Hot Issues of Skills Development

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SKY[Skills and Knowledge for Youth] home Hot Issues of Skills Development Three Types of Unemployment Factors and the Informal Sector

Three Types of Unemployment Factors and the Informal Sector Yujiro Yamazaki
  • Labour Market Information and Investment Environment in Africa

Unemployment is a condition in which a person is looking for a job but cannot find one. Why does unemployment, which is the inability to find a job, occur? The causes of this condition are classified into three categories: “insufficient demand unemployment,” “frictional unemployment,” and “structural unemployment” (Pissarides 2000).

Unemployment due to insufficient demand” occurs when consumption and investment cool down due to heightened anxiety about the economy, etc. Supply also decreases due to a decrease in the overall market in the economy. As the supply side decreases, the demand to hire labor also decreases. When unemployment occurs due to the decline in demand, some companies will try to hire more workers at lower wages. On the other hand, more and more workers will decide to stop working because of the low wages. This kind of economic recession leads to low-demand unemployment.

Frictional unemployment refers to the unemployment that occurs when workers are looking for a new job or changing jobs (Pissarides 2000). Individual workers search for workplaces where they can use their abilities, work in the type of industry they want to work in, and receive good benefits. However, the search for a suitable workplace inevitably leads to a certain period of unemployment since the desired job may not be found, or even if it is found, it may take a long time to be hired.

On the other hand, “structural unemployment” occurs because of the discrepancy between the characteristics that employers seek in workers, such as skills, education, and personality, and the characteristics of unemployed workers (Genda and Kondo, 2003). (Genda and Kondo, 2003) Even if a worker is willing to work, they will not be hired if they do not have the skills required by the company or if access to the company is difficult due to distance. When there is a gap between supply and demand in these characteristics, this is structural unemployment.

Actual unemployment does not necessarily fall into any of the three categories above but rather a combination of factors (Herz and van Rens 2014). However, it is helpful to consider which of the three causes is relatively more important to make appropriate employment policies. For example, when unemployment is caused by insufficient demand, macro demand-expanding policies such as fiscal and monetary policies are needed. On the other hand, when structural unemployment is caused by a mismatch of skills, age, and other factors, it is necessary to improve the human resource development system. In addition, job placement systems are needed for “frictional unemployment” caused by the fact that it takes a long time to match people due to information asymmetry.

In developing countries, unemployment policies and social security systems such as insurance, pensions, and welfare are underdeveloped. When workers cannot find jobs under undeveloped policies and systems, they engage in small-scale businesses called the informal sector to earn income. In this respect, the informal sector plays the role of a safety net (Moser 1998). The informal sector is widespread in developing countries. It is now seen as a way of working, rather than a segment of the population left out of the formal sector, as with income diversification strategies (Ogawa, 2019).

While the informal sector is attracting attention, does it provide a comprehensive solution to the problem of unemployment? Looking at the three categories of causes of unemployment mentioned earlier, it becomes clear that simply increasing the number of work opportunities is not the fundamental solution. For unemployment caused by lack of demand due to economic instability and frictional unemployment, which is the period it takes to find a new job, the informal sector can be a survival strategy and a strategy to diversify income since it is easy to enter.

On the other hand, in terms of structural unemployment caused by the gap between the skills demanded by companies and the skills possessed by workers, increasing the number of job opportunities is not a total solution since the abilities and characteristics of the workers are at the center of the problem. For this reason, in the case of structural unemployment where there is a gap between the supply and demand of skills, it is crucial to identify what skills are needed and what skills are in short supply, and to take a human resource development approach, rather than simply solving the problem through easy access to jobs.



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