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Different economic situations give birth to varied forms of unemployment, including cyclical, structural, and frictional unemployment.
In accordance with the business cycle, cyclical unemployment rises during recessions and falls during expansions. Longer-term structural unemployment results from basic economic changes that deprive workers of the skills required for open positions. This might be brought on by improvements in technology or a downturn in a specific industry.
When employees change jobs, whether voluntarily or involuntarily, they often experience frictional unemployment, which is a brief period of time without employment. Frictional unemployment, in contrast to structural unemployment, is generally accepted as a normal aspect of a robust economy.
Cyclical unemployment
Cyclical unemployment occurs due to shifts in the economic cycle or business cycle. It happens when the economy experiences a decline, causing a drop in the need for goods, services, and labor. Cyclical unemployment happens when demand for goods and services in an economy decreases, forcing companies to lay off workers in an effort to cut costs.
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To combat cyclical unemployment, governments can implement:
Expansionary fiscal policy
Raising expenditures and reducing taxes in order to create budget shortfalls,tax reductions, transfer payments, refunds, and heightened government expenditures on initiatives like enhancing infrastructure.
Expansionary monetary policy
The Federal Reserve (the Fed) primarily uses open market operations to stimulate the economy. This involves the Fed buying Treasury notes from member banks, creating new credit in the process. This increases the amount of money banks have to lend, leading to lower interest rates and increased consumer spending. Lower interest rates also make it cheaper for businesses to borrow, allowing them to expand and hire more workers. The Fed can also lower the fed funds rate, the discount rate, and the reserve requirement, though these are less frequently used due to their complexity or the stigma associated with them. All of these tools aim to boost the economy by increasing liquidity and promoting spending and investment.
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Structural unemployment
Structural unemployment occurs when major shifts in the economy leave workers without the skills or location needed for available jobs. Here’s how it happens.
Technological Innovation
Technological progress can have a major impact on the economy. The implementation of new technologies may lead to the elimination of certain jobs, resulting in a rise in unemployment rates for many individuals. Additionally, advancements in technology can greatly enhance efficiency, enabling businesses to decrease their workforce size without negatively impacting their overall production. In this situation, numerous employees will experience job losses, leading to the emergence of structural unemployment.
Competition
Competition in the economy can also contribute to structural unemployment. One of the main factors leading to heightened competition globally is globalization. Developing nations typically offer low-cost labor, prompting numerous companies from developed countries to move their manufacturing operations there. Consequently, laborers previously engaged in production are left without jobs.
While geographic immobility does not directly cause structural unemployment, it can significantly exacerbate the consequences. If people in high unemployment areas refuse to move to places with lots of job opportunities, then the high unemployment rate will persist.
Ways to Address Structural Unemployment
Overcoming structural unemployment is a difficult task. Because of the scope and the type of changes in an economy, policymakers often cannot directly tackle the issue. Nevertheless, the situation could potentially be enhanced by taking the following measures:
Education and training
The government assists unemployed individuals by offering education or training to help them enhance their skills and secure employment in a different sector.
Relocation subsidies
The government provides financial support for moving unemployed individuals from regions with high structural unemployment to other regions. Furthermore, the government has the ability to provide subsidies or inducements to businesses in order to generate employment in economically struggling areas.
Decrease or remove unemployment benefits
The government has the option to eliminate unemployment benefits in order to encourage the unemployed to seek employment quickly.
Frictional Unemployment
Frictional unemployment happens when workers are between jobs or searching for new employment, transitioning from their old job to a new one. This brief period of joblessness is caused by intentional changes in the economy. It is different from structural unemployment, which arises due to economic changes that hinder workers from securing employment.
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How to Overcome Frictional Unemployment
As mentioned previously, excessive frictional unemployment could have a detrimental impact on the economy. Therefore, it is essential for regulators to keep a close eye on levels of unemployment and implement appropriate measures to tackle the problem. There are steps that can be implemented to maintain acceptable levels of naturally occurring unemployment.
Increase the information transmission between job seekers and employers
A main factor contributing to increasing frictional unemployment is the limited transmission of information. Using platforms like social networks and online job boards for faster information exchange will decrease the time it takes for job seekers and employers to find each other, ultimately leading to a decrease in unemployment.
Resist prejudice against workers, jobs, or locations
Regulators must overcome biases by enhancing the appeal of specific workers, positions, or areas.
Enhance job flexibility
Regulators could potentially motivate employers to offer greater flexibility to potential employees in order to make job opportunities more attractive to those seeking employment.
Conclusion
To sum up, unemployment is a complicated problem with numerous reasons and varied effects. During economic cycles, cyclical unemployment changes and can be reduced with fiscal or monetary policies, whereas structural unemployment, resulting from technology and competition, requires specific solutions like education, training, or relocation aid. Frictional unemployment is a normal aspect of a strong economy, but can be reduced by improving communication between job seekers and employers and encouraging flexibility in the job market.
Careful consideration must be given to the current economic conditions and the type of unemployment in order to determine the appropriate measures to address the issue of unemployment. Recognizing that no one solution can fully eradicate unemployment, it is crucial to use a mix of strategies to effectively reduce its adverse effects. In the end, the aim of unemployment policy is to establish a labor market that is flexible and responsive to changing economic needs, while also providing people with access to meaningful jobs.
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