Causes/types of unemployment: frictional unemployment

Government and the Macro‑economy – Employment and Unemployment (Syllabus 4.6)

1. Key Definitions

  • Employment: People who are working for pay (including part‑time) and are not looking for another job.

  • Unemployment: People who are without work, are actively looking for a job, and are available to start work.

  • Labour force: All people aged 16 + who are either employed or unemployed. (Students, retirees and anyone not seeking work are excluded.)

  • Full‑employment: The economy is operating at the natural rate of unemployment. This is the level of unemployment that exists when the only joblessness is frictional and structural. It does not mean zero unemployment.

  • Natural rate of unemployment (Un): The sum of frictional and structural unemployment. It is the unemployment rate when the economy is at full‑employment.

2. Measuring Unemployment

The Cambridge IGCSE uses the quarterly labour‑force survey to obtain the numbers of employed (E) and unemployed (U) people.

Unemployment rate (UR):

\[

\text{UR} = \frac{U}{\text{Labour force (LF)}} \times 100

\qquad\text{where } LF = U + E

\]

The survey also provides the natural rate of unemployment (Un). The difference between the actual unemployment rate and Un indicates the cyclical component.

3. Types of Unemployment

TypeCauseTypical durationVoluntary?Example
FrictionalJob‑search and matching; geographic moves; first‑time entrants; career changes; short retirement breaksWeeks‑to‑a few monthsUsually voluntaryA graduate looking for a teaching post after university
StructuralMismatch between workers’ skills/locations and the skills demanded by employersMonths‑to‑yearsUsually involuntaryCoal miners in a region where mines have closed and no retraining is available
CyclicalInsufficient aggregate demand during an economic downturnVaries with the business cycle; can be prolongedInvoluntaryFactory workers laid off during a recession
SeasonalRegular, predictable fluctuations in demand for labour in certain industriesPredictable periods each yearUsually involuntary (but known in advance)Holiday‑shop staff in December; agricultural workers during the off‑harvest months

3.1. Frictional Unemployment in Detail

  • Nature: Short‑term and largely voluntary; it exists even at full‑employment.

  • Job‑matching time: The period required for employers and job‑seekers to find a mutually suitable match.

  • Key causes:

    1. Job‑search process: Collecting information on vacancies, preparing applications, attending interviews.

    2. Geographical mobility: Moving house to be nearer to a new job.

    3. Career change: Switching sectors or occupations, often needing new qualifications.

    4. New entrants: Recent school or university graduates entering the labour market for the first time.

    5. Retirement transition: Older workers who take a brief period of inactivity before fully retiring.

3.2. Measuring the Frictional Component

Economists estimate frictional unemployment (Uf) by removing the structural and cyclical parts from the natural rate:

\[

Uf = Un - Us - Uc

\]

where Us = structural unemployment and Uc = cyclical unemployment.

4. Consequences of Unemployment

  • Individuals: Loss of income, lower living standards, psychological stress, erosion of skills (human‑capital loss).

  • Firms: Higher recruitment costs, loss of productivity, possible downward pressure on wages.

  • Government: Increased spending on benefits, lower tax receipts, greater pressure on public services.

  • Economy: Reduced total output (GDP), potential upward pressure on inflation if unemployment falls below the natural rate (Phillips‑curve effect), widening income inequality.

5. Policies to Reduce Unemployment

Cambridge expects candidates to discuss the target type(s) of unemployment, the mechanism, and the likely effectiveness (short‑run vs. long‑run).

PolicyTarget type(s) of unemploymentHow it worksTypical effectiveness (short‑/long‑run)
Job‑matching services (public employment offices, online portals)FrictionalProvide up‑to‑date vacancy information, organise interviews, help with CV writing and applications.High short‑run impact; low cost.
Education, training and apprenticeshipsStructural, frictionalUpgrade workers’ skills to meet changing industry needs; provide qualifications for career changes.Medium‑term effect; requires time and investment.
Geographical‑mobility assistance (relocation grants, transport subsidies)Frictional, structuralReduce the financial and psychological cost of moving to areas with more job opportunities.Moderate short‑run impact; supports long‑run labour‑market flexibility.
Fiscal stimulus (increased government spending or tax cuts)CyclicalBoost aggregate demand, encouraging firms to expand output and hire.Effective in a recession; may raise inflation if used at full‑employment.
Monetary easing (lower interest rates, quantitative easing)CyclicalCheaper borrowing stimulates investment and consumer spending.Quick impact on demand; limited when rates are already low.
Minimum‑wage legislationStructural (if set above equilibrium)Sets a floor for wages; can reduce low‑skill employment if the floor is too high.May increase structural unemployment among unskilled workers.
Seasonal employment schemes (e.g., holiday‑work programmes)SeasonalProvide temporary jobs during peak periods, smoothing seasonal peaks and troughs.Effective for short‑term, sector‑specific needs.

6. Suggested Diagrams for the Exam

  1. Job‑search flowchart: Search → Application → Interview → Job offer. Highlight where frictional unemployment occurs.

  2. Labour‑market diagram: Show the labour‑force line, equilibrium wage, and the vertical distance between the natural rate (Un) and the actual unemployment rate. Label the frictional, structural and cyclical components.

  3. Phillips curve: Illustrate the inverse relationship between unemployment and inflation. Note that cyclical unemployment moves along the curve, whereas changes in frictional or structural unemployment shift the curve.

7. Summary

Frictional unemployment is a normal, short‑term form of joblessness that results from the time needed for workers to move between jobs, relocate, or enter the labour market for the first time. It exists even when the economy is at full‑employment and forms part of the natural rate of unemployment. While it does not indicate a problem with aggregate demand, policies that improve information, training, and mobility can shorten its duration, raising overall productivity and welfare. A solid grasp of all four types of unemployment, their causes, consequences, and the range of government policies is essential for success in the Cambridge IGCSE Economics examination.