Labor Market, Unemployment, and Microeconomics Explained

Defining Unemployment, the Labor Market, and Microeconomics

There is always some level of unemployment in any economy, which is not automatically a bad thing, as many people assume. The presence of unemployment—usually expressed as a percentage—indicates that at any given point in that economy, there are people looking for work and employers looking for better employees. In economics, the key factor when determining the level of unemployment is the number of workers who are eager to work but cannot find work. Unemployment refers to circumstances involving unwanted job losses and willing workers without jobs. The unemployed are those individuals who are currently without work but actively seeking it. A person cannot be classified as unemployed when they are not looking for a job. Consequently, in economics, not everyone who is not employed is considered unemployed (Romer, 2011).

The market in which employers search for employees, determine wages, and workers seek employment opportunities is referred to as the labor market. Smaller, interrelated markets with different skills, training requirements, and locations make up local and international labor markets. Labor markets exchange information about employment conditions, wage rates, levels of competition, and working location between the workforce and job seekers. Generally, more common jobs—such as those held by drivers, secretaries, and clerks—serve as the starting point from which general wage levels are established in a labor market (Romer, 2011).

The branch of economics that examines how companies, individuals, and households allocate scarce resources in society is referred to as microeconomics. Macroeconomics, by contrast, analyzes the mechanisms of the national economy as a whole—including output, income, and growth—by developing, testing, and employing models and hypotheses about how the national economy functions. The theories developed in macroeconomics are used both to determine how economic policies should be applied and to forecast events that may affect the national economy positively or negatively (Romer, 2011).

Many people view economics as a complex study of tables, statistics, charts, and numbers. In actuality, economics simply studies human behavior in satisfying needs and wants, on the assumption that this behavior is rational (Romer, 2011).

Types of Unemployment and Their Causes

Unemployment is beneficial for any economy in that it helps keep inflation in check. Even in very healthy economies, some level of unemployment must be present. It is for this reason that a natural rate of unemployment was established. The natural rate of unemployment was articulated by two renowned American economists, Edmund Phelps and Milton Friedman, both of whom won the Nobel Prize in economics. The natural rate of unemployment in the United States currently stands at around five percent (Acocella et al., 2008).

There are several distinct types of unemployment that together account for the level of unemployment present in any economy. They include frictional, structural, seasonal, cyclical, and surplus unemployment. Frictional unemployment takes place when skilled workers leave their current job and begin searching—or waiting—for a position that better fits their skills. Workers may seek a job that pays more or offers greater fulfillment compared to their current role (Acocella et al., 2008).

Structural unemployment is generally considered more serious than frictional unemployment. It occurs when willing workers lack the skills required for available jobs. Structural unemployment is influenced by changes in consumer demand and technology, both occupationally and geographically. Geographically, certain skills are in greater demand in some regions than others; occupationally, certain skills are more sought after than others (Acocella et al., 2008).

Cyclical unemployment is caused by changes in total expenditure. It occurs when businesses do not have sufficient demand to require all available workers. When business cycles are at their peak, unemployment tends to be low; when cycles contract, unemployment rises (Acocella et al., 2008).

Seasonal unemployment occurs at certain times of the year, as the name suggests. A classic example involves fishermen, who can only fish during the fishing season. If fishing is their sole occupation, they remain unemployed until the next season. Other examples include forestry and construction workers, whose employment is affected by seasonal and weather conditions. Workers can avoid such joblessness by planning ahead and holding part-time jobs during the off-season (Acocella et al., 2008).

References

Acocella, N., Bartolomeo, D., and Hibbs, D. A. (2008). Labor market regimes and the effects of monetary policy. Journal of Macroeconomics, 30, 134–156.

Arestis, P. (1986). Wages and prices in the UK: The post-Keynesian view. Journal of Post Keynesian Economics, 8(3), 339.

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Barlevi, G. (2001). Why are the wages of job changers so procyclical? Journal of Labor Economics, 19, 837–878.

Blundell, R., and MaCurdy, T. (2008). Labor supply. In The New Palgrave Dictionary of Economics (2nd ed.).

Head, S. (2005). The new ruthless economy: Work and power in the digital age. Oxford University Press.

Romer, D. (2011). Unemployment. In Advanced macroeconomics (4th ed., pp. 456–512). McGraw-Hill.