1. THE CAUSES AND
CATEGORIES OF
UNEMPLOYMENT
MODULE 13

2. TYPES OF UNEMPLOYMENT
 There are three types of unemployment:
1. FRICTIONAL UNEMPLOYMENT
2. STUCTURAL UNEMPLOYMENT
3. CYCLICAL UNEMPLOYMENT

3. FRICTIONAL UNEMPLOYMENT
 Frictional unemployment consists of those searching for jobs or
waiting to take jobs soon. This type of unemployment is
regarded as somewhat desirable, because the economy is more
productive if workers take the time to find jobs that are well-
matched to their skills, and workers that are unemployed for
short amounts of time while searching for the right job don’t
experience great hardships.
 Workers who spend time looking for employment are engaged
in job search.
 Frictional unemployment is also regarded as inevitable because
of two reasons:
1. the constant process of job creation and job destruction
2. new workers are always entering the job market

4. STRUCTURAL UNEMPLOYMENT
 Structural unemployment results when there are more
people seeking jobs in a labor market than there are jobs
available at the current wage rate.
 This type of unemployment results due to changes in the
structure of the demand for labor, for example, when
certain skills become obsolete or geographical distribution
of jobs changes.
 The most important factors that lead to a wage rate that is
above the equilibrium price are minimum wages, labor
unions, efficiency wages, and the side effects of
government policies.

5. CAUSES OF STRUCTURAL
UNEMPLOYMENT
 A minimum wage is a government mandated floor on the
price of labor. This price floor leads to a surplus in the
labor market, which means that more people want to work
than can find jobs at the minimum wage, which leads to
structural unemployment.
 Labor unions can win higher wages from employers than
workers that bargain individually can, through collective
bargaining. The union can threaten firms with a labor
strike, which is a collective refusal to work. This pushes
the wage that workers receive above the equilibrium, so
that there are more people willing to work at the wage
being paid than there are jobs available, which leads to
structural unemployment.

6. CAUSES OF STRUCTURAL
UNEMPLOYMENT
 Efficiency wages refer to when the employer sets the
wages above the equilibrium wage as an incentive for their
workers to perform better. The result of efficiency wages
is more workers than jobs available, which leads to
structural unemployment.
 Side effects of public policy also may contribute to
structural unemployment, as an unintended side effect.
When the unemployment benefits reduce the incentive to
quickly find a new job, thus keeping people unemployed
for longer, the benefits increase structural and frictional
unemployment.

7. THE NATURAL RATE OF UNEMPLOYMENT
AND CYCLICAL UNEMPLOYMENT
 A certain amount of unemployment is normal, or
“natural”, and actual unemployment fluctuates around
this normal level.
 The Natural Rate of Unemployment (NRU) is the normal
unemployment rate around which the actual rate of
unemployment rate fluctuates.
 Cyclical unemployment is the difference between the
actual and the natural rates of unemployment. It is caused
by the recession phase of the business cycle, and is
sometimes called deficient demand unemployment.

8. RELATIONSHIPS BETWEEN THE TYPES OF
UNEMPLOYMENT
1. NATURAL UNEMPLOYMENT = FRICTIONAL UNEMPLOYMENT +
STRUCTURAL UNEMPLOYMENT
2. ACTUAL UNEMPLOYMENT = NATURAL UNEMPLOYMENT +
CYCLICAL UNEMPLOYMENT
 The NRU is also called the full employment rate of unemployment.
 Full employment does not mean zero unemployment. It is reached
when labor markets are in balance; the number of job seekers equals
the number of job vacancies. At this point the economy’s potential
output is being achieved.
 The natural rate of unemployment is not fixed; it changes over time
and is affected by economic policies.

9. CAUSES IN THE CHANGE
IN THE NRU
 The causes of change in the natural rate of unemployment are:
1. Changes in the characteristics of the labor force: more
women, older/younger workers, more educated, etc.
2. Changes in labor market institutions: unions, employment
agencies, and technological change for example.
3. Changes in government policies: minimum
wages, unemployment benefits, job training, employment
subsidies, for example.