Define unemployment, explain its main types and causes, and assess its consequences

What this dot point is asking

The syllabus wants you to define unemployment, explain its main types and causes, and assess its consequences. The big idea is that unemployment means people who want to work cannot find jobs, that it has several different causes needing different remedies, and that it is costly both to the individuals affected and to the whole economy, which is why low unemployment is a government aim.

The answer

What unemployment is

Note that people who are not looking for work, such as full-time students or retirees, are not counted as unemployed; they are outside the labour force.

The main types and causes of unemployment

Unemployment has different causes, and the type matters because each needs a different policy:

• Cyclical unemployment is caused by a fall in aggregate demand during a downturn. When spending falls, firms sell less, produce less, and lay off workers. It rises in recessions and falls in booms.
• Structural unemployment is caused by a long-term change in the structure of the economy, so that some workers' skills are no longer wanted. Workers from a declining industry may not have the skills the growing industries need, a skills mismatch.
• Frictional unemployment is the short-term unemployment of people moving between jobs. There is always some, as workers leave one job and take time to find another.

The consequences of unemployment

Unemployment is costly on several levels:

• For the individual. They lose their wage, so income and living standards fall, and prolonged unemployment can erode their skills and wellbeing.
• For the economy. Unemployed workers are idle resources, so the economy produces less than it could. This lost output is shown as a point inside the production possibility curve.
• For the government. It pays more in support to the unemployed and collects less in income tax, worsening its budget.
• Wider problems. High unemployment is linked to poverty, inequality and social problems.

Why low unemployment is the aim

Because of these costs, governments aim for low unemployment, meaning most people who want work can find it. They accept that some frictional unemployment is unavoidable, since there will always be people between jobs, so the aim is low, not zero, unemployment.

Examples in context

Example 1. Structural change and retraining in Singapore. As Singapore's economy has shifted away from labour-intensive manufacturing toward higher-skill services, some workers have faced structural unemployment. Schemes such as SkillsFuture help workers retrain for growing industries, which is the appropriate supply-side response to a skills mismatch.

Example 2. Cyclical unemployment in a recession. During a global downturn, falling demand for exports and weaker spending lead firms to cut output and lay off workers, raising cyclical unemployment. A government may respond by raising its own spending to support aggregate demand until the economy recovers and firms rehire.

Try this

• Cue. Define unemployment. A situation where people who are willing and able to work, and are actively looking for a job, cannot find one.

• Cue. State the cause of cyclical unemployment and the policy used to reduce it. A fall in aggregate demand during a downturn; it is reduced by policies that raise aggregate demand so firms produce more and hire workers.

• Cue. Explain why high unemployment represents a cost to the whole economy. Unemployed workers are idle resources, so the economy produces less than it could; this lost output is shown as a point inside the production possibility curve and cannot be recovered.