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Unemployment Types and Theories

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Frictional Unemployment

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Temporary unemployment that occurs when people are between jobs or are entering the workforce for the first time. It is often due to workers voluntarily changing jobs and not due to economic factors.

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Structural Unemployment

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Occurs due to a mismatch between the skills that workers possess and those needed by employers. It is often caused by technological changes or the decline of certain industries.

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Cyclical Unemployment

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A type of unemployment that corresponds to the cyclical trends in growth and production within an economy. It rises during economic recessions and declines with economic growth.

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Seasonal Unemployment

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A type of unemployment that occurs due to seasonal patterns of work in specific industries. Common in tourism, agriculture, and retail businesses.

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Long-term Unemployment

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Refers to workers who have been unemployed for an extended period of time, often defined as longer than 27 weeks. It can lead to a deterioration of skills and make re-entering the workforce difficult.

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Classical Unemployment Theory

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An economic theory that suggests unemployment occurs when wages are artificially kept above the equilibrium level. According to this theory, the labor market should clear if wages are allowed to fall to their market-clearing levels.

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Keynesian Unemployment

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Based on the ideas of John Maynard Keynes, this theory proposes that insufficient demand in the economy leads to unemployment, as companies reduce production and therefore require fewer workers.

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Natural Rate of Unemployment

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Often denoted as UU^*, it is the sum of frictional and structural unemployment when the economy is at full employment. It is the level of unemployment expected in a healthy economy.

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New Classical Macroeconomics

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A school of thought that emphasizes the importance of rational expectations and market-clearing models. It generally believes that unemployment is caused by government interference, such as minimum wages and other regulations.

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Marxian Theory of Unemployment

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Originating from the works of Karl Marx, this theory sees unemployment as an inevitable result of the capitalist system, due to labor being treated as a commodity and the cyclical nature of capital investment.

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Underemployment

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A situation where workers are employed in jobs that do not use their skills and abilities to the fullest or when they work fewer hours than they would prefer. It reflects the underutilization of labor in the economy.

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Monetarist Theory

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The monetarist perspective on unemployment emphasizes the role of monetary policy in controlling inflation and influencing the business cycle, which in turn impacts unemployment rates.

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Real Wage Unemployment

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Occurs when real wages (wages adjusted for inflation) are set above the market-clearing level, often due to minimum wage laws or trade union activity. It can lead to surplus labor and unemployment.

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Search Theory

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A theory of frictional unemployment that focuses on the process of matching workers with jobs. It takes into account the time and effort that workers must spend searching for suitable positions.

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Discouraged Worker Effect

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When individuals who are capable of working are not actively seeking employment due to a belief that no jobs are available for them. These individuals are not counted in the labor force.

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Hysteresis in Unemployment

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Refers to the phenomenon where a history of high unemployment can lead to a higher natural rate of unemployment. This could be due to skill loss or demotivation among long-term unemployed workers.

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Institutional Unemployment

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Arises from the institutional framework of an economy, such as high minimum wage laws, restrictive employment protection legislation, and generous unemployment benefits that may reduce the incentive to work.

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Okun's Law

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A relationship described by economist Arthur Okun which posits that the unemployment rate decreases about 1% for every 3% increase in gross domestic product (GDP).

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Beveridge Curve

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Illustrates the relationship between unemployment and the job vacancy rate in an economy. It shows that high unemployment tends to coincide with a low number of job vacancies, and vice versa.

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Mismatch Theory

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A concept that explains instances where unemployment persists even when there are job vacancies, due to a mismatch between the skills and locations of the jobless and the requirements and locations of the available jobs.

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Technological Unemployment

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Unemployment that occurs when innovations and advancements in technology result in the replacement of workers with machines or software, leading to a decrease in the demand for labor.

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Efficiency Wage Theory

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The theory that employers may pay wages above the market-clearing level to increase worker productivity, reduce turnover, and attract better candidates, which can unintentionally lead to unemployment.

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Reservation Wage

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The lowest wage at which a worker would be willing to accept a particular type of job. If market wages are below this level, the worker will choose to remain unemployed rather than accept employment.

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Phillips Curve

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A graphical representation of the inverse relationship between the rate of inflation and the rate of unemployment within an economy.

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Hidden Unemployment

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This encompasses individuals who are not counted in official unemployment statistics because they have stopped looking for work, often due to a lack of success or because they are marginally attached to the labor force.

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