Significance

People willing to work but not presently working. The "unemployed" comprise all persons above a specified age who during the reference period were:

(a) "without work", i.e. that hadn't a paid employment or a self-employment;
(b) "currently available for work", i.e. were willing to accept a paid employment or a self-employment during the reference period;
(c) "seeking work", i.e. had taken specific steps to seek paid employment or self-employment. The specific steps may include e.g. registration at a public or private employment exchange; application to employers; answering or placing newspaper advertisements.

In an enlarged meaning, under-employment is the emergence of the group of people 1. working less hours and days than desired, 2. working with labour contracts different from desired ones, 3. working in places where their competences are not full employed or 4. whose productivity is lower than it would be on another job.
In other word, unemployment and under-employment consist in under-used or mis-used labour.

Economic losses from unemployment are large, since they relate to all goods and services that could be produced by the unemployed, to income losses for the unemployed household, to consumption and employment losses caused by reduced demand of the latter, to a wide range of social pathologies and health diseases.

In terms of cumulated stocks, during unemployment a depletion of human capital takes place. Moreover, economic return to education is reduces, thus education efforts are frustrated.

Unemployment is often an element of a vicious circle with poverty, low education and human capital, health disease, social and political marginality. Moreover, the same risk of remaining unemployed is a reduction in utility and welfare for the actual employees.

Composition

Unemployment is usually segmented according to the following characteristics of the unemployed:

1. age;
2. sex;
3. education;
4. duration of unemployment period;
5. kind of occupation and economic activity previously carried out.

In particular, developing this last point, unemployment can be partitioned according the preceding work experience of the unemployed. Thus, we distinguish:
1. people seeking for first occupation; typically the young or housewives in abrupt need of a job; their lack of work experience is often an handicap to be hired, resulting in a vicious circle;
2. people re-entering into the labour market after a long pause, e.g. pregnancy and child education; their skills may turn out to be outdated;
3. dismissed people because of firms' objective conditions, e.g. failure or reduction of demand; if this is an industry-wide phenomenon, these persons risk to need a drastic re-orientation of skills;
4. dismissed people because of personal condition or behaviour; e.g. if illness can be a reason of firing, a downward vicious cycle can begin and be reinforced, possibly leading to social marginality;
5. people annoyed of working in past organization, feeling themselves strong enough to overwhelm a period of unemployment; these persons usually do not register in unemployment offices, because of self-confidence and narrow occupation targets.

On a collective level, one usually distinguishes:
1. structural unemployment, where age, skills and industry-specific abilities of the population do not meet the requirements of employers;
2. business-cycle unemployment, where a lack of demand has lead to a reduced demand for labour;
3. underdevelopment, where lack of entrepreneurship, insufficient technical and social infrastructure, and political distress cause a persistent historical low level of employment in a country or a region;
4. technological unemployment, with unsufficient installed capital stock and, dynamically, when the introduction of labour-saving technologies reduces employment and people do not find new jobs;
5. frictional unemployment, when a short-run unemployment phase is necessary to find out an adequate job; this type of unemployment usually does not lead to a registration at employment agencies;
6. voluntary unemployment, when the unemployed is looking for a higher wage than the market offers and he refuses suitable jobs.

Determinants

Different types of unemployment have their respective determinants.

In general terms, unemployment depend on the compared dynamics of labour demand and population (in particular, active population, i.e. the people willing to work in percentage on the total population in a certain age range).

A reduction in GDP means that employees are redundant and, depending on institutional arrangements, a dismissal tide will take place. This, in turn, may depress consumption, leading to a further reduction in GDP ("Keynesian multiplier").

Firms' downsizing strategies and the conscious decision of weaken labour strength may lead to an increased unemployment.

Any reason of dismissal wave will have an immediate impact on unemployment, unless the involved persons totally renounce to seek a new job, passing directly from employment to non-active population, without an unemployment phase. In a longer time horizon, unemployment will be reduced if the persons earlier involved in dismissal find new jobs.

Lack of labour market transparency (e.g. highly inefficient public employment agencies) may lead to losses in job opportunities.
Lack of variety in labour legal contracts may reduce the compatibility between respective needs of employers and unemployed and, as consequence, of signed-up agreements.

Impact on other variables

A large unemployment may brake wage dynamics. Still, labour market is often split with a sharp separation between firms internal and external markets, so that their dynamics and relationships turn out to be not automatic.

Employees' consumption is clearly dependent on actual and forecasted unemployment.

Social integration of groups, as women, young and minorities, heavily depends on unemployment structure. Selection criteria at job interviews may lead to discrimination and vicious circles.

Depression, apathy, lack of self-confidence are common individual effects of unemployment.

Long-term trends

Unemployment is far from zero in most countries for most of the time. Some countries have experienced stable high level of unemployment rate with GDP growth clearly ineffective in reducing it.

By contrast, full employment is possible and historically well documented, usually after a clear policy commitment.

Business cycle behaviour

Depending on institutional arrangements, in particular about flexibility in entry and exit from work, unemployment rate is a more or less coincident anti-cyclical indicator, falling with recovery and rising with recession.

If labour use is not too flexible, unemployment may be lagging behind the cycle, with a reduction of unemployment only after a period of trustworthy recovery and dismissal tide well after the high GDP peak, if at all. In this case, temporary slow-down may be overwhelmed without unemployment increase.

Data

2004 unemployment levels and trends in all countries of the world

Daily time spent on different activities by employment status, sex, and age

Data for all the variables in IS-LM model

EU data for all the variables in IS-LM model (Germany, France, Italy, Spain, UK, Switzerland and other 13 European countries)

Related papers

Downsizing, unemployment and psycho-social conditions: an empirical enquiry

Forecasting unemployment: an ex-post comparision of accuracy of FMI vs. private forecasting

Labour market in Peru: the transition path from unemployment to employment and the reverse

Formal models

An interactive map of how the economy works according to a basic macroeconomic scheme: the IS-LM model

An agent-based model of unemployment