Types of unemployment

A) Seasonal unemployment

Is a periodic unemployment. E.g. Agricultural workers suffer from unemployment during

agricultural lean seasons. Workers in developed countries can however easily switch skills to
meet varying labor demands. It can also be countered through government intervention. In
addition to the laborers, regular seasonal changes in employment / labour demand affects certain
industries more than others such as: Catering and leisure, Construction, Retailing, Tourism and
Agriculture.
B) Frictional unemployment

Is a transitional unemployment due to people moving between jobs: Includes people

experiencing short spells of unemployment, and new and returning entrants into the labour
market
Imperfect information about available job opportunities can lengthen the period of someone’s job
search. In general, Frictional unemployment refers to the unemployment that results from the
time that it takes to match workers with jobs. In other words, it takes time for workers to search
for the jobs that are best suit their tastes and skills.
C) Structural unemployment

Arises from the mismatch of skills and job opportunities as the pattern of labour demand in the
economy changes and often involves long-term unemployment. This type of unemployment is
prevalent in regions where industries go into long-term decline. Good examples of structural
unemployment include industries such as mining, engineering and textiles.
Structural unemployment is the unemployment that results because the number of jobs available
in some labor markets is insufficient to provide a job for everyone who wants. It occurs when the
quantity of labor supplied exceeds the quantity demanded.
Structural unemployment is often thought to explain longer spells of unemployment and Large
scale unemployment caused by low productive capacity. Unlike cyclical unemployment,
structural unemployment is of long-term nature; thus, reduction of structural unemployment
requires expansion of productive capacity which takes time.

Chapter III Page 1 of 6

 D) Cyclical (Keynesian) unemployment

Under cyclical (Keynesian) unemployment:

 There is a cyclical relationship between demand, output, employment and unemployment
 Is caused by a fall in aggregate demand leading to a loss of real national output and
employment
 A slowdown can lead to businesses laying off workers because they lack confidence that
demand will recover

Keynes argued that an economy can become stuck with a low rate of AD and an economy
operating persistently below its potential. Look at the graphs below; Y* representing full
employment output level, sometimes national output falls due to a fall in demand, this is called
recession. Labor demand declines, additional unemployment occurs to the extent of ee*. This is
called cyclical unemployment.

LRAS
Gener Real
al Wage
Price Level
Level Supply
of
Labour
P W
1 W1
P 2
2
SRAS
A LD Deman
A D1 2 d for
Y2 Y1 D2Yf E2 E Labour
YFC
c
Real National 1 Employment2 of
Income Labour

In general,
– Short-run unemployment is the cyclical rate of unemployment and

– Long-run unemployment is the natural rate of unemployment

Chapter III Page 2 of 6

Natural Rate of Unemployment
The amount of unemployment that the economy normally experiences and does not go away on
its own even in the long run is called natural rate of unemployment. In other words, it is the long-
run average or “steady state” rate of unemployment. The labor market is in steady state, or in
long-run equilibrium, if the unemployment rate is constant.
Natural rate of unemployment is the average or long-run rate of unemployment around which the
economy fluctuates. In a recession, the actual unemployment rate rises above the natural rate. In
a boom, the actual unemployment rate falls below the natural rate.
Economists believe that such kind of unemployment is created when real wages are maintained
above their market clearing level leading to an excess supply of labour at the prevailing wage
rate or if the national minimum wage is set too high.

2.8.1.2 Solutions to unemployment

 boost aggregate demand e.g. increase government spending, build statues (creating

jobs), reduce taxes
 interest rates reduced: more investment, more money borrowed, more money
spend, more jobs
 Supply side economics: train the workers make them more skilful. Also reduce taxes
to increase working incentives
 Lower the retirement ages/ raise school leaving age: it reduces unemployment
however these days is unlikely

2.8.2Inflation

There are two primary types of inflation: demand-pull and cost-push. Understanding which type
of inflation is occurring at any given point in time is important if policymakers want to respond
appropriately. The two types of inflation are not mutually exclusive, so it is possible for both to
occur simultaneously. Left untreated, inflation can cause a wage-price spiral or even
hyperinflation.
2.8.2.1 Types and causes of inflation

Chapter III Page 3 of 6

The term inflation is usually used to indicate a rise in the general price level, though one can
speak of inflationary movements in any single price or group of prices.
The most important inflation is called demand-pull or excess demand inflation. It occurs when
the total demand for goods and services in an economy exceeds the available supply, so the
prices for them rise in a market economy. Historically this has been the most common type and
at times the most serious. Every war produces this type of inflation because demand for war
materials and manpower grows rapidly without comparable shrinkage elsewhere. Other types of
inflation occur more readily in conjunction with demand-pull inflation.
Another type of inflation is called cost-push inflation. The name suggests the cause--costs of
production rise, for one reason or another, and force up the prices of finished goods and services.
Often a rise in wages in excess of any gains in labor productivity is what raises unit costs of
production and thus raises prices. This is less common than demand-pull, but can occur
independently as well as in conjunction with it.
A third type of inflation could be called pricing power inflation, but is more frequently called
administered price inflation. It occurs whenever businesses in general decide to boost their prices
to increase their profit margins. This does not occur normally in recessions but when the
economy is booming and sales are strong. It might be called oligopolistic inflation, because it is
oligopolies that have the power to set their own prices and raise them when they decide the time
is ripe. One can at such times read in the newspapers that business is just waiting a bit to see how
soon they might raise their prices. An oligopolistic firm often realizes that if it raises its prices,
the other major firms in the industry will likely see that as a good time to widen their profit
margins too without suffering much from price competition from the few other firms in the
industry.
The fourth type is called sectoral inflation. The term applies whenever any of the other three
factors hits a basic industry causing inflation there, and since the industry hit is a major supplier
of many other industries, as for example steel is, or oil is, that raises costs of the industries using
say steel or oil, and forces up prices there also, so inflation becomes more widespread throughout
the economy, although it originated in just one basic sector.
What sorts of policies might each type of inflation call for? Sectoral inflation takes us back to
which of the other 3 caused the inflation there.

Chapter III Page 4 of 6

For oligopolistic inflation, make sure there is no collusion which antitrust law makes illegal. It is
likely not possible to induce oligopolies to be more price competitive with each other, so the
only way to get the benefit of price competition to restrain oligopolistic inflation is to increase
import competition if that is a possibility.

Since cost-push inflation is often wage increases exceeding increases in labor productivity, the
problem is whether it is possible or desirable to restrain such wage increases. The fact of the
matter is, many wage rates now leave the worker or the worker & family in poverty. It would be
difficult to argue that those wages should not rise to what is called a living wage level even
though that may cause price increases for all who already have higher incomes. But what about
other wage earners. Should all of them, or all whose wages are above average (but still below
that of others) be restrained somehow from wage increases that exceed the gains in their own
labor productivity? If nobody else is restrained and profits are ballooning, would that be fair?
Some European economies have wrestled with this problem more than others. They have
sometimes come up with what is called an incomes policy, essentially a bargain between
business and labor that neither wages nor profits shall gain more than the other for some agreed
period, and that both shall be relatively restrained. University of Minnesota economist Walter
Heller at one time proposed what he called wage-price guidelines for the same purpose, and
others have suggested tax policies to enforce such bargains between labor and business. Europe’s
bargains often broke down because business conditions improved and profits grew more than
was in the bargain and labor refused to restrain itself as much as originally agreed to. There is
presently no agreed upon policy to deal with cost-push inflation.

Demand pull inflation can appropriately and successfully be dealt with by a sufficiently
aggressive macro-economic policy: tight monetary and fiscal policies to cut out the excess
demand. Tight money & high interest rates to cut borrowing and slow or stop increases in the
money supply, and running a government budget surplus if necessary to reduce incomes and
purchasing power. It is usually not employed vigorously enough to do the job, but it always
could be and stop this type of inflation. But if applied to any of the other types of inflation it

Chapter III Page 5 of 6

would likely create or increase unemployment and would not get at the root cause of that
inflation.
Another angle to be mentioned is that these several types of inflation can all work at the same
time. A familiar term is a wage-price spiral, where demand pull likely starts inflation, labor
demands and gets wage increases to catch up to the rising cost of living, which increase their
incomes and adds more demand-pull. That is a good time for oligopolies to raise prices, and any
of these hitting key sectors ads further inflation.

Such inflation can become cumulative and produces what is called hyperinflation or run-away
inflation. Prices may rise so fast that when labor gets paid it quits work and rushes to the stores
to buy things needed before their prices rise even further. At the extreme some countries with
such inflation have in the end had to repudiate their currency and start a new with money which
they issue more sparingly to stop the inflation.
No one in their right mind would ever risk hyperinflation, so the problem is to know how much
inflation can be allowed without running the risk of hyperinflation. That will vary country by
country and situation by situation, and no one knows the answer anytime. So the risk should not
be run.
But slow inflation does not pose the risk for this country. Inflation of 3% a year even increases
business profits and stimulates business because it buys materials and labor at one price level and
by the time its products are on the market they can be sold at a slightly higher price level.
The problem is to keep inflation from creeping upwards from that rate. And if it is continuous for
a lifetime, people who struggle to save as much as they can for retirement find that the
purchasing power of their savings is being reduced by 3% a year.
We will see in the next essay in this series that both inflation and inflation policies hurt
somebody, so inflation policy hangs upon decisions about who can best bear the effects of
inflation and the effects of each anti-inflation policy, and this involve an ethical judgment, not an
economic judgment.

Chapter III Page 6 of 6