Unemployment, as defined by the International Labour Organization, occurs when people are

without jobs and they have actively looked for work within the past four weeks.[2] The
unemployment rate is a measure of the prevalence of unemployment and it is calculated as a
percentage by dividing the number of unemployed individuals by all individuals currently in the
labour force.

There remains considerable theoretical debate regarding the causes, consequences and solutions
for unemployment. Classical, neoclassical and the Austrian School of economics focus on
market mechanisms and rely on the invisible hand of the market to resolve unemployment.[citation
needed]
These theories argue against interventions imposed on the labour market from the outside,
such as unionization, minimum wage laws, taxes, and other regulations that they claim
discourage the hiring of workers. Keynesian economics emphasizes the cyclical nature of
unemployment and potential interventions to reduce unemployment during recessions. These
arguments focus on recurrent supply shocks that suddenly reduce aggregate demand for goods
and services and thus reduce demand for workers. Keynesian models recommend government
interventions designed to increase demand for workers; these can include financial stimuli, job
creation, and expansionist monetary policies. Marxism focuses on the relations between the
controlling owners and the subordinated proletariat whom the owners pit against one another in a
constant struggle for jobs and higher wages. This struggle and the unemployment it produces
benefit the system by reducing wage costs for the owners. For Marxists the causes of and
solutions to unemployment require abolishing capitalism and shifting to socialism or
communism.

In addition to these three comprehensive theories of unemployment, there are a few types of
unemployment that are used to more precisely model the effects of unemployment within the
economic system. The main types of unemployment include structural unemployment which
focuses on structural problems in the economy and inefficiencies inherent in labour markets
including a mismatch between the supply and demand of laborers with necessary skill sets.
Structural arguments emphasize causes and solutions related to disruptive technologies and
globalization. Discussions of frictional unemployment focus on voluntary decisions to work
based on each individuals' valuation of their own work and how that compares to current wage
rates plus the time and effort required to find a job. Causes and solutions for frictional
unemployment often address barriers to entry and wage rates. Behavioral economists highlight
individual biases in decision making and often involve problems and solutions concerning sticky
wages and efficiency wages.

Structural unemployment exists when a person is not qualified for any job because the amount he
can contribute to any job (his marginal revenue product) is less than the minimum wage payable
for that job. The minimum wage can be set legally, by union negotiations, or by the force of
public opinion. Structural unemployment can exist even if the minimum wage is zero. There are
some people, such as psychotics, whose presence on the job might so upset others that the
amount of work done would drop. There are others, such as the severely mentally retarded, who
might require more value spent in supervision than they can produce.

Many of the structurally unemployed will not show up in the unemployment statistics because
after a time these people should become convinced that they cannot find a job and stop trying.
The existence of this type of unemployment is considered a problem, and government programs
have attempted to deal with it. For example, the Job Crop program of the 1960s and the CETA
program of the 1970s were attempts to give the unskilled some skills and thus make them
employable.1 On the other hand, legislation that establishes a legal minimum wage contributes to
the pool of structurally unemployed labor.

Frictional unemployment is that unemployment caused by information or search costs. Usually

when a person quits, is fired, or enters the labor market, there are jobs available for which that
person is qualified. The person will be frictionally unemployed because it takes time (and effort)
to find the jobs that are available.

The division between frictionally and structurally unemployed labor can shift with time. Since
the demand for labor (its marginal revenue product) depends on the general demand for goods
and services, an increase in the demand for goods and services will increase the value of labor
services, and some who were previously structurally unemployed become "employable." Also, it
is possible that some people may have such high search costs that even if there are jobs for which
they are qualified, finding them may be so expensive that these people may be more properly
considered structurally rather than frictionally unemployed. Hence, the division not only shifts,
but is a bit fuzzy as well.
Structural Unemployment

Structural Unemployment, one of the three types of unemployment, is associated with the
mismatch of jobs and workers due to the lack of skills or simply the wrong area desired for work.
Structural unemployment depends on the social needs of the economy and dynamic changes in
the economy. 

For instance,advances in technology and changes in market conditions often turn many skills
obsolete; this typically increases the unemployment rate. For example, laborers who worked on
cotton fields found their jobs obsolete with Eli Whitney's patenting of the cotton gin. Similarly,
with the rise of computers, many jobs in manual book keeping have been replaced by highly
efficient software. Workers who find themselves in this situation find that they need to acquire
new skills in order to obtain a new job.

Frictional Unemployment

Frictional Unemployment is always present in the economy, resulting from temporary transitions
made by workers and employers or from workers and employers having inconsistent or
incomplete information. This type of unemployment is closely related to structural
unemployment due to its dependence on the dynamics of the economy. It is caused because
unemployed workers may not always take the first job offer they receive because of the wages
and necessary skills. This type of unemployment is also caused by failing firms, poor job
performance, or obsolete skills.  This may also be caused by workers who will quit their jobs in
order to move to different parts of the country.

Frictional unemployment can be seen as a transaction cost of trying to find a new job; it is the
result of imperfect information on available jobs. For instance, a case of frictional unemployment
would be a college student quitting their fast-food restaurant job to get ready to find a job in their
field after graduation. Unlike structural unemployment this process would not be long due to
skills the college graduate has to offer a potential firm.

Cyclical Unemployment

Unemployment that is attributed to economic contraction is called cyclical unemployment. The

economy has the capacity to create jobs which increases economic growth. Therefore, an
expanding economy typically has lower levels of unemployment. On the other hand, according
to cyclical unemployment an economy that is in a recession faces higher levels of
unemployment. When this happens there are more unemployed workers than job openings due to
the breakdown of the economy. This type of unemployment is heavily concentrated on the
activity in the economy.  To understand this better take a look at our Business Cycles section.

Back to Unemployment
Frictional Unemployment: Frictional unemployment is a temporary condition. This
unemployment occurs when an individual is out of his current job and looking for another job.
The time period of shifting between two jobs is known as frictional unemployment. The
probability of getting a job is high in a developed economy and this lowers the probability of
frictional unemployment. There are employment insurance programs to tide over frictional
unemployment

Structural Unemployment: Structural unemployment occurs due to the structural changes

within an economy. This type of unemployment occurs when there is a mismatch of skilled
workers in the labor market. Some of the causes of the structural unemployment are geographical
immobility (difficulty in moving to a new work location), occupational immobility (difficulty in
learning a new skill) and technological change (introduction of new techniques and technologies
that need less labor force). Structural unemployment depends on the growth rate of an economy
and also on the structure of an industry.

Classical Unemployment: Classical unemployment is also known as the real wage

unemployment or disequilibrium unemployment. This type of unemployment occurs when trade
unions and labor organization bargain for higher wages, which leads to fall in the demand for
labor.

Cyclical Unemployment: Cyclic unemployment when there is a recession. When there is a

downturn in an economy, the aggregate demand for goods and services decreases and demand
for labor decreases. At the time of recession, unskilled and surplus labors become unemployed.
Read about causes of economic recession.

Seasonal Unemployment: A type of unemployment that occurs due to the seasonal nature of the
job is known as seasonal unemployment. The industries that are affected by seasonal
unemployment are hospitality and tourism industries and also the fruit picking and catering
industries.
Causes of Unemployment

Recession and the gap in the demand and supply are the causes of unemployment. An
unemployment situation occurs as long as the demand-supply gap persists. Another cause of
unemployment is financial crisis and economic depression.

If an unemployment situation continues for a long period of time, it is called as long-term

unemployment. During this period, an unemployed individual could apply for unemployment
compensation. The main objective of unemployment compensation is to provide partial and
temporary wages to involuntarily unemployed workers who were recently laid off. Another aim
of unemployment compensation is to stabilize the economy at the time of recession.

Are you aware of unemployment insurance programs? Unemployment insurance programs were
introduced immediately after the Great Depression of 1930s. The main aim of unemployment
insurance is to provide temporary income to an unemployed individual and his dependents to tide
over the period of unemployment. Unemployment insurance programs help cushion the impact
of the downturn of an economy at the time of recession.

To sum up, unemployment is a nightmare faced by the workforce around the globe at the times
of recession or when there is a downturn in the economy.