Unemployment is universally recognized as a disease with no proper cure. According to the ILO report, more than 200 million people globally or 6% of the world’s workforce were without a job in 2012. Today, almost every country, whether it be developed, developing or underdeveloped, is fighting from different types of unemployment issue.
In my previous article, I have discussed the Cost of Unemployment and in this article, I’m going to discuss the different types of unemployment & their causes with examples.
Types of Unemployment
There are three main types of unemployment but some economists define extra five types of unemployment namely Seasonal, Classical, Long-Term, Real & Natural unemployment. These we will discuss later.
At present, we will discuss the three main types of unemployment i.e. Structural, Frictional and Cyclical unemployment and their causes. The first two occurs as a natural unemployment and the third one occurs when demand falls, usually during a recession period.
Type1: Structural Unemployment
Structural unemployment occurs when there is a mismatch between the jobs available in the market and the skill levels of the unemployed. It occurs due to an underlying shift in the country’s economy that makes it difficult to find a job for some groups. Structural unemployment is also responsible for keeping the unemployment rate high even after the end of the recession period. It can also lead to higher natural unemployment if it is ignored by the policymakers.
Two Causes of Structural Unemployment
Structural unemployment is neither voluntary nor short-term. In fact, structural unemployment is the main cause of long-term unemployment.
Cause – 1
The first cause is the advancement in technology. A few decades ago when industrial revolution happened, many lost their jobs to machine & now many are losing their job to artificial intelligence. In coming years, 70% of the IT jobs will be lost due to automation as robots are cheaper than humans. Moreover, technology is advancing but education isn’t as most of the students need extra training before they can get a job.
Cause – 2
The second cause is job outsourcing. Many companies are moving their manufacturing or call centers to another country. It’s obvious, countries with lower cost of living will have cheap labors. It occurred in many states after NAFTA was signed in 1994 because of which many manufacturing jobs moved to Mexico. Now, many companies are setting up their manufacturing plant in India & China in order to take advantage of cheap labors.
Example – 1
Newspaper Industry: Web-based advertising has taken over newspaper advertising and also online news media has drawn customers away from physical newspapers. Newspaper employees, such as journalists, printers, and delivery route workers lost their job as their skills were focused on the paper’s method of distributing news.
Example – 2
IT Industry: Tech giants like Infosys, cognizant are continuously cutting their workforce as AI cuts labor cost. Moreover, it is believed that in coming years AI will take all the service sector jobs.
Example – 3
Industrial Revolution: A few decades ago, when industrial revolution came then all the workers were replaced by the machines. As machines were faster, cheaper & better, many companies choose machines over men.
Example – 4
Manufacturing: All the big companies such as Apple, Nokia, Sony are hiring Chinese manufacturers such as Foxconn as they are cheaper.
Type2: Frictional Unemployment
Frictional unemployment is self-caused unemployment as it occurs when workers leave their jobs to find a better or a right one. As a matter fact, frictional unemployment is unavoidable because the job market is continuously changing. Workers have to find new opportunities, go to interviews and even relocate before they can get into the emerging job market. It’s an inevitable part of the job search process which requires time, effort, and expense. The only good thing about frictional unemployment is that it’s short-term.
Four Causes of Frictional Unemployment
Cause – 1
Volunteerism is one of the biggest reason behind Frictional Unemployment. The employed who have saved enough from his unfulfilling job quits his job in order to search for the right job.
Cause – 2
Sometimes workers have to relocate for unrelated reasons. Due to this, they quit their job and remain unemployed until they find the new job.
Cause – 3
Frictional unemployment is also the primary reason for youth unemployment. When graduate students from high school, college enter the workforce, they look for a job that fits their new skills and qualifications.They are termed as unemployed until they find the new job.
Cause – 4
Sometimes people quit their job when they have to raise their children, get married or take care of their elderly relatives. This becomes the fourth cause of frictional unemployment. They remain unemployed until they re-enter the workforce.
Example – 1
The best example of frictional unemployment is s student after graduation. They are part of the labor force but termed as unemployed until they find work.
Example – 2
A mother quits her job in order to raise her child or a daughter quits her job to take care of her mother/father.
Example – 3
Imagine a construction worker working in Arizona. Is he employed in the winter season? Naah. This can also be termed as seasonal unemployment.
Type3: Cyclic Unemployment
Cyclical unemployment depends on the economy of the country. Whenever there is a fall in country’s GDP, the unemployment rate rises. This happens due to downturns in the business cycle and if the economy contracts for two quarters or more then the country is in recession. When the unemployment rate crosses 6% then it is considered to be high and cyclical unemployment is the main reason for this.
Why is it known as Cyclic?
It’s known as “cyclical” because it’s tied to the business cycle. A typical recession lasts around 18 months, depression lasts around 10 years and after this, the economy re-enters the expansion phase of the business cycle. The unemployed worker gets the job again. This also shows that cyclical unemployment is temporary & it depends on the length of the contraction.
How it leads to large-scale unemployment?
Spending of one is income to other. If people with less income or no income starts to spend less then companies lose too much profit as the demand for their product falls. If they don’t expect their sales to pick up anytime soon then they forced to cut down their workforce. This leads to higher unemployment which in turn leads to even more drop in demand. This is the reason why It results in large-scale unemployment.
What Causes Cyclical Unemployment?
Cause – 1
The only reason for cyclic unemployment is when the supply is much more than the demand. The actual term for this type of unemployment is demand–deficient unemployment. It is termed as cyclic unemployment when it happens during the recession phase of the business cycle.
Example – 1
The financial crisis of 2008: In 2008, many construction workers lost their jobs due to the burst of the housing bubble. As the housing crisis unfolded, home builders stopped constructing new homes. Approximately, 2 million construction workers lost their jobs due to this.
The Great Depression of 1929: The Great Depression had a devastating effect in both rich and poor countries. Everything including personal income, tax revenue, profits, and prices dropped at max. Moreover, more than 50% of the international trade was absorbed due to this. The unemployment rate in the U.S. rose to 25% and in some countries, it rose to as high as 33%.