Unemployment

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

To calculate the unemployment rate of a place, those people who, being of working age (between 16 and 65 years old) and actively seeking, cannot find employment, that is, what is known as the active population are taken.

Having a high unemployment rate is a serious problem for a country as it directly affects economic growth, in addition to the problem for people who are unemployed. 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 like psychological effects or discriminatory effects.

According to the World Bank, the unemployment rate is the proportion of the workforce that does not have a job, but is looking for work and available to do so. Definitions for calculating the labor force and unemployment rate may vary slightly from country to country.

Types of unemployment

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

• Seasonal unemployment: It is caused by changes in the demand for work by companies due to the season of the year, seasonality or other seasonal factors. As happens, for example, in the tourism sector in Spain, which in high season (summer, Easter and Christmas) absorbs new workers and once the business activity returns to its usual rhythm, they go into unemployment again.
• Frictional unemployment : It is voluntary. People who, being able to work, decide to take time to train, rest or look for the job that best suits their qualifications and tastes. It is independent of the proper functioning of the labor market.
• Structural unemployment : It is due to mismatches between the qualification or location of the workforce and the qualification required by the employer. Training and recycling programs or adaptation to new technologies are some of the measures that are carried out to reduce this type of unemployment.
• Cyclical unemployment : It takes place when the workers, and in general the other productive factors, are left idle due to the moment of the cycle that is being crossed, in which the economic activity is not enough to use the productive factors.
• Hidden unemployment : It occurs when there are people who have a job, but their productive capacity is being underused.

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 greater than the equilibrium wage, a mismatch is generated that causes unemployment.
• New technologies and automation : The advancement of technology and the development of robotics make it possible to replace jobs with precise machines.
• Low qualification of the population : The low qualification of the population slows the economic development of a country due to its low levels of productivity.
• Economic or financial crisis: Economic or financial crises cause a multitude of company closures and trigger unemployment rates.
• Weak business fabric : When an economy does not have a large business fabric that is capable of absorbing the workforce, 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 according to each economy, but the following consequences coincide:

• Increase in social inequalities : A part of the population has a very tight income that 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.
• The mental health of the population worsens : Unemployment generates a great demotivation causing great depression and psychological problems.
• Consumption reduction : Consumption increases or decreases depending on the economic capacity of the population. When a certain economy has high unemployment rates, its consumption will be reduced.
• Higher state spending : Unemployment benefits provided by the state are increased, generating a greater disbursement of public money. In this way, 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 unemployed, their knowledge is reduced.

Supply and demand in the labor market

Starting from an initial situation, where all the work demanded by the companies is absorbed by the supply of the active population. This equilibrium market breaks down 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 amount of work in the market, at which time the step indicated in the graph occurs, shifting the demand for work to the left.

The end result is less work in the economy and lower pay. That is, assuming that the demand for workers by companies falls and the supply of work 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 work by companies, which may even push wages down. What will make citizens consume less goods and services, this will affect companies selling less and will be forced to lower prices and narrow margins. This vicious cycle of downward prices is called a deflationary spiral and occurs when there is deflation.

See the world ranking of unemployment by country.