Types and costs of unemployment

There are two very different views on unemployment. On one side, in the ‘classical view’, there are only unemployed people who are not able and willing to work at the going wage rate. In other words, if people would accept a lower wage rate they could find a job. In this view, all unemployment is essentially a short term problem and the best solution is ‘lassiez-faire’ – that is, leave the market to get on with it and the problem will go away.

If people accept loer wage rates then the costs of living will fall as firms will not need to charge such high prices, so in fave workers will find the lower wages are acceptable once they start working. For this reason, it is called ‘real wage’ unemployment, where wages have been forced above the market-clearing level. People who believe that this is the only cause of unemployment think that out-of-work benefits should be cut, trade unions should be curtailed and there should not be a minimum wage. Thus, unemployed people will be forced to work.

In the opposing ‘Keynesian’ view, people can be unemployed even in the long run. This is because there is insufficient aggregate demand in the economy If you agree that the economy can be in equilibrium but not everyone has a job then you are arguing that there is demand deficient unemployment, or cyclical unemployment. Keynes said that if people do not spend, and save too much, there are multiplier effects in the economy, and less spending means there are fewer job opportunities. If people are loosing jobs then there will be less spending and the vicious circle continues. Even if wages are cut there will not be more people employed, in fact lower wages mean that there is even less spending, so even fewer people are needed in unemployment.

Apart from saving too much, other reasons for demand deficient unemployment are lack of business confidence, increase in the value of currency, slow rate of productivity growth relative to other countries, external shocks such as oil price rises; and increased use of imports from low wage economies.

Another argument for employment problems that are not linked solely to labour being unwilling to work at the going rate is hat the economy is undergoing structural change and therefore different types of labour are required. The skill set of those, for example, who are trained in manufacturing will not have much value in a business based in the service sector. Clearly, over time, as fewer people are being trained for manufacturing and more for services, this kind of structural unemployment will disappear. But, as Keynes said, ‘in the long run we are all dead’, so in the view of many there out to be proactive policies put in place to deal with both demand-deficient and structural kinds of unemployment.

There will always be one kind of unemployment, frictional unemployment – that is, people who are moving from one job to another – but this kind of unemployment is a sign of a healthy, flexible labour market with people willing to change jobs in order to improve their prospects.

Costs of unemployment
The costs of unemployment to the economy include:

  • The cost the individual and dependants. People will have lower incomes an living standards will fall. However, there is a wider unseen cost, as people out of work loose moral and their skill sets can become quickly obsolete.
  • The cost to firms. Firms will find that people spend less, so they will have to lower price and will make less profit. However, it may mean that people are more willing to stay in their jobs owing to fear of unemployment, so they may work harder.
  • The cost to government. As unemployment rises the government has to pay more in jobseekers benefits and will receive less tax.
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