There are many different possible causes of unemployment, and unfortunately for governments, it is never easy to identify which is the most important and what to do about it. The causes of unemployment can be split into two main types: Demand-side and Supply-side.
Unemployment caused by supply-side factors results from imperfections in the labour market. A perfect labour market will always clear and supply will equal demand. However, if the market doesn’t clear properly there may be unemployment. This may happen because wages don’t fall properly to clear the market.
Supply-side unemployment may also happen because there is occupational or geographical immobility. It may happen because there is poor information about job opportunities. This will lead to people taking a long time looking for jobs, increasing the level of frictional unemployment.
When somebody loses their job (or chooses to leave it), they will have to look for another one. If they are lucky they find one quite quickly, but it may take some time as well. On average it will take everybody a reasonable period of time as they search for the right job. This creates unemployment while they look. The more efficiently the job market is matching people to jobs, the lower this form of unemployment will be. However, if there is imperfect information and people don’t get to hear of jobs available that may suit them then frictional unemployment will be higher.
The better the economy is doing, the lower this type of unemployment is likely to be. This is because people will usually be able to find jobs that suit them more quickly when the economy is doing well.
One final cause of unemployment is changes in the workforce. The workforce is made up of people who are of working age and not currently in full-time education. Their number will change with the demographic structure of the population. If there is a baby-boom, more people are joining the work-force than leaving. This may increase unemployment, unless there are enough extra jobs created to employ the extra people in the work-force. This was one of the causes of unemployment in the early 1980s when people born in the baby-boom of the 1960s joined the work-force.
Then there are many different types of unemployment.
Demand-deficient unemployment occurs when there is not enough demand to employ all those who want to work. Economists believe it happens when there is a disequilibrium in the economy.
It is also often known as cyclical unemployment because it will vary with the trade cycle. When the economy is booming, there will be lots of demand and so firms will be employing large numbers of workers. Demand-deficient unemployment will at this stage of the cycle be fairly low. If the economy slows down, then demand will begin to fall. When this happens firms will begin to lay workers off as they do not need to produce so much. Demand-deficient unemployment rises. The behaviour of demand-deficient unemployment will exactly mirror the trade cycle.
Seasonal unemployment is fairly self explanatory. Father Christmas tends to be in demand only for a short period of the year, and the rest of the year would be classified as seasonally unemployed. Most other seasonal unemployment is less severe than this, and tends to occur in certain industries: Hotel and catering, Tourism, Fruit picking, Father Christmases. The effects of seasonal unemployment are often highly regionalised.Structural unemployment occurs when the structure of industry changes. As an economy develops over time the type of industries may well change. This may be because people’s tastes have changed or it may be because technology has moved on and the product or service is no longer in demand. In the UK many industries that were once major employers have now all but disappeared. Shipbuilding and mining are prime examples of this sort of trend, but there are also many more minor examples as well. The extent of structural unemployment will depend on various things: mobility of labour (if people are able to quickly switch jobs from a declining industry to a rapidly growing one, then there will be less unemployment), the pace of change in the economy (the faster the changes are taking place, the more unemployment there may be as industry has to adapt to change more quickly), the regional structure of industry (if industries that are dying are heavily concentrated in one area, then this may make it much more difficult for people to find new jobs. Both the shipbuilding and mining industries were heavily concentrated and some areas have taken many years to adapt and reduce the level of structural unemployment).
Perhaps the main cost of unemployment is a personal one to those who are unemployed. However, if they suffer then the whole economy suffers. Individuals may become dispirited by unemployment. This may affect their motivation to work. The longer they are unemployed the more they may lose their skills. The whole economy suffers from people being unemployed.
As well as these microeconomic effects, there will also be macro effects. These will include: Loss of output to the economy (the unemployed could be producing goods and services and if they are not, then GDP is lower than it could be), Loss of tax revenue (unemployed people are not earning and they therefore are not paying taxes), Increase in government expenditure (the government has to pay out benefits to support the unemployed), Loss of profits (with higher employment firms are likely to do better and make higher profits. If they make less profit because of unemployment, they may have less funds to invest).
The answer then is – we all pay.