Unemployment and Full Employment

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Unemployment is the condition where a person is searching for job. It is due to changes in economy which is changes in friction and cycles.

Case of frictional unemployment

People all over the world are continuously moving either in or out from the labor force because of the different situations they may be facing in life. The process of finding a new job after completing school, shifting to a better paying option, retirement etc all are seen in the scenario. Jobs are continuously created and destroyed in this process. New companies are established in the market, some are closed with time and some plan for the expansion process and all these things are a routine in economy.

The people search for the best available opportunities and the businesses are also looking for the best workers, and both of them are willing to wait till the best alternative comes to them. In this process there is a time lag in between till one can find the best available opportunity and it leads to frictional unemployment.

The reason why frictional unemployment occurs is because of the fact there is a certain time gap when the people are continuously either moving in or out from labor force and also through the process of job creation and its destruction. Thus one can regard frictional unemploymenta normal part and parcel of a nation that is evolving over a period of time.

Case of structural unemployment

It is that unemployment that occurs when the changes occur on the level of technology or there is change in skills required to complete the jobs seeing the scenario of competition at international level or when location becomes a barrier for doing work. In this case the unemployment scene will last much longer when compared to the frictional case of unemployment where workers have to be trained again as per the new skill requirement and latest technology and if location is a barrier then they will have to relocate to a new place to find job. For example automation in a sector will lead to fewer requirements for labor and whereas some sectors may get created where new labor may be required. But this process of learning new skills and technology, moving to other jobs or in some cases relocating to other location takes a lot of time. It is a very difficult case mostly for the older people because they find it difficult to adapt to latest skills and technology and also find relocation as a challenging task. Thus many times it seen that they opt for either retirement or go for low paying jobs.

Case of cyclical unemployment

Cyclical unemployment arises due to recession. Thus when a worker loses a job when such economy is facing recession then it can be attributed to cyclical changes. He may get a job after few months when process of expansion will start but till then he will be cyclically unemployed.

Case of natural unemployment

It is that case when the structural and frictional changes are combined together resulting in unemployment. But here the case of cyclical unemployment is excluded. Natural unemployment rate is expressed in the way of natural unemployment as a percentage of labor force.

Case of full employment

When the rate of natural unemployment is same as the unemployment rate, it is the case of full employment.

How rate ofnatural unemployment is determined?

Will it be the same or will it vary with time period?

There are various factors influencing rate of natural unemployment and these are-

  • The population age distribution pattern.
  • The level of changes on the structural front.
  • Wage rates that are real.
  • Benefits related to unemployment.

Population age distribution

If the young population will be more in an economy then they will automatically seek new jobs every year and thus frictional unemployment will be more. But in an economyif most of the population is old and there is not much demand for new jobs per year then the frictional unemployment will be less.

Structural change scale

Mostly the structural changes are small where a little up gradation of skills and technology is seen but when the technology is completely altered then a large number of workforces can lose their jobs. Thus the scale of structural in case of unemployment will be dependent upon how much technological change has occurred and what new skills are to be adapted to face international competition.

Rate of real wage

Rate of real weight helps in the determination of unemployment rate on natural basis. Real wage rates which lead to unemployment are the efficiency wage and a minimum level wage. Talking about efficiency wage it is that level of wage that is higher than the market wage rate by which the firms obtain workers and engage them for productive activities and avoid their quitting.

The unemployment benefits

Such benefits will raise the rate of natural unemployment because opportunity cost in case of searching of job will be lowered. As compared to US the European nations have more liberal benefits in terms of unemployment and greater rates for natural unemployment. More and more benefits related to unemployment will raise the rate for natural unemployment.

Rate of natural unemployment do exists and it changes also but its exact proportion and change level is still a difficult evaluation for economists. As per Congress budget estimates for the year 2010 rateof natural unemployment was around 4.8%, that was half of unemployment which in the same year.

Unemployment over the cycle and real GDP

The potential GDP is depicted by the real GDPquantityat the level of full employment. Real GDP will fluctuate around the potential GDP over the cycle of business. Thus the output gap is the difference between the potential GDP along with GDP in real nature.  Due to the fluctuation of output gap during business cycle then in this casethe rate of unemployment will also fluctuate around the rate of natural unemployment.

In diagram 5.5 the various fluctuations are shown. These are for the year 1980 to 2010 for US. Part a shows the gap in output and part b shows the rate of unemployment and the rate of natural unemployment. During full employment stage, natural unemployment rate and unemployment rate are same and thus the potential and real GDP are also equal with each other, thus making output gap to be zero. But if the natural unemployment rate is greater than the unemployment rate, then real GDP will be more than potential rate of GDP, leading to positive output gap. But when the situation will be reversed then real GDP will be lower as compared to potential GDP contributing to a negative output gap. Diagram 5.5 part b depicts the rate of natural unemployment as per the budget office of Congress.

Here one can note that the rate of natural unemployment is 6.2% in the year 1980 and continuously it fell and reached 4.8% in 2000. Many economists agree with this rate but still there are ones who disagree with it.

Next you will see that how the rate of inflation and level of price is monitored. You will get to know that how CPI which is consumer price index is evaluated on monthly basis. It will also help understand about the other aspects related with the rates of inflation and levels of prices.


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