Unemployment, also referred to as joblessness, occurs when people are without work and actively seeking employment. During periods of recession, an economy usually experiences high unemployment rates. There are many proposed causes, consequences, and solutions for unemployment.


  1. CLASSICAL-Occurs when real wages for jobs are set above the market clearing level. It causes the number of job seekers to be higher than the number of vacancies.
  2. CYCLICAL-Occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. Demand for goods and services decreases, less production is needed, and fewer workers are needed.
  3. STRUCTURAL-Occurs when the labor market is not able to provide jobs for everyone who wants to work. There is a mismatch between the skills of the unemployed workers and the skills needed for available jobs. It differs from frictional unemployment because it lasts longer.
  4. FRICTIONAL-The time period between jobs when a worker is searching for work or transitioning from one job to another.
  5. HIDDEN-The unemployment of potential workers that is not taken into account in official unemployment statistics because of how the data is collected. Foe example, workers are only considered unemployed if they are looking for work so those without jobs who have stopped looking are no longer considered unemployed.
  6. LONG TERM-Usually defined as unemployment lasting longer than one year.

MEASURING UNEMPLOYMENT-Unemployment is calculated as a percentage by divided the number of unemployed individuals by the number of all individuals currently employed in the workplace. The final measurement is called the rate of unemployment.

EFFECTS OF UNEMPLOYMENT-When unemployment rates are high and steady, there are negative impacts on the long run economic growth. Unemployment wastes resources, generates redistributive pressures and distortions, increases poverty, limits labor mobility, and promotes social unrest and conflict. The effects of unemployment can be broken down into three types:

  1. INDIVIDUAL-People who are unemployed cannot earn money to meet their financial obligations. Unemployment can lead to homelessness, illness, and mental stress. It can also cause underemployment where workers take on jobs that are below their skill level.
  2. SOCIAL-An economy that has high unemployment is not using all of its resources efficiently, specifically labor. When individuals accept employment below their skill level the economies efficiently is reduced further. Workers lose skills which causes a loss of human capital.
  3. SOCIO-POLITICAL-High unemployment rates can cause civil unrest in a country.

REDUCING UNEMPLOYMENT-There are numerous solutions that can help reduce the amount of unemployment:

  1. DEMAND SIDE SOLUTIONS-Many countries are unemployed worker through social welfare programs. Individuals receive unemployment benefits include insurance, compensation, welfare, and subsidies to aid in retraining. An example of a demand side solution is government funded employment of the able-bodied poor.
  2. SUPPLY SIDE SOLUTIONS-The labor market is not 100% efficient. Supply side solutions remove the minimum wage and reduce the power of unions. The policies are designed to make the market more flexible in an attempt to increase long run economic growth. Examples of supply side solutions include cutting taxes on businesses, reducing regulation, and increasing education.

FULL EMPLOYMENT-Full employment is the level of employment rates where there is no cyclical or deficient demand unemployment. Mainstream economists define full employment as an acceptable level of unemployment somewhere above 0%. Full employment represents a range of possible unemployment rates based on the country, time period, and political basis.

IDEAL UNEMPLOYMENT-Full employment is often seen as an “ideal” unemployment rate. Ideal unemployment excludes types of unemployment where labor market inefficiency is reflected. Only some frictional and unemployment exists, where workers are temporarily searching for new jobs. This classifies the unemployed individuals as being without a job voluntarily. Ideal unemployment promotes the efficiency of the economy. Lord William Beveridge defined “full employment” as the situation where the number of unemployed workers equaled the number of job vacancies available. He preferred that the economy be kept above the full employment level to allow for maximum economic production.

NON-ACCELERATING INFLATION RATE OF UNEMPLOYMENT(NAIRU)-The full employment unemployment rate is also referred to as “natural” unemployment. In an effort to avoid this normative connotation, James Tobin introduced the term “Non-Accelerating Inflation Rate of Unemployment” also known as the NAIRU. It corresponds to the level of unemployment when the real GDP equals potential output. The NAIRU has been called the “inflation threshold”. The NAIRU states the inflation does not rise or fall when unemployment equals the natural rate. As an example, the United States is committed to full employment. The “Full Employment Act” was passed in 1946 and revised in 1978. It states that full employment in the United States is no more than 3% unemployment for persons 20 and older, and 4% for persons aged 16 and over.