Why Are People Unemployed?
Macroeconomic objectives
What you will learn
- Job search, skills mismatch, seasonal changes and weak overall spending create different kinds of unemployment.
- Match policies to causes and interpret labour-market diagrams
Essential definitions
- Frictional unemployment
- Temporary unemployment while people move between jobs or enter the labour market.
- Structural unemployment
- Unemployment from persistent mismatches or structural impediments in labour markets.
- Cyclical unemployment
- Unemployment caused by insufficient aggregate demand relative to productive capacity.
Separate search from a mismatch
Frictional unemployment occurs while people move between jobs or enter work. A suitable vacancy may exist, but finding it takes time. Clear job information and placement services can shorten this search.
Structural unemployment arises when workers' skills or locations do not match available jobs, or labour-market arrangements prevent adjustment. A closed factory may leave machine operators unemployed while hospitals need qualified technicians. Lower wages alone cannot supply the missing qualifications; training and mobility support may help. Seasonal unemployment follows predictable changes such as the end of a tourism season.
Follow a fall in economy-wide spending
Cyclical unemployment results from weak aggregate demand. Customers buy less, firms reduce output and workers lose jobs. Their lower incomes can reduce spending further. In an AD–AS diagram with real GDP horizontally and the price level vertically, a leftward AD shift can move output below potential.
Training cannot by itself create vacancies when firms across the economy lack customers. Conversely, demand stimulus cannot immediately make a displaced worker qualified for a specialist job. The natural rate includes frictional, structural and seasonal unemployment in this course; it is the rate remaining at potential output. Better matching and skills can reduce it over time.
Read labour-market diagrams carefully
A labour-market diagram places the real wage vertically and labour quantity horizontally. Labour demand is employers' willingness to hire; labour supply is workers' willingness to work. Their intersection is the market equilibrium. A fall in demand for a particular occupation shifts labour demand left. If its wage cannot adjust, firms want fewer workers than people offer.
A binding wage floor above the competitive equilibrium also creates excess labour supply in that model. Read employment from labour demand at the floor, rather than from labour supply. Employer market power and actual policy design can change this prediction. Compare incentives with income security, and identify whether demand support, information, training or mobility tackles the particular cause.
Hypothetical non-cyclical unemployment
- Labour force = 10 million; frictional unemployment = 0.2 million, structural = 0.2 million and seasonal = 0.1 million.
- Natural rate = (0.2 + 0.2 + 0.1) ÷ 10 × 100 = 5%.
- Cyclical unemployment of 0.4 million would raise total unemployment to 9%.
Removing cyclical unemployment returns unemployment to 5%, not zero.
Labour market and structural unemployment
DL: w = 20 − 0.1L; SL: w = 4 + 0.1L. Equilibrium: 80 thousand workers at a real wage of 12. At the binding wage 14, 40 thousand workers are willing to work but not demanded.
Labour demand reflects firms’ demand for workers; labour supply shows workers willing to work. At a binding real wage above equilibrium, workers supplied exceed workers demanded. Skills or location mismatches can also cause structural unemployment without a legal wage floor.
How to draw it and model assumptions
- Real wage vertically and quantity of labour horizontally.
- Label DL, SL, equilibrium wage and employment.
- For a binding wage, mark labour demanded and supplied and the gap between them.
Competitive single labour market, all other determinants fixed. The excess-supply model is one structural explanation, not a claim that all unemployment or every minimum wage has this effect.
Output gaps and classical adjustment
AD: P = 150 − 0.8Y. SRAS: P = 20 + 0.8Y. E2: Y=81.25, P=85. Short-run gap=-18.75%. After input costs adjust, the long-run position has Y=100 and P=70.
AD and SRAS can intersect away from potential in the short run. Below potential, unemployment can reduce wage growth and unit costs; SRAS moves down until output returns to potential. Above potential, input-cost pressure shifts SRAS up.
How to draw it and model assumptions
- Mark Yp with vertical LRAS.
- Mark initial E1 at potential, then short-run E2 left or right of Yp after the demand shock.
- Shift SRAS to the long-run position on LRAS; retain E2 so the temporary output gap stays visible.
Adjustment assumes flexible wages and prices over time, unchanged AD and unchanged capacity. It is not automatic or rapid under Keynesian assumptions.
A local fall in labour demand
At the initial wage 12, employment falls from 80 to 40 thousand while labour supplied stays 80. The local excess supply is 40 thousand. If wages adjust fully, the new intersection has employment 60 thousand and real wage 10.
When a local industry contracts, labour demand falls. With the real wage initially sticky, employment falls while workers still offer their labour. Reallocation may require new skills or moving to another area.
How to draw it and model assumptions
- Draw DL₁, SL and the initial wage.
- Shift demand left to DL₂.
- At the old wage, show fewer workers demanded. Mark initial E1 and lower-wage clearing point E2 separately from sticky-wage employment.
A particular labour market, fixed initial real wage and supply curve. The new market-clearing point is also shown to distinguish wage adjustment from the initial excess supply.
Apply and evaluate
- Demand policies work best against cyclical unemployment; training and mobility policies address mismatches over longer periods.
- Labour-market flexibility can improve adjustment but may reduce security and bargaining power.
Common misconceptions
- Full employment allows frictional, structural and seasonal unemployment under the course convention.
- All unemployment cannot be cured simply by raising aggregate demand.
Knowledge check
A region has unemployed miners and vacancies for nurses. What is the main mismatch?
Real-world application
An inflation rate is a change, not a price level
16 November 2022: The UK CPI rose 11.1% over the twelve months to October 2022, compared with 10.1% over the twelve months to September.
These are rates over overlapping twelve-month windows. A subsequent fall in the inflation rate would mean slower average price increases, not necessarily falling prices. Judge the costs alongside wages, household expenditure patterns and employment conditions.
ONS, Consumer price inflation, UK: October 2022 ↗Historical evidence checked 9 October 2026. The model interpretation is an original teaching application.
What to remember
Job search, skills mismatch, seasonal changes and weak overall spending create different kinds of unemployment. Effective policy must address the cause rather than just the headline rate.
Completion is your own reflection on learning, not a test score. Syllabus references: 3.3.06, 3.3.07.
Lessons in this section
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