Frequency and Duration of Unemployment

Frequency of Fnemployment.

I. The frequency of unemployment is the average number of times, per period, that the workers become unemployed.

Determinants of the Frequency of Unemployment:

(i) Sectoral Shifts:

In an economy, some firms are growing while some are contracting. The labours displaced from the contracting firms join the growing firm. As a result the turnover and frequency of unemployment increases.

(ii) Growth Rate:

It is the rate at which the new workers enter the labour force. Faster the growth rate of labour force, greater is the NRU.

According to Mankiw:

“Labour force (L) is the sum of employed (E) and the unemployed (U) workers,”

L = E + U …(i)

Assume:

1. Labour force is fixed

2. There is transition in the labour force between unemployed and employed.

Let s be the rate of job separation, that is, fraction of employed individuals who lose their job each month.

Let f be the rate of job finding, that is, fraction of unemployed individuals who find a job each month.

Job search/Duration of Unemployment:

The duration of unemployment gives us an idea of whether unemployment is of short run or long run.

If unemployment is of short-term it is frictional which is unavoidable. Frictional unemployment arises when people shift from one job to other then during the search period they are unemployed. If unemployment is of long-term, it will be wait unemployment.

Factors on which the duration of unemployment depends are:

(1) Cyclical factors

(2) Structural characteristics of the labour market:

(a) The organisation of the labour market, including the presence or absence of employment agencies, etc.

(b) The demographic makeup of the labour force.

(c) Desire of the unemployed to keep looking for a better job, which depends on unemployment benefits =>

(i) If all jobs are same → duration of unemployment is less because Unemployed person will take the first job offered.

(ii) If some jobs are better than others → duration of unemployment will be more.

People will search and wait for a better job (called search unemployment).

Increase in unemployment benefits increases unemployment because these benefits induce people to keep searching for a better job. They quit the current job to find a better job. Thus, NRU increases.