1 The unemployment rate UR is the number of unemployed perso

1.         The unemployment rate (UR) is the number of unemployed persons (U) divided by the labor force, which is the sum of those unemployed and employed (E):

U

_____

U + E

a) Describe frictional unemployment.

b) Describe structural unemployment.

c) Describe cyclical unemployment.

d) Which of the three types of unemployment is the most serious (or problematic)? Which is the most benign?

e) For each type of unemployment, list a way (discussed in class) to reduce that type of unemployment.

Solution

a) Frictional unemployment is defined as that unemployment where people are searching for new jobs or when people are switching between the jobs. This kind of unemployment is voluntary.

b) Structural unemployment arises whenever there is a technological change in the economy or when the skill set of job seekers are not matched by the skills needed by the employer.

c) Cyclical unemployment is defined as that kind of unemployment that occurs due to the fluctuations in the output level. When the demand level in the economy falls during recessions then cyclical unemployment is raised.

d) Out of the three, cyclical unemployment is more problematic as it is caused by the business fluctuations in the economy. This kind of unemployment is a long term unemployment that might take many years to resolve. Cyclical unemployment occurs when the economy is going through a recession. As the level of demand is contracted, employers begin to lay off workers which further reduces the demand level. The most benign is the frictional unemployment as this type of unemployment is voluntary and lasts for a shorter duration. Under frictional unemployment the workers voluntarily quit their jobs for better opportunities.

e) Frictional unemployment can be reduced by providing better information about the jobs in the market. Internet sites can be made so that workers get to know the proper information about better jobs.

Structural unemployment can be reduced by giving training programs to the unemployed. Government can pay subsidies to the firms to provide for the appropriate skills meant for the job. Also the government can motivate the workers to get the required skills for the jobs.

Cyclical unemployment can be reduced by taking expansionary policies, both fiscal and monetary. Governments can increase their spending or reduce taxes so as to stimulate the demand level in the economy.