Employment and unemployment, economics of

The historical evolution of employment follows the evolution of spending patterns that accompanies economic growth. At early stages of growth employment is concentrated in agriculture and raw materials. Later, employment grows in the production sector and finally in the public and private services. At any particular time, a country's employment structure tends to reflect its stage of growth and its particular comparative advantages in international trade. Short-run changes in employment and unemployment are influenced by the fact that in modern industrial economies there are both fixed and variable costs associated with hiring labour. When fixed labour costs are important, employers are more likely to adjust hours of work before they change the number of employees in response to changes in output. Changes in employment and unemployment thus lag behind changes in output. Fixed labour costs associated with turnover and training tend to rise with the skill of a worker. As a result, employers are more reluctant to lay off skilled than unskilled workers, and the unemployment of unskilled workers is more responsive to cyclical changes than the unemployment of skilled workers.

Economic analysts identify four general types of unemployment. Deficient demand unemployment can be reduced by fiscal and monetary policies that increase the demand for labour. Frictional, structural and seasonal unemployment, which exist even when business conditions are good, depend more on relative wage adjustments, labour mobility and other aspects of the functioning of labour markets. There are significant international differences in unemployment, and since the 1970s unemployment in Europe has increased relative to unemployment in North America and Japan. Much of this change appears to reflect an increase in the structural and frictional components of unemployment in European labour markets.

Frictional and structural unemployment can be reduced by avoiding policies that raise the incidence and duration of unemployment and by pursuing policies that reduce them. The structure of unemployment insurance provides an example of the former. Unemployment durations will generally be lower when unemployment benefits are low relative to prior earnings and when benefit eligibility periods are relatively short. Policies that may reduce unemployment include retraining programmes, wage subsidies, and subsidies for worker relocation. Most industrialized countries have pursued such policies in the post-war period, but the results have been mixed.

Robert J. Flanagan