Economic Cost of Unemployment

Tags: Output gap, Unemployment, Full employment


In the recent economic downturn, many companies collapsed, resulting in many jobless workers. Corporations, in order to survive the downturn reduced their head counts by retrenching. The unemployed couldn't find jobs as companies are not hiring due to the pessimism of the economy. This hence attributes to the unemployment rate which has reached the highest in n the United States since 1983. Unemployment rate has always been one of the key economic indicator that investors and traders look at for direction of the market. The reason being that unemployment may bring about serious consequences to the economy. This essay will discuss the two types of unemployment and the economic cost of unemployment to a country.

Frictional unemployment arises because people changing jobs will go through a period of unemployment. They include people who change job voluntarily, fired workers seeking re-employment, people being laid off temporarily due to seasonal demand and also young workers looking for their first job. Whilst these people get employed, new job seekers and laid off workers will replace them in unemployment pool. As the economy gets better, the unemployment pool grows as well. While unemployment may be waste of resource, on the contrary, frictional unemployment allows for a better reallocation of resources by moving people from low paying, low productivity job to a higher paying, higher productivity job thus resulting in a larger real GDP for the economy. Frictional unemployment is inevitable due to the imperfect functioning of the labor market.

Structural unemployment arises when there is a change in the demand for labor, both occupationally and geographically. Occupationally, when the labor force do not respond immediately to the demand for new skills, workers will realize that their skill does not match the jobs opportunities available. Their skills become obsolete and they find it increasingly hard to find a job as employers demand new...
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