Question

Explain the different types of unemployment and their relationship to the natural rate of unemployment and full employment. Include in your analysis the three key indicators that describe the state of the labor market of an economy.

Answer 1

There are three main types of unemployment that occurs in an economy:

1. Frictional Unemployment: This type of unemployment occurs when the workers leave their old jobs and searching for the new jobs. It is a short term unemployment and a natural process of job search process. This is a goof for the economy as a whole as it allows workers to be more productive.

2. Structural Unemployment :It occurs due to shifts in the economy when there is mismatch between the skills workers have and the skills needed by the employers. It is along term type of unemployment because it is caused by changes in the production process in the economy.

3. Cyclical Unemployment: This mainly arises from the business cycles. Such unemployment occurs due to deficiency of demand and fall in purchasing power in the economy. It is mainly seen in times of recession in the economy.

The natural rate of unemployment in an economy is equal to frictional plus structural type of unemployment and is the unemployment which occurs at the level of full employment in the economy.

The three key indicators that indicate the state of the labor market in an economy include - level of unemployment in the economy as low unemployment means that labor market can accommodate the unemployed, level of wage rate in the economy and inflation rate in the economy.