1. Types of unemployment
Frictional, structural and disequilibrium

2. Frictional unemployment
 Temporarily unemployed whilst moving
between jobs
 Often measured by number of vacancies
 Includes geographical immobility (cost of
moving, family ties, lack of information)
 Includes occupational immobility
(discrimination, need for training)
 Includes seasonal unemployment

3. FRICTIONAL cont...
The search theory of unemployment
 Will a redundant worker take a lower paid job?
 Will consider living costs (mortgage
commitment?), status, working conditions, chance
of better paid job becoming available
 As time passes, a gradual reduction in
'aspirational wage' will take place
 Either desired job is found (after search), desired
job becomes available or accepts lower-paid job
 This is classed as 'voluntary' unemployment

4. FRICTIONAL cont...
Factors affecting search period
 Redundancy pay
 Welfare benefits (replacement ratio – ratio
between in-work and out-of-work pay)
 Savings or family support
 Commitments (e.g. main income earner for
household?)

5. Structural Unemployment
 Structural decline of industries (sunset
industries) and growth of others (sunrise)
 Due to international competition (e.g.
cheap-labour economies)
 Or due to changing consumer wants
 Or due to improving technology
(technological unemployment)
 Or due to depleting natural resources

6. STRUCTURAL cont...
Impact
 Regional unemployment (e.g. ship building,
mining, textiles)
 Changing jobs available (low to high value-added)
 Resisted (by unions and media) due to human
cost and national pride – 'our jobs going abroad',
'destruction of communities'
 Largely beneficial in long run – real incomes rise
and UK maintains competitive edge
 Automation reduces need for labour whilst
mechanisation means workers needed with
higher skills

7. Disequilibrium Unemployment
 The 'natural rate' of unemployment is where
demand for labour equals supply of labour
(equilibrium)
 This is not the same as zero unemployment
 Frictional and structural unemployment
make up the natural rate
 Economy in disequilibrium when
 AS labour exceeds AD labour
 Sticky wages prevent wages falling to clear market

8. DISEQUILIBRIUM version 1
Classical or real-wage unemployment
 Excessive wages cause supply to exceed
demand
 Classical economists believe that if the
labour market is competitive then wage
level will fall
 Blame is cast on trade unions and
restrictive legislation for firms

9. DISEQUILIBRIUM version 2
Cyclical, Keynesian or demand-
deficient unemployment
 Deficient aggregate demand
 Based on Say's Law (19th century economist
Jean-Baptiste Say)
 “Supply creates its own demand”
 When an output is produced the factor incomes
are sufficient to create demand for additional
output
 Monetarists argue that monies are spent therefore
demand-deficiency won't arise
 Keynesians argue that money may be held
therefore causing insufficient demand

10. Link with inflation
 We came across the Keynesian view that money can be
held rather than spent in relation to inflation also
 Monetarists assertion that people spend the money they
receive led to the belief that inflation was directly related to
the money supply (MV=PT)
 This same belief leads to the conclusion that demand will
follow supply and demand-deficient unemployment does
not exist
 Keynes believed that people may hold their money
therefore the link between M and P may not always hold
 This same belief leads to the conclusion that Say's Law
does no necessarily follow and there may be periods of
increased supply failing to lead to increased demand