Disequilibrium in the labor market. Unemployment and its types and methods of measurement.

Labor market equilibrium occurs when labor demand meets labor supply. Equilibrium occurs at a wage where quantity supplied of labor equals quantity demanded of labor.

Point E is the equilibrium. For quantity demanded to equal quantity supplied, wagemust equal w*. If w>w*, there would be excess of labor, which would appear as unemployment (see the chart above). If w<w*, there would be a shortage, which would appear as job vacancies. Thus, unemployment is a phenomenon connected with disequilibrium in the labor market.

Types of unemployment

-Frictional Unemployment is unemployment due to the time workers spend for job searching.

-Structural Unemployment is unemployment connected with structural shifts in production patterns, which changes demand for labor force in the economy.

Frictional Unemployment together with Structural Unemployment forms natural rate of unemployment, or the unemployment under the full employment of economic resources, which corresponds to the potential level of output in the economy. Some economists believe that it is unacceptable to use the term “natural” while speaking about unemployment associated with structural changes. For this reason, the term NAIRU (Non-Accelerating-Inflation Rate of Unemployment) is widely used in macroeconomics. This term focuses on the fact that this unemployment rate stabilizes inflation.

-Cyclical Unemployment represents a deviation from the natural rate of unemployment. Cyclical Unemployment occurs only during a recessionary phase of economic cycles.

Methods of measurement are complicated because there are no strict criteria for attributing individuals to employed or unemployed categories.

Generally, Employment is the number of people currently employed in the economy, either full time or part time. Unemployment is the number of people who are actively looking for work but aren’t currently employed. The labor force is equal to the sum of employment and unemployment.

Unemployment rate in the economy is usually determined by taking the following ratio: the number of unemployed to labor force.