Macroeconomics For Dummies®, uk edition Published by: John Wiley & Sons, Ltd

Uncovering Unemployment: Causes and Responses

An ideal world would have no unemployment: everyone who’s able and willing to work would be able to find a job. Sadly, in real life unemployment does exist, and in some economies a large proportion of people are unable to find work.

Fortunately, macroeconomists have a good idea what causes unemployment and what policy makers can do to reduce it. For loads more on this subject, check out Chapter 6.

Recognising that unemployment is bad for society

Unemployment involves many costs:

Personal costs: Unemployed people bear much of the impact, compared with employed people:


Worse physical and mental health


More likely to be divorced


Lower life expectancy


Economic costs: Unemployment reduces the amount of tax revenue the government is able to raise and at the same time increases expenditure on social assistance programmes.


Unemployment leads to what economists call a deadweight-loss: basically the time that people spend not working they could’ve spent working and doing something productive. Instead that time is lost and can never be recovered.


Working on unemployment: Labour market flexibility

Some level of unemployment is inevitable. In general terms it falls into the two categories we describe in this section.

Frictional unemployment


Frictional unemployment arises mostly from the natural flows of people in and out of employment. Technological advances and changes in consumer tastes mean that the skills that firms are looking for and the skills that workers possess sometimes differ.


For instance, the UK used to have a large coalmining industry, but technological advances (for example, cheap nuclear power) and competition from abroad meant that mining coal in the UK was no longer economical. Sadly, many people lost their jobs and had difficulty finding other work – their skills were no longer in demand.

Limited information is another cause of frictional unemployment. Firms have limited information about which workers would be a good fit for them and

workers have limited information about which firms they’d enjoy working for. This problem makes it costly – in time and effort – for workers to find suitable jobs and firms to find workers they want to hire.


In short, a certain level of frictional unemployment is inevitable in a market economy and policy makers can do little about it. (Some economists point out that generous unemployment benefits may contribute to frictional unemployment by reducing the incentives to search for work.)