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

hear about the vacancy. Plus, the firm doesn’t know about the worker’s existence and thus they won’t be matched.


Geographical constraints can stop a worker and a firm being an


excellent match. Workers often can’t easily relocate.

These frictions make the labour market less efficient and increase the level of unemployment.

Policy makers have difficulty reducing frictional unemployment, but here are some possible ways:

Making sure that jobs are widely advertised to the unemployed, for example at job centres.


Encouraging people to gain respected qualifications that firms can use to identify good matches. For example, having a first-class degree in economics signals to an employer that you know your economics.

Ensuring that unemployment benefits aren’t so generous that they discourage workers from exerting effort in their job search. Generous unemployment benefits can increase unemployment because they reduce the incentive to look for work.

Structural unemployment: Experiencing a mismatch between labour supply and demand

The other major cause of unemployment is structural unemployment. This refers to a mismatch between the demand for labour and the supply of labour.

Figure 6-4 illustrates the situation. At the prevailing market wage w, firms would like to hire L_D amount of workers. However, many more workers are willing to work at the wage w; in particular, L_S people would like a job. The difference between the number of people willing and able to work (L_S) and the number of people firms want to hire (L_D) represents the structural unemployment in an economy.

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Figure 6-4: Structural unemployment.

If wages fell to the equilibrium wage w^e, demand for labour would exactly equal the supply of labour: in other words, everyone who wants to work is able to find a job and structural unemployment is eliminated. If only things were that simple!