Some of the major causes of unemployment are: 1. Job Search 2. Wage Rigidity.
1. Job Search:
(Reason of Frictional Unemployment):
It takes time and effort to find appropriate jobs. Search for an appropriate job tends to decrease the rate of job finding.
It takes time for workers to search a job; during this time period the workers are unemployed.
This is called frictional unemployment. It is temporary in nature. This is because there exists both job and job seekers but they do not immediately come in contact with each other due to imperfect information, knowledge etc. Thus frictional unemployment arises due to imperfections in the labour market.
Causes of job separation and frictional unemployment:
(a) Some Changes in demand for goods due to innovations over time is inevitable:
This decreases the demand for labour. In the long run, in a growing economy the techniques of production are constantly changing. As a result, people are likely to lose the job when these outdated technologies are replaced by modern techniques of productions. For example, with the invention of computer, the demand for typewriter decreases. As a result, demand for labour by typewriter manufacturer decreases.
(b) Sectoral Shifts:
Frictional unemployment occurs due to the sectoral shifts because it takes time for workers to change sectors. Sectoral shifts occur because different regions produce different goods, so the demand for labour may rise in one part while decrease in the other parts of the country.
(c) When the firm fails or when the job performance of the labour is not satisfactory, the workers are laid off.
(d) Sometimes workers quit job to change careers or move to other parts of the country.
Thus, frictional unemployment will continue to occur so long as demand for labour is less than the supply of labour. As frictional unemployment occurs due to imperfection in the labour market and as such imperfections cannot be totally eliminated, this type of unemployment will always remain in the economy.
2. Reason of Unemployment:
Real-Wage Rigidity: – Reason for Wait Unemployment:
Unemployment resulting from wage rigidity and job rationing is called wait unemployment. In Classical sense supply curve of labour is vertical because of the assumption that in the long run supply of labour is fixed. Wage rigidity implies that the wages fail to adjust until demand for labour becomes equal to the supply to labour.
Wage Rigidity arises because sometimes the wages are not flexible and the real wages are fixed above the equilibrium level. This results in unemployment. Thus, workers are unemployed not because they are searching for the jobs but because at the prevailing wage rate supply of labour is greater than the Demand for labour.