Unemployment: What it is, causes and formula

What is unemployment?

It is a mismatch in the labor market, where the demand for work is greater than the supply. Unemployment means lack of employment . This means that there are more workers looking for work than there are companies offering positions.

Unemployment: A Simple Explanation

When there are more people willing to offer their work to companies than available jobs, unemployment occurs. When there are people who do not have a job, it is known as unemployment.

To calculate the unemployment rate for a place, we take into account those people who are of working age (between 16 and 65 years old) and actively seeking work but do not find employment, that is, what is known as the active population .

Here is the formula for the unemployment rate:

Having a high unemployment rate is a serious problem for a country, as it directly affects economic growth. In addition, there is a social problem because people who are unemployed do not generate income.

Thus, the effects of unemployment, on the one hand, can be economic, such as a decrease in real production, a decrease in demand and an increase in the public deficit. But it can also cause social effects, such as psychological effects or discriminatory effects.

According to the World Bank, the unemployment rate is the proportion of the working population that is not employed, but is seeking work and available for work. Definitions for calculating the  working population and  unemployment rate  may vary slightly by country.

Types of unemployment

We can differentiate different types of unemployment that also explain the causes.

• Seasonal unemployment: This is caused by changes in the demand for labour by companies due to the season of the year, temporary employment or other seasonal factors. This is the case, for example, in the tourism sector in Spain, which in the high season (summer, Easter and Christmas) takes on new workers and once business activity returns to its normal pace, they become unemployed again.
• Frictional unemployment : This is voluntary. People who are able to work decide to take time off to train, rest or look for a job that best suits their qualifications and tastes. It is independent of the actual functioning of the labour market.
• Structural unemployment :  This is due to a mismatch between the qualifications or location of the workforce and the qualifications required by the employer. Training and retraining programmes or adaptation to new technologies are some of the measures implemented to reduce this type of unemployment.
• Cyclical unemployment :  It occurs when workers, and in general the remaining productive factors, become idle due to the moment of the cycle that is being experienced, in which economic activity is not sufficient to employ the productive factors.
• Hidden unemployment :  This occurs when there are people who have a job, but their productive capacity is being underutilized.

Causes of unemployment

Among the different factors causing unemployment, the following stand out:

• Minimum wage higher than the equilibrium wage : When the minimum wage is higher than the equilibrium wage, a mismatch is generated that causes unemployment.
• New technologies and automation : The advancement of technology and the development of robotics allows jobs to be replaced by precise machines.
• Low qualification of the population : Low qualification of the population hinders the economic development of a country due to its low levels of productivity.
• Economic or financial crisis : Economic or financial crises cause many companies to close and unemployment rates to skyrocket.
• Weak business fabric : When an economy does not have a large business fabric capable of absorbing the working population , unemployment is generated.
• Natural disaster : Natural disasters such as earthquakes, pandemics or tsunamis cause the destruction of many companies.

Consequences of unemployment

The effects of unemployment vary depending on each economy, but they coincide in the following consequences:

• Increase in social inequalities : A portion of the population has a very limited income, which makes it difficult for them to improve their economic position.
• Decreased quality of life : The fewer resources a person has, the lower their quality of life will be.
• It worsens the mental health of the population : Unemployment generates great demotivation, causing major depression and psychological problems.
• Reduction in consumption : Consumption increases or decreases depending on the economic capacity of the population. When a given economy has high unemployment rates , its consumption will be reduced.
• Increased government spending : Unemployment benefits provided by the state are increased, generating a greater outlay of public money. Thus, if the country does not have the capacity to meet these benefits, it will have to issue debt .
• Loss of human capital : When a professional spends a long period of time unemployed, his or her knowledge is reduced.

Supply and demand in the labor market

Starting from an initial situation, where all the work demanded by companies is absorbed by the supply of the active population. This market in equilibrium is broken when, for example, an economic recession occurs  in a country (see the concept of supply , the concept of demand and the law of supply and demand ).

Companies will demand less labor on the market, at which point the step indicated in the graph occurs, shifting the demand for labor to the left.

The end result is less labor in the economy and lower wages. That is, assuming that demand for workers by firms falls and the supply of labor remains the same (people continue to look for work), this is the result:

As we mentioned, in a situation of economic recession, there will be less demand for labor from companies, which can even push wages down. This will cause citizens to consume fewer goods and services, which will affect companies by selling less and they will be forced to lower prices and narrow margins. This vicious circle of falling prices is called a deflationary spiral  and occurs when there is  deflation .