Factors Determining Unemployment

The most important factors determining the level of frictional, structural and seasonal unemployment are:

Level of Economic Activity – When actual output is close to potential output, employers will face a competitive labor market. Employers will be more likely to advertise and to spend on recruiting. Employers will also likely offer better retraining programs and relocation assistance. These measures will reduce structural unemployment. When unemployment is high, companies will have an easier time finding employees to hire and will be less willing to pay for this type of program.

Transmission of Information – Jobs cannot be filled unless job-seekers can find out about openings and hiring managers can find out about candidates. The more effectively the information is transferred, the lower frictional (and to some extent structural) unemployment will be.

Structural Change – The overall composition of the goods produced by an economy changes with time, as tastes change, new products are invented, world trade patterns move production of particular goods between different nations, etc. Sometimes it changes quickly, sometimes slowly. If structural change is occuring at a rapid pace, the number of people unemployed due to having the wrong skills or living in the wrong location will tend to be higher.

Workforce Mobility – The easier it is to change location, and the easier it is to gain training in new fields, the lower structural unemployment will be. This will depend on factors such as the cost and availability of training, the cost of travel and moving expenses, the degree to which appropriate schools and hospitals are universally available, and so forth.

Institutional Restrictions and Barriers – Governments, trade unions and even employers will sometimes take actions designed to protect particular groups of workers. These actions reduce the efficiency of the labor market and lead to additional structural and frictional unemployment. Examples: restrictive union practices, required professional certifications, pension and medical plans tied to the job, or even local policies which favor existing residents over new arrivals.

Seasonal Industries – Some industries are seasonal by nature: Fishing, farming, forestry, tourism, construction. Despite the fact that predictable unemployment will occur in some periods of the yearly cycle, some economies have clear natural advantages in these industries and find it worthwhile to pursue them.