Classical Unemployment

Classical Unemployment

Unemployment caused by some form of real wage rigidity

(i) Minimum wage laws
[You need to know how minimum wage creates classical unemployment]
(ii) Trade Unions

[You need to know how the presence of trade unions result in classical unemployment.]
(ii) Efficiency wages [Please refer to the notes I have uploaded for you on efficiency wages. For this you also need to know the reasons why firms offer efficiency wages]

Structural Unemployment

Structural Unemployment

Unemployment that arises because of a mismatch between the character of the job and the workers in terms of

(i) Location (are jobs and unemployed workers located in the same area?)
(ii) Skills (what are the skills required for the jobs vacancies and the skills of those who are unemployed)

Mismatch arises because of changes in demand and technology
For example, technological change may have caused a worker's skills to become obsolete, and he or she may experience a period of unemployment before finding the opportunity to develop new skills and to adapt.

Frictional Unemployment

Frictional Unemployment

Unemployment that arises because it takes time for those:

(i) Who enter the job market for the first time to find jobs;
(ii) Who quit one job to find another

This is mainly due to the fact that information is imperfect and therefore it takes time for employers and workers to find an appropriate match. For example, job seekers tend to spend time to find the best possible job rather than take the first one available, and employers take the time to interview several candidates to find the best fit.

Voluntary Unemployment

What do we understand by the word ’voluntary unemployment’?

Voluntary Unemployment

Unemployment created when labour chooses not to work on the available jobs while anticipating better jobs to be forthcoming

Unemployment cannot be zero when the economy is at full employment or the NRU. Since zero unemployment is unachievable in a free labor market, Milton Friedman used the term natural rate of unemployment to describe the baseline rate of unemployment as some unemployment cannot be avoided. Types of unemployment present when the economy is at its natural rate of unemployment:

Introduction to Unemployment

Key concepts that you need to know:

Natural Rate of Unemployment

It is the average rate of unemployment around which the economy fluctuates. Can also be viewed as the rate of unemployment at which the economy gravitates in the long run . At this rate of unemployment there is no tendency for real wage to change as the labour market is in equilibrium (labour demand = labour supply)

Everyone who wants to work has a job. Therefore all unemployment is regarded as voluntary.