Unemployment of any factor of production is wastage, something which could be put to good use but lays idle. The issue and main causes have been debated among the Keynesians and New Classicals, mainly at the beginning of the 20th Century.

Here we will mainly talk about labour unemployment, but capital can be unemployed too

Labour Unemployment

The people looking for work as a percentage of those in work

So no, the wastemen Jeremy is talking to and the disabled also do not come under this definition. They are deemed economically inactive

But part time work and flexitime is included

So if we have 100000 seeking work and 1m working, we have a 10% unemployment rate

How it’s measured in practice

Measuring the number in work is relatively easy, the problem is:

How do you define when a person is seeking work?

The traditional way the UK government done this was by measuring the claimant count i.e. the number claiming jobseekers allowance.

But this underestimated the true level, as not everyone who wants to work claims e.g. Married women, demoralised, have another source of income.

ILO Labour Force Survey

Others used, and we added the Labour Force Survey back in 1997. LFS finds the labour force i.e all able and looking to work, and finds those job seeking through a sample survey. It is said to make up for the inaccuracy.

There is also the employment ratio, which is the % of all over 16 working. Over the past 20 years the figure has been around 60%…

The Economically Inactive as mentioned above is any human being which isn’t working or seeking work, thus not in the labour force. Can be the retired, disabled, children…

The Causes of Unemployment

Every economy has people unemployed, no matter how well it is performing with free migration and constant structural shifts.

Then again, there was Stalin, but let’s not go there…

Here, we will look at the major causes of unemployment in a free market economy

Structurally Unemployed

These are the workers who’s skills are no longer in demand in their home country. This happens for two main reasons:

  1. The company has found it cheaper to employ overseas e.g. Bombardier
  2. The company has found it cheaper to replace the worker with a machine (automation) e.g. weavers, miners
It can also be the industry itself has died out, although this is much rarer e.g ferreters, chimney sweepers.

Cyclically Unemployed

Unemployment varies over the economic cycle, and during a downturn unemployment rises across pretty much all sectors.

If you’re laid off because the economy is contacting you have succumbed to cyclical unemployment…

See how periods of high unemployment have happened in recessions 1980-82, 90-92 and 2008-

Frictionally Unemployed

People change jobs, whether if be changing firm or career or both.

In the interim they are said to be frictionally unemployed, but there must be a job open to them.

Regional Unemployment

If you’re unemployed due to where you live….

You may have the skills, the economy may be good but you cannot afford to move to a better area with jobs. Work is just too far away

Experienced virtous and vicious cycles?  This is how some areas become wealthy and some ghettos. We see regional disparities in both areas of the country, and urban neighbourhoods.

So why does unemployment persist in clusters?

Three main reasons:

  1. A local version of the multiplier effect
  2. Geographical immobility of labour
  3. A higher chance of occupational immobility due to unemployed parents etc

Of course, there are many other factors such as cultural and socioeconomic which kickstart, and sustain this cycle.

The old cotton, shipbuilding and mining towns in the North create a ‘North-South divide’…

Seasonally Unemployed

You live in Faliraki and work as a barman. In the winter it’s dead (and it is, believe me), and you find yourself watching Jeremy Kyle, counting the days down until May 1st…

Some sectors employ only at certain times of the year e.g. Tourism, Restaurants, Lapland

Real Wage Unemployed

People don’t want to work because the wage offered is too low…..

Mostly comes in the form of:

  1. Trade Unions refused pay rises
  2. Individuals refusing to work at the going rate

Also called voluntary unemployment, the old classical school believed this was the only cause of unemployment as labour markets would clear. We know, years later, that this is not the case…

~The Search Theory of Unemployment says that individuals who expect a certain level of income will keep revising down their expectations the longer they are unemployed, until they find a spot…

Think of this the next time your taxi driver tells you about his past life as a banker

The Natural Rate of Unemployment

Reviewing the Phillips Curve: The discovery of a natural rate of unemployment was a victory for supply side economists over the demand side view that prevailed when this was founded(about 1970). Originally, in the late 1950’s, A.W Phillips had found an inverse relationship looking back in history between inflation and unemployment.

After this was founded, it became a key point of macroeconomic policy; for some time after it was thought there is a trade off between inflation and unemployment. It was thought not possible that the ideal of low inflation and unemployment could actually be achieved. This relationship proved fairly solid through the 1960’s, and it appeared fine tuning economics had conquered a major issue, leading Milton Friedman to quote ‘We’re all Keynesians now’.

Breakdown and Reform of the Phillips Curve

Stagflation events in the 1970’s however proved that levels of inflation, only had a temporary and small effect on unemployment, which would eventually restore due to the expectations of labour when demanding pay rises. That is although inflation targeting would for the short term reduce cyclical unemployment, it does not reduce structural unemployment at all.

Eventually, unemployment would revert back to the level where anticipated inflation equals actual inflation and there is no money illusion. Another finding is that if the inflation was cost push, it would actually result in rising unemployment, known as stagflation, through a greater balance of payments deficit on necessary inflated import prices.

The Natural Level of Unemployment

Unemployment levels where anticipated inflation is correct is the Natural Level of Unemployment. This rate is where inflation neither rises not falls, i.e the change in prices is stable, and is the rate the economy tends towards after inflation or deflation(although this takes greater time to adjust).

It applies that the NAIRU is the unemployment at the economies long run capacity to produce. Milton Friedman was the founder of this view and debated with fellow great economist Paul Samuelson over one assumption of how this works.

The Long Run Phillips Curve in Practice…

The Process: Say we start at the natural rate(A), and a huge injection of spending causes more workers to be hired. Two things happen to get us to B, which feed off one another. Firstly as we are at capacity employment, factors of production are scarce and to employ more rises firms costs, causing cost push inflation. The high inflation of goods brings a high inflation of money wages, and this draws in more workers.

Even though the money wages rise in about equal step with goods, people feel they are earning more, i.e they suffer money illusion, causing unemployment to fall further. But workers only think ‘yippee’ for a short time, then they think, hang on, living costs are also soaring, I demand a further pay rise!(They ‘revise up their inflationary expectations’)

Reversion: Workers are less pleased than they thought, and demand further pay rises if they are to remain staffed. Unemployment manifests itself in two ways: 1.Firms cannot afford further pay rises and have to offload more demanding workers, deciding to cut down. 2.Workers in less unionised industries decide to cut back on their hours or leave their job altogether.We are back at C, with more inflation, and the Phillips curve has shifted with the NAIRU prevailing once again.

The natural rate of the U.S over the last 60-odd years looks about 5-6%

Friedman v Samuelson: Friedman stated that workers will have money illusion in inflation, but it will be short lived, and we will return to the natural rate shortly when the workers become more demanding. Everytime people will act rationally and change their wage demands equally with inflation.

Samuelson,(taken from Animal Spirits) said Friedman was like the boy who could spell ‘banana’ and didn’t know when to stop. He said people behave more adaptive and money illusion could set in(before people realise how fast prices are rising).

The Unemployment of Capital

By capital we mean anything labour is employed to use to produce (learn more)

In hard times for the macro economy, businessmen across all sectors tend to cut back on production, sometimes closing down altogether. This leads to disinvestment, leaving massive amounts of machinery, buildings and equipment sitting idle.

Effects on the Economy

Idle capital has 3 main negative effects:

  1. Less replacement investment further reducing aggregate demand.
  2. Further unemployment for workers employed to maintain capital. E.g. cleaners, technicians.
  3. Hysteresis: A fall in productive capacity due to capital depreciation.

Battersea Power station in London, a classic example of capital unemployment

Replacement Investment and Recessions

An idea of Albert Aftalion, a little known economist of the early 20th century, was that the length of a recession was heavily influenced by the life cycle of the nation’s capital stock…

Even in Britney Spears like depressions, output very rarely contracts over 10%, meaning that most physical capital will still be in use.

This capital will be replaced in time and when it is, replacement investment is said to kick start the economy through a multiplier-accelerator process.

This applied better in the 18th-19th century however. Nowadays financial markets have a much bigger effect then this possibly could…


Rational Expectations is where people make choices that are in their best interests given the info they have. The ‘Rational Economic Man’ introduced earlier. The neo classical economic assumption created by Robert Lucas.

Having these exact expectations is rare in reality as people are emotionally affected by the animal spirits. People also economise on their time and effort too when making decisions, aswell as considering utility, price and budget.

Adaptive Expectations is where people make a choice is made based upon past experience. An animal spirit of sentiment or fairness may cause this to play. E.g I will credit default swap on some mortgage debt as this has been a good source of revenue in the past or ‘I didn’t work this many hours before, the manager’s being unfair!'(when really they believe in you to do a task) are examples of where this can lead to irrational decision making.


4 Responses to Unemployment

  1. Pingback: Thinktank « Zahablog's Economic Page

  2. MikivKty7 says:

    Helpful post. Thanks for posting

  3. IlkicSeo1 says:

    Howdy everyone, could you aid please.

    How come will not the links on the top menu of the site web page that post a comment work for me?

    Appreciate it

    • Zahablog says:

      Hey, do you mean the work experience guru section? Just fill in all the ‘required’ post sections and should run smoothly.
      Thanks for you’re visit!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: