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Types and Causes of Unemployment

 

            There are two types of unemployment, voluntary and involuntary unemployment. Voluntary unemployment is when a worker chooses not to accept a job at the going wage rate whereas involuntary unemployment would accept a job at the going wage rate but cannot get an offer. Natural rate of unemployment occurs when the labour market is at equilibrium. It is entirely voluntary and it includes frictional and structural unemployment. There will always be some voluntary unemployment in an economy due to people being in between jobs. The diagram shows that there are two supply curves, one for those who are employed and one for those workers in the labour force but decide not to supply their service at the going wage rate. However if wages increase there will be fewer workers unemployed because they are attracted by the wage increase and enter employment.
             There are four causes of unemployment, which are classical unemployment, Keynesian unemployment, frictional unemployment and structural unemployment. Classical unemployment caused by real wages being above market equilibrium leading to excess supply of labour. The introduction of minimum wage creates classical unemployment in industries where average rate are close to minimum wage. Trade unions and minimum wage forcer wages to be above equilibrium real wage. At this high level of real wages the number of workers able to work and offer their services increases but the demand for labour decreases due to cost of labour increasing, firms will employ less or lay off workers. Which means that there will be workers involuntary unemployed.
             To solve this problem of unemployment governments should intervene and remove anything that distorts the labour market. The elimination of national minimum wage and trade unions would be suggested. For instance trade unions in the UK are weaker than they used to be 20 years ago. In the diagram you can see that the market will clear at equilibrium at W* given level of employment L*.


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