The concept of full employment and under-employment

Governments target full employment to ensure that all individuals of working age who wish to work can secure jobs at existing wage levels, excluding groups such as students or those who have retired. This does not imply zero unemployment, as there will always be some people transitioning between roles. Achieving full employment maximises output in the economy and improves living standards for the population.

Under-employment

Under-employment happens when an economy is not operating at its maximum potential. This can occur even if individuals have jobs, but those roles do not make effective use of their abilities, experience, or available time. For example, a trained engineer employed in a basic administrative position illustrates under-employment, as their skills are not being applied productively.

The relationship between economic growth and unemployment

The need for workers stems from consumer demand for products and services, making labour a derived demand. When overall demand in the economy decreases, businesses reduce hiring or lay off staff, leading to higher unemployment. Conversely, strong demand encourages firms to expand production and recruit more employees, which lowers unemployment rates.

An economy with significant unemployment cannot function at its peak productive level. Reaching full employment allows the economy to utilise all resources efficiently, boosting total output and supporting sustained economic growth.

Different types of unemployment

Unemployment can arise from various causes, each with distinct characteristics and impacts on the economy.

Cyclical unemployment

Cyclical unemployment, also known as demand-deficient unemployment, emerges during periods of economic downturn. A drop in aggregate demand reduces the need for goods and services, prompting firms to cut back on staff. This type is common in economies experiencing a negative output gap, where actual production falls short of potential, and it can impact multiple sectors simultaneously.

Seasonal unemployment

Seasonal unemployment results from fluctuations in labour demand throughout the year in specific industries. For instance, sectors like tourism or farming experience high demand during certain periods, such as summer holidays or harvest times, but lower needs off-season. This form is typically predictable and limited to particular fields, unlike cyclical unemployment which can affect the broader economy.

Structural unemployment

Structural unemployment stems from long-term shifts in industries or occupations, often triggered by evolving consumer tastes, advancements in technology, or the availability of more affordable options elsewhere. It frequently concentrates in areas reliant on declining sectors, such as traditional heavy manufacturing, leading to persistent job losses in those regions.

Frictional unemployment

Frictional unemployment refers to the temporary joblessness that occurs as workers move from one position to another. This is a natural part of a dynamic labour market, where individuals may leave roles voluntarily or be made redundant and then seek new opportunities. Some level of frictional unemployment persists even in economies at full employment, as job transitions are inevitable.

Labour immobility and the negative multiplier effect

Labour immobility hinders workers from accessing available jobs, exacerbating unemployment in certain areas or sectors. This can create regional disparities and prolong joblessness.

Types of labour immobility

• Occupational immobility - Workers lack the necessary skills or training to switch to growing occupations, particularly when their current field is shrinking.
• Geographical immobility - Individuals cannot relocate from high-unemployment areas to regions with job openings, often due to financial constraints, family commitments, or housing issues.

The negative multiplier effect

In regions hit by structural unemployment, a negative multiplier effect can worsen the situation. Initial job losses reduce local spending, which in turn affects other businesses, leading to further redundancies and a downward spiral of economic activity.

Future trends in structural unemployment and factors affecting frictional unemployment

Rapid technological progress is likely to accelerate structural unemployment by making industries outdated and decreasing the number of workers required in various roles. Better-informed consumers may shift preferences more quickly, favouring cheaper or superior products, which further drives industry declines.

Factors influencing the duration of frictional unemployment

• Economic conditions - During periods of strong growth, abundant job openings shorten the time workers spend unemployed. In economic slumps, fewer vacancies can extend frictional unemployment.
• Welfare systems - High benefit levels might reduce the urgency to find new work, prolonging unemployment spells.
• Information availability - Limited awareness of job opportunities or required skills can keep workers out of employment longer.
• Labour mobility issues - Both occupational and geographical immobility contribute to extended periods between jobs.

Real wage unemployment

Real wage unemployment arises when wages are set above the market equilibrium, creating an excess supply of labour. This often results from actions like trade unions pushing for wage increases or the implementation of a minimum wage.

Causes and effects of real wage unemployment

Introducing or raising a national minimum wage beyond the equilibrium point encourages more people to enter the job market while reducing employers' demand for workers, resulting in unemployment. However, increases in worker productivity or higher consumer spending can boost labour demand, helping to alleviate this type of unemployment.