Controlling or reducing unemployment

Societies try a number of different measures to get as many people as possible into work, and various societies have experienced close tofull employment for extended periods, particularly during the Post-World War II economic expansion. The United Kingdom in the 1950s and 60s averaged 1.6% unemployment, while in Australia the 1945 White Paper on Full Employment in Australia established a government policy of full employment, which policy lasted until the 1970s when the government ran out of money.

However, mainstream economic discussions of full employment since the 1970s suggest that attempts to reduce the level of unemployment below the natural rate of unemployment will fail, resulting only in less output and more inflation.

Demand side solutions

United States Families on Relief (in 1,000's)^]

	1936	1937	1938	1939	1940	1941
Workers employed
WPA	1,995	2,227	1,932	2,911	1,971	1,638
CCC and NYA	712	801	643	793	877	919
Other federal work projects	554	663	452	488	468	681
Cases on public assistance
Social security programs	602	1,306	1,852	2,132	2,308	2,517
General relief	2,946	1,484	1,611	1,647	1,570	1,206
Totals
Total families helped	5,886	5,660	5,474	6,751	5,860	5,167
Unemployed workers (BLS)	9,030	7,700	10,390	9,480	8,120	5,560
Coverage (cases/unemployed)	65%	74%	53%	71%	72%	93%

Many countries aid the unemployed through social welfare programs. These unemployment benefits include unemployment insurance, unemployment compensation, welfare and subsidies to aid in retraining. The main goal of these programs is to alleviate short-term hardships and, more importantly, to allow workers more time to search for a job.

Government unemployment office with job listings, Berlin, Germany.

A direct demand-side solution to unemployment is government-funded employment of the able-bodied poor. This was notably implemented in Britain from the 17th century until 1948 in the institution of the work house, which provided jobs for the unemployed with harsh conditions and poor wages to dissuade their use. A modern alternative is a job guarantee, where the government guarantees work at a living wage. Temporary measures can include public works programs such as the Works Progress Administration. Government-funded employment is not widely advocated as a solution to unemployment, except in times of crisis; this is attributed to the public sector jobs' existence depending directly on the tax receipts from private sector employment.

In the U.S. the unemployment insurance allowance one receives is based solely on previous income (not time worked, family size, etc.) and usually compensates for one-third of one's previous income. To qualify, one must reside in their respective state for at least a year and, of course, work. The system was established by the Social Security Act of 1935. Although 90% of citizens are covered by unemployment insurance, less than 40% apply for and receive benefits. However, the number applying for and receiving benefits increases during recessions. In cases of highly seasonal industries the system provides income to workers during the off seasons, thus encouraging them to stay attached to the industry.

According to classical economic theory, markets reach equilibrium where supply equals demand; everyone who wants to sell at the market price can. Those who do not want to sell at this price do not; in the labour market this is classical unemployment. Increases in the demand for labour will move the economy along the demand curve, increasing wages and employment. The demand for labour in an economy is derived from the demand for goods and services. As such, if the demand for goods and services in the economy increases, the demand for labour will increase, increasing employment and wages. Monetary policy and fiscal policy can both be used to increase short-term growth in the economy, increasing the demand for labour and decreasing unemployment.

Supply-side solutions

However, the labour market is not 100% efficient: it does not clear, though it may be more efficient than bureaucracy. Some argue that minimum wages and union activity keep wages from falling, which means too many people want to sell their labour at the going price but cannot. This assumes perfect competition exists in the labour market, specifically that no single entity is large enough to affect wage levels. Advocates of supply-side policies believe those policies can solve this by making the labour market more flexible. These include removing the minimum wage and reducing the power of unions. Supply-siders argue the reforms increase long-term growth. This increased supply of goods and services requires more workers, increasing employment. It is argued that supply-side policies, which include cutting taxes on businesses and reducing regulation, create jobs and reduce unemployment. Other supply-side policies include education to make workers more attractive to employers.

However, recent meta-analyzes involving many studies refute that there is any statistically significant, negative impact of minimum wages on unemployment. Further, a number of scholars argue that the predicted negative impact is based on incoherent or simplistic logic that ignores mitigating environmental factors, such as non-minimum wage labour markets including farm, service and self employed workers. They argue that the benefits of minimum wage laws outweigh the supposed but unproven costs.

Benefits of full employment

Unemployment may have advantages as well as disadvantages for the overall economy. Notably, it may help avert inflation, which is argued to have damaging effects, by providing (in Marxian terms) a reserve army of labour, which keeps wages in check. However the direct connection between full local employment and local inflation has been disputed by some due to the recent increase in international trade that supplies low-priced goods even while local employment rates rise to full employment.

In the Shapiro-Stiglitz model of efficiency wages, workers are paid at a level that dissuades shirking. This prevents wages from dropping to market clearing levels. Full employment cannot be achieved because workers would shirk if they were not threatened with the possibility of unemployment. Because of this, the curve for the no-shirking condition (labeled NSC) goes to infinity at full employment.

The inflation-fighting benefits to the entire economy arising from a presumed optimum level of unemployment has been studied extensively. The Shapiro-Stiglitz model suggests that (in the absence of minimum wages) wages are not bid down sufficiently to ever reach 0% unemployment. This occurs because employers know that when wages decrease, workers will shirk and expend less effort. Employers avoid shirking by preventing wages from decreasing so low that workers give up and become unproductive. These higher wages perpetuate unemployment while the threat of unemployment reduces shirking.

Before current levels of world trade were developed, unemployment was demonstrated to reduce inflation, following the Phillips curve, or to decelerate inflation, following the NAIRU/natural rate of unemployment theory, since it is relatively easy to seek a new job without losing one's current one. And when more jobs are available for fewer workers (lower unemployment), it may allow workers to find the jobs that better fit their tastes, talents, and needs.

As in the Marxist theory of unemployment, special interests may also benefit: some employers may expect that employees with no fear of losing their jobs will not work as hard, or will demand increased wages and benefit. According to this theory, unemployment may promote general labour productivity and profitability by increasing employers' rationale for their monopsony-like power (and profits).

Optimal unemployment has also been defended as an environmental tool to brake the constantly accelerated growth of the GDP to maintain levels sustainable in the context of resource constraints and environmental impacts. However the tool of denying jobs to willing workers seems a blunt instrument for conserving resources and the environment—it reduces the consumption of the unemployed across the board, and only in the short term. Full employment of the unemployed workforce, all focused toward the goal of developing more environmentally efficient methods for production and consumption might provide a more significant and lasting cumulative environmental benefit and reduced resource consumption.If so the future economy and workforce would benefit from the resultant structural increases in the sustainable level of GDP growth.

Some critics of the "culture of work" such as anarchist Bob Black see employment as overemphasized culturally in modern countries. Such critics often propose quitting jobs when possible, working less, reassessing the cost of living to this end, creation of jobs which are "fun" as opposed to "work," and creating cultural norms where work is seen as unhealthy. These people advocate an "anti-work" ethic for life.

Effects of unemployment

Individual

Migrant Mother,Dorothea Lange, 1936

Unemployed individuals are unable to earn money to meet financial obligations. Failure to pay mortgage payments or to pay rent may lead to homelessness through foreclosure or eviction. Across the United States the growing ranks of people made homeless in the foreclosure crisis are generating tent cities.Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression. According to a study published in Social Indicator Research, even those who tend to be optimistic find it difficult to look on the bright side of things when unemployed. Using interviews and data from German participants aged 16 to 94 – including individuals coping with the stresses of real life and not just a volunteering student population – the researchers determined that even optimists struggled with being unemployed.

Dr. M. Brenner conducted a study in 1979 on the "Influence of the Social Environment on Psychology." Brenner found that for every 10% increase in the number of unemployed there is an increase of 1.2% in total mortality, a 1.7% increase in cardiovascular disease, 1.3% more cirrhosis cases, 1.7% more suicides, 4.0% more arrests, and 0.8% more assaults reported to the police. A more recent study by Christopher Ruhm on the effect of recessions on health found that several measures of health actually improve during recessions. As for the impact of an economic downturn on crime, during the Great Depression the crime rate did not decrease. Because unemployment insurance in the U.S. typically does not replace 50% of the income one received on the job (and one cannot receive it forever), the unemployed often end up tapping welfare programs such as Food Stamps or accumulating debt.

Not everyone suffers equally from unemployment. In a prospective study of 9570 individuals over four years, highly conscientiousness people suffered more than twice as much if they became unemployed. The authors suggested this may be due to conscientious people making different attributions about why they became unemployed, or through experiencing stronger reactions following failure.

Some hold that many of the low-income jobs are not really a better option than unemployment with a welfare state (with itsunemployment insurance benefits). But since it is difficult or impossible to get unemployment insurance benefits without having worked in the past, these jobs and unemployment are more complementary than they are substitutes. (These jobs are often held short-term, either by students or by those trying to gain experience; turnover in most low-paying jobs is high.)

Another cost for the unemployed is that the combination of unemployment, lack of financial resources, and social responsibilities may push unemployed workers to take jobs that do not fit their skills or allow them to use their talents. Unemployment can cause underemployment, and fear of job loss can spur psychological anxiety.

Social

An economy with high unemployment is not using all of the resources, specifically labour, available to it. Since it is operating below itsproduction possibility frontier, it could have higher output if all the workforce were usefully employed. However, there is a trade-off between economic efficiency and unemployment: if the frictionally unemployed accepted the first job they were offered, they would be likely to be operating at below their skill level, reducing the economy's efficiency.

Demonstration against unemployment in Kerala, India

During a long period of unemployment, workers can lose their skills, causing a loss of human capital. Being unemployed can also reduce the life expectancy of workers by about 7 years.

High unemployment can encourage xenophobia and protectionism as workers fear that foreigners are stealing their jobs. Efforts to preserve existing jobs of domestic and native workers include legal barriers against "outsiders" who want jobs, obstacles to immigration, and/or tariffs and similar trade barriers against foreign competitors.

High unemployment can also cause social problems such as crime; if people don't have as much disposable income as before, then it is very likely that crime levels within the economy will increase.

Socio-political

High levels of unemployment can be causes of civil unrest, in some cases leading to revolution, and particularly totalitarianism. The fall of the Weimar Republic in 1933 and Adolf Hitler's rise to power, which culminated in World War II and the deaths of tens of millions and the destruction of much of the physical capital of Europe, is attributed to the poor economic conditions in Germany at the time, notably a high unemployment rate of above 20%; see Great Depression in Central Europe for details.

Note that the hyperinflation in the Weimar republic is not directly blamed for the Nazi rise – the Inflation in the Weimar Republic occurred primarily in the period 1921–23, which was contemporary with Hitler's Beer Hall Putsch of 1923, and is blamed for damaging the credibility of democratic institutions, but the Nazi party only assumed government in 1933, 10 years after the hyperinflation but in the midst of high unemployment.

Limitations of the unemployment definition

The unemployment rate may be different from the impact of the economy on people. The unemployment figures indicate how many are not working for pay but seeking employment for pay. It is only indirectly connected with the number of people who are actually not working at all or working without pay. Therefore, critics believe that current methods of measuring unemployment are inaccurate in terms of the impact of unemployment on people as these methods do not take into account the 1.5% of the available working population incarcerated in U.S. prisons (who may or may not be working while incarcerated), those who have lost their jobs and have become discouraged over time from actively looking for work, those who are self-employed or wish to become self-employed, such as tradesmen or building contractors or IT consultants, those who have retired before the official retirement age but would still like to work (involuntary early retirees), those on disability pensions who, while not possessing full health, still wish to work in occupations suitable for their medical conditions, those who work for payment for as little as one hour per week but would like to work full-time. These people are "involuntary part-time" workers, those who are underemployed, e.g., a computer programmer who is working in a retail store until he can find a permanent job, involuntary stay-at-home mothers who would prefer to work, and graduate and Professional school students who were unable to find worthwhile jobs after they graduated with their Bachelor's degrees.

Internationally, some nations' unemployment rates are sometimes muted or appear less severe due to the number of self-employed individuals working in agriculture. Small independent farmers are often considered self-employed; so, they cannot be unemployed. The impact of this is that in non-industrialized economies, such as the United States and Europe during the early 19th century, overall unemployment was approximately 3% because so many individuals were self-employed, independent farmers; yet, unemployment outside of agriculture was as high as 80%. Many economies industrialize and experience increasing numbers of non-agricultural workers. For example, the United States' non-agricultural labour force increased from 20% in 1800, to 50% in 1850, to 97% in 2000. The shift away from self-employment increases the percentage of the population who are included in unemployment rates. When comparing unemployment rates between countries or time periods, it is best to consider differences in their levels of industrialization and self-employment.

Additionally, the measures of employment and unemployment may be "too high". In some countries, the availability of unemployment benefits can inflate statistics since they give an incentive to register as unemployed. People who do not really seek work may choose to declare themselves unemployed so as to get benefits; people with undeclared paid occupations may try to get unemployment benefits in addition to the money they earn from their work.

However, in countries such as the United States, Canada, Mexico, Australia, Japan and the European Union, unemployment is measured using a sample survey (akin to a Gallup poll). According to the BLS, a number of Eastern European nations have instituted labour force surveys as well. The sample survey has its own problems because the total number of workers in the economy is calculated based on a sample rather than a census.

It is possible to be neither employed nor unemployed by ILO definitions, i.e., to be outside of the "labour force. These are people who have no job and are not looking for one. Many of these are going to school or are retired. Family responsibilities keep others out of the labour force. Still others have a physical or mental disability which prevents them from participating in labour force activities. And of course some people simply elect not to work, preferring to be dependent on others for sustenance.

Typically, employment and the labour force include only work done for monetary gain. Hence, a homemaker is neither part of the labour force nor unemployed. Nor are full-time students nor prisoners considered to be part of the labour force or unemployment. The latter can be important. In 1999, economists Lawrence F. Katz and Alan B. Krueger estimated that increased incarceration lowered measured unemployment in the United States by 0.17% between 1985 and the late 1990s. In particular, as of 2005, roughly 0.7% of the U.S. population is incarcerated (1.5% of the available working population). Additionally, children, the elderly, and some individuals with disabilities are typically not counted as part of the labour force in and are correspondingly not included in the unemployment statistics. However, some elderly and many disabled individuals are active in the labour market

In the early stages of an economic boom, unemployment often rises. This is because people join the labour market (give up studying, start a job hunt, etc.) because of the improving job market, but until they have actually found a position they are counted as unemployed. Similarly, during a recession, the increase in the unemployment rate is moderated by people leaving the labour force or being otherwise discounted from the labour force, such as with the self-employed.

For the fourth quarter of 2004, according to OECD, (onrmalized unemployment for men aged 25 to 54 was 4.6% in the U.S. and 7.4% in France. At the same time and for the same population the employment rate (number of workers divided by population) was 86.3% in the U.S. and 86.7% in France. This example shows that the unemployment rate is 60% higher in France than in the U.S., yet more people in this demographic are working in France than in the U.S., which is counterintuitive if it is expected that the unemployment rate reflects the health of the labour market.

Due to these deficiencies, many labour market economists prefer to look at a range of economic statistics such as labour market participation rate, the percentage of people aged between 15 and 64 who are currently employed or searching for employment, the total number of full-time jobs in an economy, the number of people seeking work as a raw number and not a percentage, and the total number of person-hours worked in a month compared to the total number of person-hours people would like to work. In particular the NBER does not use the unemployment rate but prefer various employment rates to date recessions.

Measurement unemployment rate

There are also different ways national statistical agencies measure unemployment. These differences may limit the validity of international comparisons of unemployment data."  To some degree these differences remain despite national statistical agencies increasingly adopting the definition of unemployment by the International Labour Organization. To facilitate international comparisons, some organizations, such as the OECD, Eurostat, and International Labor Comparisons Program, adjust data on unemployment for comparability across countries.

Though many people care about the number of unemployed individuals, economists typically focus on the unemployment rate. This corrects for the normal increase in the number of people employed due to increases in population and increases in the labour force relative to the population. The unemployment rate is expressed as a percentage, and is calculated as follows:

As defined by the International Labour Organization, "unemployed workers" are those who are currently not working but are willing and able to work for pay, currently available to work, and have actively searched for work. Individuals who are actively seeking job placement must make the effort to: be in contact with an employer, have job interviews, contact job placement agencies, send out resumes, submit applications, respond to advertisements, or some other means of active job searching within the prior four weeks. Simply looking at advertisements and not responding will not count as actively seeking job placement. Since not all unemployment may be "open" and counted by government agencies, official statistics on unemployment may not be accurate.

The ILO describes 4 different methods to calculate the unemployment rate:

• Labour Force Sample Surveys are the most preferred method of unemployment rate calculation since they give the most comprehensive results and enables calculation of unemployment by different group categories such as race and gender. This method is the most internationally comparable.
• Official Estimates are determined by a combination of information from one or more of the other three methods. The use of this method has been declining in favor of Labour Surveys.
• Social Insurance Statistics such as unemployment benefits, are computed base on the number of persons insured representing the total labour force and the number of persons who are insured that are collecting benefits. This method has been heavily criticized due to the expiration of benefits before the person finds work.
• Employment Office Statistics are the least effective being that they only include a monthly tally of unemployed persons who enter employment offices. This method also includes unemployed who are not unemployed per the ILO definition.

The primary measure of unemployment, U3, allows for comparisons between countries. Unemployment differs from country to country and across different time periods. For example, during the 1990s and 2000s, the United States had lower unemployment levels than many countries in the European Union, which had significant internal variation, with countries like the UK and Denmark outperforming Italy and France. However, large economic events such as the Great Depression can lead to similar unemployment rates across the globe.

types and theories of unemployment

Economists distinguish between various overlapping types of and theories of unemployment, including cyclical or Keynesian unemployment, frictional unemployment, structural unemployment and classical unemployment. Some additional types of unemployment that are occasionally mentioned are seasonal unemployment, hardcore unemployment, and hidden unemployment. The U.S. BLS measures six types of unemployment, U1-U6.

Though there have been several definitions of voluntary and involuntary unemployment in the economics literature, a simple distinction is often applied. Voluntary unemployment is attributed to the individual's decisions, whereas involuntary unemployment exists because of the socio-economic environment (including the market structure, government intervention, and the level of aggregate demand) in which individuals operate. In these terms, much or most of frictional unemployment is voluntary, since it reflects individual search behavior. Voluntary unemployment includes workers who reject low wage jobs whereas involuntary unemployment includes workers fired due to an economic crisis, industrial decline, company bankruptcy, or organizational restructuring.

On the other hand, cyclical unemployment, structural unemployment, and classical unemployment are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by the unemployed in the past, while classical (natural) unemployment may result from the legislative and economic choices made by labour unions or political parties. So, in practice, the distinction between voluntary and involuntary unemployment is hard to draw. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers even when wages are allowed to adjust, so that even if all vacancies were to be filled, some unemployed workers would still remain. This happens with cyclical unemployment, as macroeconomic forces cause microeconomic unemployment which can boomerang back and exacerbate these macroeconomic forces.

Classical unemployment

Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level, causing the number of job-seekers to exceed the number of vacancies.

Most economists have argued that unemployment increases the more the government intervenes into the economy to try to improve the conditions of those with jobs. For example, minimum wage laws raise the cost of laborers with few skills to above the market equilibrium, resulting in people who wish to work at the going rate but cannot as wage enforced is greater than their value as workers becoming unemployed. Laws restricting layoffs made businesses less likely to hire in the first place, as hiring becomes more risky, leaving many young people unemployed and unable to find work.

However, this argument is criticized for ignoring numerous external factors and overly simplifying the relationship between wage rates and unemployment- in other words, that other factors may also affect unemployment. Some, such as Murray Rothbard, suggest that even social taboos can prevent wages from falling to the market clearing level. It is noted that there can be unemployment when job market is in equilibrium. For example, the salary of appliance repairman in a city is $3,000. At this salary, the appliance stores of city want to hire 100 repairmen. But there are 300 repairmen looking for jobs within the city. So there are 200 repairmen looking for jobs are unemployed. At this time, job market is not in equilibrium. But six months later, the salary of appliance repairman in this city drop to $1,000. At this salary, the appliance stores of city want to hire 200 repairmen. There are 200 repairman want to accept jobs. For the rest 100 repairmen, they no longer want to work for this kind of job because the salary is too low. By this time, job market reaches equilibrium. But there are still 100 repairmen unemployed because they no longer want to work for this kind of job.

Cyclical or Keynesian unemployment

The IS-LM Model is used to analyze the effect of demand shocks on the economy.

Cyclical or Keynesian unemployment, also known as deficient-demand unemployment, occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. Demand for most goods and services falls, less production is needed and consequently fewer workers are needed, wages are sticky and do not fall to meet the equilibrium level, and mass unemployment results. Its name is derived from the frequent shifts in the business cycle although unemployment can also be persistent as occurred during the Great Depression of the 1930s. With cyclical unemployment, the number of unemployed workers exceeds the number of job vacancies, so that even if full employment were attained and all open jobs were filled, some workers would still remain unemployed. Some associate cyclical unemployment with frictional unemployment because the factors that cause the friction are partially due to cyclical variables. For example, a surprise decrease in the money supply may shock rational economic actors and suddenly inhibit aggregate demand.

Classical economists reject the conception of cyclical unemployment and alternatively suggest that the invisible hand of free markets will respond quickly to unemployment and underutilization of resources by a fall in wages followed by a rise in employment. Similarly, Hayek and others from theAustrian school of economics argue that if governments intervene through monetary policy to lower interests rates this will exacerbate unemployment by preventing the market from responding effectively.

Keynesian economists on the other hand see the lack of demand for jobs as potentially resolvable by government intervention. One suggested interventions involves deficit spending to boost employment and demand. Another intervention involves an expansionary monetary policy that increases the demand of money which should reduce interest rates which should lead to an increase in non-governmental spending.

Marxist theory of unemployment

It is in the very nature of the capitalist mode of production to overwork some workers while keeping the rest as a reserve army of unemployed paupers.

– Marx, Theory of Surplus Value, ^[51]

According to Karl Marx, unemployment is inherent within the unstable capitalist system and periodic crises of mass unemployment are to be expected. The function of the proletariat within the capitalist system is to provide a "reserve army of labour" that creates downward pressure on wages. This is accomplished by dividing the proletariat into surplus labour (employees) and under-employment (unemployed). Thisreserve army of labour fight among themselves for scarce jobs at lower and lower wages. At first glance, unemployment seems inefficient since unemployed workers do not increase profits. However, unemployment is profitable within the global capitalist system because unemployment lowers wages which are costs from the perspective of the owners. From this perspective low wages benefit the system by reducing economic rents. Yet, it does not benefit workers. Capitalism unfairly manipulates the market for labour by perpetuating unemployment which lowers laborers' demands for fair wages. Workers are pitted against one another at the service of increasing profits for owners.

According to Marx, the only way to permanently eliminate unemployment would be to abolish capitalism and the system of forced competition for wages and then shift to a socialist or communist economic system. For contemporary Marxists, the existence of persistent unemployment is proof of the inability of capitalism to ensure full employment.

Involuntary unemployment

In The General Theory, Keynes argued that neo-classical economic theory did not apply during recessions because of excessive savings and weak private investment in an economy. In consequence, people could be thrown out of work involuntarily and not be able to find acceptable new employment.

This conflict between the neoclassical and Keynesian theories has had strong influence on government policy. The tendency for government is to curtail and eliminate unemployment through increases in benefits and government jobs, and to encourage the job-seeker to both consider new careers and relocation to another city.

Involuntary unemployment does not exist in agrarian societies nor is it formally recognized to exist in underdeveloped but urban societies, such as the mega-cities of Africa and of India/Pakistan. In such societies, a suddenly unemployed person must meet their survival needs either by getting a new job at any price, becoming an entrepreneur, or joining the underground economy of the hustler.

Involuntary unemployment is discussed from the narrative standpoint in stories by Ehrenreich, the narrative sociology of Bourdieu, and novels of social suffering such as John Steinbeck's The Grapes of Wrath.

Full employment

Main article: Full employment

Short-Run Phillips Curve before and after Expansionary Policy, with Long-Run Phillips Curve (NAIRU)

In demand-based theory, it is possible to abolish cyclical unemployment by increasing the aggregate demand for products and workers. However, eventually the economy hits an "inflation barrier" imposed by the four other kinds of unemployment to the extent that they exist.

Some demand theory economists see the inflation barrier as corresponding to the natural rate of unemployment. The "natural" rate of unemployment is defined as the rate of unemployment that exists when the labour market is in equilibrium and there is pressure for neither rising inflation rates nor falling inflation rates. An alternative technical term for this rate is the NAIRU or the Non-Accelerating Inflation Rate of Unemployment.

No matter what its name, demand theory holds that this means that if the unemployment rate gets "too low," inflation will get worse and worse (accelerate) in the absence of wage and price controls (incomes policies).

One of the major problems with the NAIRU theory is that no one knows exactly what the NAIRU is (while it clearly changes over time). The margin of error can be quite high relative to the actual unemployment rate, making it hard to use the NAIRU in policy-making.

Another, normative, definition of full employment might be called the ideal unemployment rate. It would exclude all types of unemployment that represent forms of inefficiency. This type of "full employment" unemployment would correspond to only frictional unemployment (excluding that part encouraging the McJobs management strategy) and would thus be very low. However, it would be impossible to attain this full-employment target using only demand-side Keynesian stimulus without getting below the NAIRU and suffering from accelerating inflation (absent incomes policies). Training programs aimed at fighting structural unemployment would help here.

To the extent that hidden unemployment exists, it implies that official unemployment statistics provide a poor guide to what unemployment rate coincides with "full employment".

Structural unemployment

Main article: Structural unemployment

Okun's Law interprets unemployment as a function of growth in GNP

"Driver looking for work" Unemployed German laborer in 1949

Structural unemployment occurs when a labour market is unable to provide jobs for everyone who wants one because there is a mismatch between the skills of the unemployed workers and the skills needed for the available jobs.

Structural unemployment is hard to separate empirically from frictional unemployment, except to say that it lasts longer. As with frictional unemployment, simple demand-side stimulus will not work to easily abolish this type of unemployment.

Structural unemployment may also be encouraged to rise by persistent cyclical unemployment: if an economy suffers from long-lasting low aggregate demand, it means that many of the unemployed become disheartened, while their skills (including job-searching skills) become "rusty" and obsolete. Problems with debt may lead to homelessness and a fall into the vicious circle of poverty. This means that they may not fit the job vacancies that are created when the economy recovers. Some economists see this scenario as occurring under British Prime MinisterMargaret Thatcher during the 1970s and 1980s. The implication is that sustained high demand may lower structural unemployment. This theory of persistence in structural unemployment has been referred to as an example of path dependence or "hysteresis".

Much technological unemployment (e.g. due to the replacement of workers by machines) might be counted as structural unemployment. Alternatively, technological unemployment might refer to the way in which steady increases in labour productivity mean that fewer workers are needed to produce the same level of output every year. The fact that aggregate demand can be raised to deal with this problem suggests that this problem is instead one of cyclical unemployment. As indicated by Okun's Law, the demand side must grow sufficiently quickly to absorb not only the growing labour force but also the workers made redundant by increased labour productivity. Otherwise, we see a jobless recovery such as those seen in the United States in both the early 1990s and the early 21st century.

Seasonal unemployment may be seen as a kind of structural unemployment, since it is a type of unemployment that is linked to certain kinds of jobs (construction work, migratory farm work). The most-cited official unemployment measures erase this kind of unemployment from the statistics using "seasonal adjustment" techniques.

Frictional unemployment

Beveridge curve of 2004 job vacancyand unemployment rate from the United States Bureau of Labour Statistics

Main article: Frictional unemployment

Frictional unemployment is the time period between jobs when a worker is searching for, or transitioning from one job to another. It is sometimes called search unemployment and can be voluntary based on the circumstances of the unemployed individual. Frictional unemployment is always present in an economy, so the level of involuntary unemployment is properly the unemployment rate minus the rate of frictional unemployment, which means that increases or decreases in unemployment are normally under-represented in the simple statistics.

Frictional unemployment exists because both jobs and workers are heterogeneous, and a mismatch can result between the characteristics of supply and demand. Such a mismatch can be related to skills, payment, work-time, location, seasonal industries, attitude, taste, and a multitude of other factors. New entrants (such as graduating students) and re-entrants (such as former homemakers) can also suffer a spell of frictional unemployment. Workers as well as employers accept a certain level of imperfection, risk or compromise, but usually not right away; they will invest some time and effort to find a better match. This is in fact beneficial to the economy since it results in a better allocation of resources. However, if the search takes too long and mismatches are too frequent, the economy suffers, since some work will not get done. Therefore, governments will seek ways to reduce unnecessary frictional unemployment through multiple means including providing education, advice, training, and assistance such as daycare centers.

The frictions in the labour market are sometimes illustrated graphically with a Beveridge curve, a downward-sloping, convex curve that shows a correlation between the unemployment rate on one axis and the vacancy rate on the other. Changes in the supply of or demand for labour cause movements along this curve. An increase (decrease) in labour market frictions will shift the curve outwards (inwards).

Hidden unemployment

Hidden, or covered, unemployment is the unemployment of potential workers that is not reflected in official unemployment statistics, due to the way the statistics are collected. In many countries only those who have no work but are actively looking for work (and/or qualifying for social security benefits) are counted as unemployed. Those who have given up looking for work (and sometimes those who are on Government "retraining" programs) are not officially counted among the unemployed, even though they are not employed. The same applies to those who have taken early retirement to avoid being laid off, but would prefer to be working. The statistic also does not count the "underemployed" - those with part time or seasonal jobs who would rather have full time jobs. In addition, those who are of working age but are currently in full-time education are usually not considered unemployed in government statistics. Because of hidden unemployment, official statistics often underestimate unemployment rates.

United States mean duration of unemployment (1948-2010)

Long-term unemployment

This is normally defined, for instance in European Union statistics, as unemployment lasting for longer than one year. It is an important indicator of social exclusion. The Bureau of Labor Statistics reports this as U4 and U5. The average unemployment duration is significant as well as the average unemployment rate. The average unemployment rate multilpied by the average unemployment duration represents the degree of the loss of human capital in each country.