Types of Unemployment

Question 1

What is structural unemployment?

Answer 1

Unemployment arising due to changes in the structure of demand for labour

Question 2

What is the cause of structural unemployment?

Answer 2

1. Change in demand for type of labour skill
   - due to technological changes or changes in the structure of the economy
2. Geographical location of industries
3. Labour market rigidities
   - minimum wage laws, employment protection laws, and labour union activity makes employing new individuals more expensive for a firm
   - unemployment benefits reduce incentives to work

Question 3

What is frictional unemployment?

Answer 3

Occurs when workers are between jobs. It is less serious than structural unemployment, because it is not caused by lack of skill.

Question 4

What are examples of frictional unemployment?

Answer 4

1. People between jobs
2. New job seekers
3. People returning to the workforce

Question 5

What is seasonal unemployment?

Answer 5

When the demand for labor in certain industries changes on a seasonal basis because of variations in needs

Question 6

What is cyclical unemployment?

Answer 6

Type of unemployment occurring during recessionary gap (downturn of the business cycle)

Question 7

What are the causes of cyclical unemployment?

Answer 7

Also known as “demand-deficient unemployment”, it is caused by a fall in aggregate demand which results in loss of jobs in the economy.

It could also be caused by a negative supply shock

Question 8

What is natural rate of unemployment?

Answer 8

The sum of structural unemployment, frictional unemployment, and seasonal unemployment equals to the natural rate of unemployment. When unemployment = natural rate, it is said that the economy has full employment

Question 9

Why does fall in natural rate of unemployment cause economic growth?

Answer 9

At the natural rate of unemployment, the economy is producing at its potential output, and if the natural rate of unemployment decreases, the potential output increases