Unemployment: Types & Effects

A typical 4-mark "describe the types of unemployment" question rewards four clearly distinct types, each with a one-line explanation. The syllabus names four.

Cyclical (demand-deficient) unemployment

Cyclical unemployment is caused by a fall in aggregate demand during a recession. When firms cannot sell as much output, they need fewer workers and lay people off.

The mechanism: a recession → AD falls → firms cut output → firms hire fewer workers / make existing workers redundant. As the economy recovers, AD rises again and cyclical unemployment falls.

This is also called demand-deficient unemployment because the underlying cause is too little demand for goods and services.

Structural unemployment

Structural unemployment is caused by the long-term decline of an industry, or a mismatch between the skills of unemployed workers and the skills required by the new jobs available.

Two distinct sources:

• Industry decline. Coal mining, shipbuilding, manual telephone-exchange operating and high-street retail have all shrunk dramatically over recent decades. The workers in those industries cannot all be redeployed in the new growing sectors.
• Skills mismatch. Even when total demand for labour is fine, individual workers may lack the specific skills the open jobs require. A former coal miner without IT skills cannot easily take a software-engineering job.

Structural unemployment is long-term. It does not go away when the economy recovers, because the underlying problem is not weak demand. The solution is retraining, education and regional policy.

Frictional unemployment

Frictional unemployment is the short-term unemployment that arises when workers are moving between jobs: leaving one position and looking for the next.

This kind of unemployment is voluntary and temporary. A worker who has resigned from one job to look for a better one is frictionally unemployed for the days, weeks or months until they find the new position. Almost every healthy labour market has some frictional unemployment, simply because matching workers to jobs takes time.

Better information about available jobs (online job portals, job centres) reduces frictional unemployment by shortening the search.

Seasonal unemployment

Seasonal unemployment is caused by demand for labour varying with the seasons in particular industries.

Examples:

• Ski resort workers are out of work in summer.
• Fruit pickers are needed only during the harvest months.
• Construction workers in cold climates face winter slowdowns.
• Tourism workers in coastal resorts may have very low demand in off-season months.

Seasonal unemployment is predictable; workers in seasonal industries often have second jobs or move between industries with opposite seasons.

The four types at a glance