, or if the set of jobs and workers were static and unchanging, this matching process would be quick and easy. But the real world is more complicated. In practice, both jobs and workers are highly heterogeneous
(non-uniform).

Jobs differ in their locations, in the skills they require, in the working conditions and hours, and in many other ways. Workers differ in their career aspirations, their skills and experience, their preferred working hours, their willingness to travel, etc.

The real labour market is also dynamic or constantly changing and evolving. On the demand side of the labour market, technological advances, globalizations and changing consumer tasks spur the creation of new products, new firms and even new industries; while outmoded products, firms and industries disappear.

As a

result, new jobs are constantly being created, while some old jobs cease to be viable. The workforce in a modern economy is equally dynamic. People move, gain new skills, leave the labour force for a time to rear children or go back to school, and even change careers.

Because the labour market is heterogeneous and dynamic, the process of matching jobs with workers takes time. Short term unemployment that is associated with the process of matching workers with jobs is called frictional unemployment. The costs of frictional unemployment are low and may even be negative; that is frictional unemployment may be economically beneficial. First, frictional unemployment is short-term, so its psychological effects and direct economic losses are minimal.
Second, the search process leads to a better match between workers and jobs, a period of frictional unemployment is actually productive, in the sense that it leads to higher output over the long run. A certain amount of frictional unemployment seems essential to the smooth functional of a rapidly changing, dynamic economy.

ii)

Structural Unemployment
A second major type of unemployment is structural unemployment, or the long-term and chronic unemployment that exist even when the economy is producing at a

normal rate. Several factors contributing to structural unemployment. First, a lack of skill, language barriers, or discriminations keeps some workers from finding stable, long-term jobs. Migrant farm workers and unskilled construction workers who find short-term or temporary jobs from time to time, but never stay in one job for very long, fit the definition of chronically unemployed.

Second, economic changes sometimes create a long-term mismatch between the skills some workers have and the available jobs.

Finally, structural unemployment

can result from structural features of the labour market that act as barriers to employment. Examples of such barriers include unions and minimum wage law, both of

which

keep

wages

above

their

market-clearing

level,

creating

unemployment. We will discuss some of these structural features shortly.

The costs of structural unemployment are much higher than those of frictional unemployment. Because structurally unemployed workers do little productive work over long periods, their idleness cause substantial economic looses both to the unemployed workers and to society. Structurally unemployed workers also lose out on the opportunity to develop new skill on the job, and their existing skills wither from disuse. Long spells of unemployment are also much more difficult for workers to handle psychologically than the relatively brief spells associated with frictional unemployment. iii)

Cyclical Unemployment
The third type of unemployment occurs during periods of recession (i.e. period of low production) and is called cyclical unemployment.

Increase in cyclical

unemployment, although they are relatively short-lived, are associated with significant declines in real GDP and are therefore quite costly economically.

In principle, frictional, structural and cyclical unemployment add up to the total unemployment rate. In practice, sharp distinctions often cannot be made between the different categories, so any breakdown of the total unemployment rate into the types of unemployment is necessarily subjective and approximate.