Question

Provide examples (not cited in the text) of the three types of unemployment and the “solution” to each type. (For example, a typewriter repairperson is structurally unemployed and must train for new skills.) Why is full employment never zero-percent unemployment?

Answer 1

1) Cyclical unemployment occurs when workers become unemployed because of downturns in business cycle.

Example - Housing market. During a period of collapse of housing market, which is a labor and materials intensive market, it causes tremendous recession. All construction workers, real estate agents, carpenters, plumbers and workers who are related to housing Market become unemployed at once.

Solution- FED can apply expansionary monetary policy by decreasing interest rate and increasing money supply to increase demand and restore the housing Market.

2) Structural unemployment - It occurs due to mismatch of skills between available jobs and unemployed person.

Example- If a shoe manufacturing firm shuts down, all of it's workers become unemployed. They can't get jobs in other sectors, which has different skills requirements and thus remains structurally unemployed. For example, they can't get jobs in car manufacturing industries.

Solution- Training for new skills and acquiring new skills will help them get employed in other sectors.

3) Frictional unemployment- It occurs due to the tendency of people of moving between one job to another.

Example - A first time job seeker.

Solution - If that worker is paid a high salary by his employer, he will loose his incentive to find new job or move between jobs.

• Full employment refers that every available workers willing to work at given wage rate is able to get a job. But still in this situation, unemployment can't be 0? because there is inevitably some frictional unemployment. This occurs because people take time to find the best suitable jobs for them or because they have tendency to move between jobs.