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AD: The abbreviation for aggregate demand, which is the total (or aggregate) real expenditures on final goods and services produced in the domestic economy that buyers would willing and able to make at different price levels, during a given time period (usually a year). Aggregate demand (AD) is one half of the aggregate market analysis; the other half is aggregate supply. Aggregate demand, relates the economy's price level, measured by the GDP price deflator, and aggregate expenditures on domestic production, measured by real gross domestic product. The aggregate expenditures are consumption, investment, government purchases, and net exports made by the four macroeconomic sectors (household, business, government, and foreign).

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UNEMPLOYMENT SOURCES:

The four key types or sources of the unemployment of resources, especially labor, are cyclical, seasonal, frictional, and structural. The first, cyclical, in most important in the macroeconomic analysis of business cycles. The last two, frictional and structural, are combined into what is termed natural unemployment. Stabilization policies are generally aimed at reducing cyclical unemployment.
Unemployment results when resources are willing and able to produce output but are not actively engaged in production. The unemployment of resources in general, and labor in particular, can be attributable to four primary sources: cyclical, seasonal, frictional, and structural.
  • Cyclical unemployment is involuntary unemployment created by business-cycle recessions. Workers do not have jobs because aggregate demand and production in the economy are down.

  • Seasonal unemployment is relatively regular (read this as predictable) unemployment tied to a particular job. It is termed seasonal because it often occurs during particular seasons of the year.

  • Frictional unemployment is temporary unemployment created when workers switch jobs. The key with frictional unemployment is that the number of workers is equal to the number of jobs, it just takes time and information to match them up.

  • Structural unemployment is relatively permanent unemployment created because the skills of the workers are not the same as the skills needed on the job. Again, an equality between the number of workers and jobs exists, there is just a mismatch of skills.

Cyclical Unemployment

Cyclical unemployment is attributable to a general decline in macroeconomic activity occurring during a business-cycle contraction (or recession). When aggregate demand declines, less aggregate production is sold, so fewer resources are needed. Cyclical unemployment tends to rise as the economy enters into a contraction, then falls during the ensuing recovery and expansion.

The reduction or elimination of cyclical unemployment has been one of the primary goals of macroeconomic policy (especially fiscal policy, but also monetary policy) since the Great Depression of the 1930s. Cyclical unemployment can be eliminated (or at least reduced) by avoiding business-cycle contractions through the timely application of expansionary fiscal or monetary policy.

Seasonal Unemployment

Seasonal unemployment is caused by relatively regular and predictable declines in particular industries or occupations over the course of a year, often corresponding with the seasons of the year. Many construction workers face unemployment during winter months. School teachers face unemployment during the summer months. The employment of farm workers varies with seasonal planting and harvesting activities.

Because seasonal unemployment is relatively regular and predictable, it is generally considered part of the "conditions of employment," and is largely ignored in the study of the macroeconomy.

Frictional Unemployment

Frictional unemployment results because resources are in the process of moving from one production activity to another. Frictional unemployment occurs because it takes time to move between production activities. The time needed to match up resources with production depends on information availability and the degree of geographic separation.

A carpenter is frictionally unemployed even though a construction company has a job for a carpenter because neither knows about the other. Or perhaps the carpenter lives in North Dakota and the construction company is in North Carolina. In either case, the carpenter remains frictionally unemployed until matching up with the job, which just takes time. Frictional unemployment can be reduced by improving the information available to workers and employers. This reduces the amount of search time required to match workers with existing jobs.

Structural Unemployment

Structural unemployment occurs because resources do not have the technological configuration, skills, or training required by production activity. For example, the construction company in North Carolina needs a carpenter, but the only available unemployed worker is a plumber. If the only jobs available to the plumber are in carpentry, then the plumber is structurally unemployed.

Structural unemployment is a key side effect of a growing, prosperous economy driven by technological advances. Workers find that their skills become technologically obsolete. The jobs workers know how to do no longer exist. Structural unemployment can be reduced through education and training. The only way to totally eliminate structural unemployment is to eliminate technological change, and all of the benefits that this entails.

Natural Unemployment

Frictional and structural unemployment are considered natural bi-products of a healthy, expanding economy. While they can be reduced through improved information, training, and education, total elimination is unlikely and probably undesirable. The inherent tendency for an economy to have some degree of frictional and structural unemployment gives rise to the notion of natural unemployment.

A few observations about natural unemployment are:

  • One, natural unemployment is considered the combination of frictional and structural unemployment. Although they can be reduced, the economy is always likely to have some degree of frictional and structural unemployment.

  • Two, frictional and structural unemployment do not result from the lack of available jobs, only from the problems of matching workers and jobs. In other words, the quantity demanded equals the quantity supplied. For this reason, natural unemployment is considered synonymous with full employment.

  • Three, because the demand and supply quantities are equal, there is no pressure on factor prices (wages) to change. Natural unemployment can be sustained with no changes in inflation. The same cannot be said about cyclical unemployment.

  • Four, because natural unemployment can be sustained without affecting inflation, it provides an excellent target for macroeconomic stabilization policies. Policies that achieve and maintain ONLY natural unemployment essentially eliminate ALL business-cycle instability.

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Recommended Citation:

UNEMPLOYMENT SOURCES, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: January 16, 2019].


Check Out These Related Terms...

     | cyclical unemployment | seasonal unemployment | frictional unemployment | structural unemployment | natural unemployment | unemployment rate | Current Population Survey | labor force | unemployment problems | employment-population ratio | alternative unemployment rates | unemployment reasons |


Or For A Little Background...

     | unemployment | factors of production | full employment | business cycles | contraction | recession | circular flow | macroeconomic goals | macroeconomic problems |


And For Further Study...

     | labor force participation rate | unemployment, production possibilities | full employment, production possibilities | macroeconomic sectors | Bureau of Labor Statistics | real gross domestic product | macroeconomic markets | resource markets | inflation | stabilization policies | government functions | inflation | inflation causes |


Related Websites (Will Open in New Window)...

     | Bureau of Labor Statistics | Current Population Survey Home Page |


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