Unemployment is the state where a person is unable to find a job even though he/she is actively looking for one. Why does this happen? The causes of unemployment are classified into three types: demand deficient, frictional, and structural.
Demand deficient unemployment occurs when production decreases as a result of a decline in aggregate demand due to a drop in consumption and investment over fears about the future economic outlook.
If companies are producing less, this leads to lower demand for workers. As unemployment occurs resulting from this fall in demand, some companies look to hire more workers if wages fall. On the other hand, more people will be discouraged from working in that case. If wages fall sufficiently, companies' labor demand and workers' labor supply will balance, and unemployment will be resolved. Demand deficient unemployment occurs when wages are sticky.
Frictional unemployment occurs when workers are in the process of finding a new job. Workers look for new opportunities where they can utilize their skills, hoping to receive good pay. However, it takes time to find one that is satisfying, and he/she will be unemployed for a certain time of period before actually signing the contract after going through the application and interview processes.
Structural unemployment occurs when there is a mismatch between what companies need (i.e., educational background, age, gender, work location, etc.) and what workers can offer.
In Japan, the shift of production overseas and the increase in imports from neighboring Asian countries have resulted in a decline in employment in the manufacturing industry. In contrast with those who have lost their jobs in the manufacturing industry, there is a shortage of workers in the nursing care industry. This mismatch is called structural unemployment.
Unemployment can occur due to a combination of the three factors, and cannot necessarily be classified into one type. However, it is useful to analyze which factor is affecting unemployment the most intensively as necessary policy responses will differ.
* Translated by RIETI from the original Japanese "Yasashii Keizaigaku" column in the October 18, 2013 issue of Nihon Keizai Shimbun.
