Definition
Unemployment exists when people who are willing and able to work at the going wage rate cannot find a job.
The unemployment rate is the percentage of the labour force that is unemployed.
The main types
| Type | Cause | Example |
|---|---|---|
| Cyclical | A fall in aggregate demand during a recession | Fewer jobs when spending falls |
| Structural | A mismatch between workers' skills and available jobs | Factory workers when manufacturing declines |
| Frictional | The time taken to move between jobs | A graduate searching for their first role |
| Seasonal | Demand varies with the time of year | Tourism or farming jobs in winter |
| Real wage | Wages are held above the equilibrium level | Minimum wage or strong unions |
The diagram
For cyclical unemployment, use the AD/AS diagram:
- AD shifts left.
- Real output falls.
- Firms need fewer workers, so unemployment rises.
For real wage unemployment, use the labour market diagram:
- Draw demand for labour and supply of labour.
- The wage is held above the equilibrium.
- The gap between labour supplied and labour demanded is unemployment.
Chains that earn marks
Cyclical:
A fall in consumer spending reduces aggregate demand, so AD shifts to the left. Firms sell fewer goods and need less labour, so they reduce hiring and may make workers redundant. As a result, unemployment rises.
Structural:
Technological change reduces the demand for low-skilled manufacturing workers. Because these workers do not have the skills required for available jobs in services or technology, they remain unemployed even when vacancies exist. This is structural unemployment, and it is not solved by increasing aggregate demand alone.
Why the type matters for policy
This is the most common evaluation point.
| Type | Suitable policy |
|---|---|
| Cyclical | Expansionary monetary or fiscal policy |
| Structural | Education, training, subsidies for relocation |
| Frictional | Better job information, faster benefit processing |
| Seasonal | Retraining, diversified local industry |
| Real wage | Labour market reform |
If you recommend the wrong policy for the type, the evaluation is weak.
Example:
Expansionary fiscal policy may reduce cyclical unemployment, but it will do little for structural unemployment, because the problem is a skills mismatch rather than a lack of demand. In that case, spending on training is more appropriate.
That is a strong evaluative point because it links the diagnosis to the policy.
Common lost marks
- Listing types without explaining one. Choose the relevant type and develop it.
- Mixing up cyclical and structural. One is demand, the other is skills.
- No diagram where one is expected. Use AD/AS or the labour market diagram.
- Recommending a policy without explaining the mechanism. Say how it works.
- Ignoring the cost of unemployment. Lost output, lower tax revenue, higher benefit spending.
Evaluation angles
- What type of unemployment is this?
- How quickly can the policy work?
- What is the opportunity cost of the policy?
- Could the policy create inflation?
- Are there regional differences?
Quick check
- Define unemployment.
- Explain cyclical unemployment with a chain.
- Explain structural unemployment with a chain.
- Match one policy to each type.