How clear is the distinction between voluntary and involuntary unemployment What might lead to an decrease in voluntary unemployment Economists divide unemployment into five broad categories: frictional unemployment; structural unemployment; technological unemployment; classical unemployment; and demand deficient unemployment. An examination of each of these categories will show that some are more likely than others to be made up of workers who could work and do consider themselves part of the labour force, but nevertheless choose, for whatever reason, to remain unemployed. Others will be unlikely to contain the voluntarily unemployed, but will be made up of those who are unable to find work. Having examined these categories, we will proceed to draw up two models of unemployment which show clearly the distinction between voluntary and involuntary unemployment, and then go on to consider how voluntary unemployment might be reduced. Frictional employment is caused by short run changes in the economy, which result in workers moving from one job to another. This transition will generally take time.
If someone is made redundant it may be some time before they find another job which is vacant, and it is quite likely that they will not take the first job they come across but will search for one which best suits their skills and preferences. It follows that the level of frictional unemployment in an economy will be heavily affected by the availability of information regarding the labour market. If it is hard to find out about vacancies, it will take a long time for workers to find a position which is suited to them. It is also argued that unemployment benefits may have an effect on frictional unemployment levels because if benefits are relatively high then people will feel able to stay out of work for longer and spend more time searching for an appropriate job. Structural employment is caused by more long run changes in the economy. As the structure of an economy changes, certain workers will find that their skills are no longer in demand, or that the region in which they live has a lack of employment opportunities.
An example might be the British ship building industry, which has contracted to the extent that workers with skills appropriate to this industry either cannot find jobs at all or must move around the country to find them. Structural unemployment will be affected by the cost and availability of retraining, which would allow people to acquire skills which will be useful to them in filling the vacancies which are available. The ease of relocation within the country will also have an effect on structural employment, since if people are more free to move around the country they will have more chance of finding a position which requires their particular skills. Classical employment is the result of the real wage rate being maintained at an unrealistically high level.
This might occur because a Trade Union has insisted on a certain wage, even though this wage is not really realistic. In this case, firms will be inclined to employ less people because the marginal cost of labour will be too high. Further, it will become cheaper in real terms to switch to more capital intensive methods of production, requiring less labour. Demand deficient, or Keynesian, unemployment is caused by a lack of demand. Keynes advanced the idea, in opposition to the classical model of the economy, that unemployment had more to do with the goods market than the labour market. Low demand in the goods market would mean low output, and therefore low demand for labour.
Keynes theory can be shown in two graphs, the left hand graph showing the state of the labour market and the right the state of the goods market. Because the aggregate demand schedule AD is so low, output is only Y 2, rather than its long run At real wage (W/P), unemployment stand at N 2-N 1. LS = Labour Supply LF = Labour force LD = Labour demand feasible real wage = the limit to the real wage which the economy can provide. target wage = aspirations of workers. equilibrium position at Y 1. Employment is therefore equal to only N 2.
In this case, the real wage is almost irrelevant - it could be anything between W 1 and W 2. From these brief descriptions, we can say the following about voluntary and involuntary employment. Friction unemployment will be mostly involuntary, especially if benefits are low. However, it is likely that some people will voluntarily choose to enter and remain in frictional employment as they search for a better job. This will be especially the case if benefits are high, making it less costly to be more demanding in their search. Structural unemployment, at first glance, seems likely to be made up exclusively of involuntary unemployment, since workers cannot control changes in the structure of the economy.
However, some may choose not to take another job because they feel it is beneath them, or because they do not want to change what they do. In this case, the distinction between voluntary and involuntary employment is blurred somewhat. Classical unemployment is invariably involuntary, with employed workers preventing the unemployed from getting jobs by keeping the real wage artificially high. However, as will be shown, the classical model does also include voluntary unemployment. Keynesian unemployment is also involuntary, although again, the model does also contain voluntary unemployment, as can be seen on the graphs above. One model of the rate of unemployment is the classical model, which gives the natural rate of unemployment (NRU).
The NRU model can be illustrated thus: This model assumes a competitive labour market and a competitive goods market, and implies that a large amount of unemployment is voluntary. This implication can be seen from the fact that the total labour force curve and the labour supply curve converge as real wages rise. This shows that at a higher real wage more of the labour force would be prepared to work. Presumably, then, they are choosing not to work at the lower real wage levels rather than being prevented from working. The main alternative to this model is the non-accelerating inflation rate of unemployment (NAIRU). This model challenges the classical assumption that labour markets are perfectly competitive, and instead theories that the real wage is determined by negotiation between workers and firms.
The NAIRU can be graphically illustrated thus: Since high unemployment leads to low demand in the economy, and therefore low demand for labour, it follows that workers will aspire to a lower wage when unemployment is high, and a higher wage when unemployment is low. At a certain level of unemployment, the aspirations of workers will be equal to the amount which firms are prepared to pay, and this level is the NAIRU. The NAIRU model puts more emphasis on involuntary unemployment than does the NRU model, because it assumes that there are people who would work if those who were already working were not keeping the wage too high to make it profitable for firms to employ more people. This has shown that the distinction between voluntary and involuntary unemployment is often blurred. We turn now to examine ways in which voluntary unemployment might be reduced. One answer would be that unemployment benefits should be cut.
This would lead to the frictionally unemployed having more incentive to cut their search time and to enter employment as soon as possible. It might also lead to the structurally unemployed being more motivated to enter a job which they would not usually. For example, in areas where heavy industry has all but collapsed, workers are often not prepared to enter light industry, for social reasons or reasons of preference. However, lower unemployment benefits might force them to do this.
However, this course of action would naturally have very negative effects on those who were unemployed involuntarily. Another answer might be to make more training and retraining available at a low cost. Some people may have weighed up the cost of retraining against the benefits of re-entering employment and decided that they would rather remain unemployed. Perhaps more training and retraining schemes would overcome this difficulty. This sort of system has operated with success in Sweden, where over 2 per cent of the labour force engage in some sort of retraining each year. As well as simply reducing benefits, governments could try to make the transition from benefits to paid work more attractive.
The British Government, for example, has introduced the New Deal, which hopes to make it easier for the long-term unemployed to find work. The carrot of the New Deal is balanced by its stick. Those who refuse to participate and do not actively seek employment are penalised through the benefits system. Again, as a complementary move to a reduction in benefits it would seem sensible to make sure that those who do find work actually gain from their efforts. This means not necessarily ending all benefits as soon as someone enters work, which has been a cause of voluntary unemployment in the past. People have found that entering work will cost them their benefits, and judge that the exchange, which will often give them only a little more money after tax and NI contributions, is not worth making.
Schemes which provide continuing support for the newly employed might help to encourage people into work.