What is Unemployment? Definition and 7 Types (Explained)

What is Unemployment?

Unemployment is a complex phenomenon. It is easy to notice but different to define. In ordinary or common sense, the term unemployment denotes a situation when a person is not gainfully employed in productive activity and thereby does not work.

It can be both voluntary and involuntary. Voluntary unemployment refers to those persons who are voluntarily unemployed, i.e. unemployed by their choice. They may not work due to laziness or otherwise, they are not interested in any gainful job. They are unemployed not from necessity but due to their choice.

In this category, we may include both the idle rich as well as the idle poor. Similarly, there may be some anti-social people, like thieves or pickpockets who may also be voluntarily unemployed. It would be inappropriate to include such cases of voluntarily unemployed persons under ‘unemployment’. Voluntarily unemployed persons, therefore, are not considered unemployed.

In reality, it is taken in the sense of involuntary unemployment. Involuntary unemployment refers to a situation when people are willing to work at the prevailing wage rate but they are unable to find work. From this viewpoint, it can be said that unemployment is a situation when some able-bodied persons are willing to work at the prevailing wage rate but are not able to find work that may yield them some regular income.

Types of Unemployment

The main types are:

Cyclical Unemployment

It is the most common type of unemployment in the developed capitalist economies. It is associated with the downswing and depression phases of the business cycle. A business cycle consists of alternating periods of prosperity and depression. During the phase of prosperity the level of economic activity, income, the output level of economic activity, low income, low output, and low level of employment. During the downswing and depression phases of the business cycle income and output fall giving rise to widespread unemployment.

It is caused by a deficiency in aggregate demand. During the depression, income falls and this lowers the demand for goods and services. As a result, aggregate demand is not sufficient to purchase all the output that would be produced with full employment of the labor force. Therefore, production will be less than full-employment output.

Consequently, a large number of labor-force will remain unemployed. In fact, cyclical is associated with simultaneous unemployment of all the resources, labor, and capital. Since it arises due to deficiency of aggregate spending, it can be eliminated by raising aggregate demand sufficiently to lift output which can be produced with full utilization of labor.

It is an inherent feature of a developed capitalist economy. Such unemployment is not a characteristic feature of a predominantly agricultural country like Nepal. However, it may affect the industrial segment of the economy. But since the industrial sector is small, it cannot be serious here.

Frictional Unemployment

Not all unemployment in the developed countries can, however, be traced to a shortage of demand. Even when the level of aggregate demand is high, a country may experience unemployment because of the presence of certain economic frictions or a lack of adjustment between demands for and supply of labor.

Frictional unemployment exists when there is a lack of adjustment between the demand for and supply of the labor force. In a modern dynamic economy, constant changes take place. People leave jobs for many reasons, and they take time to find new jobs because of a lack of knowledge and mobility on part of the labor. This gives rise to temporary unemployment of those workers who are moving between jobs.

Frictional unemployment, therefore, arises when the existing workers change jobs. It may take place due to several reasons. For example, it may occur due to a change in demand. It may also occur due to economic progress when old industries contact and new industries come up. Since labor cannot be immediately shifted from the ‘declining’ to the expanding industries, this may occur.

It occurs for a temporary period only. Hence, the presence of frictional unemployment should not be considered as a weakness of the economy. It may occur in the Nepalese economy as well since it is a growing economy. However, the extent of such unemployment is very small.

Frictional unemployment may be reduced by improving the employment market to adjust the supply of workers to the demand. In particular, there is a need for increased mobility of labor, occupational and geographical to reduce it.

Structural Unemployment

Unemployment in a developing country is basically structural in nature, which refers to a situation when a large number of persons do not get work because of limited job opportunities available.

It arises from the shortage of capital equipment and other complementary resources. The capacity to create jobs is limited because of the inadequate productive capacity, mainly capital equipment. It is associated with the underdeveloped structure of the economy. It can, therefore, be solved through economic development only.


Open unemployment refers to a situation when some workers have absolutely no work to do. They are willing to work at the present wage rate, but they are forced to remain unemployed in the absence of work. These workers are completely idle.


Disguised unemployment refers to a situation when a person is apparently employed, but in fact, is unemployed. Here unemployment is not open for everyone to see. You cannot say who is unemployed. It is not visible, but it is concealed or hidden. It is not employed.

This type of unemployment prevails mostly in villages. In agriculture, employment takes the form of ‘work-sharing, i.e. a given work is shared among a large number of workers. In fact, a given amount of work is shared by a larger number of workers than required.


Underemployment refers to a situation when the employed persons are contributing to production and income less than what they are really capable of. In this situation, people do not get the type of work they are capable of doing or are trained for.

They possess the abilities and expertise to do the type of work that could yield a larger income. But due to the non-availability of suitable work as per their abilities and expertise. They may join inferior occupations.

Educated Unemployment

It refers to the unemployment among the educated, i.e. matriculates and higher educated. Some of these people may be unemployed in the sense of open unemployment, i.e. they are not doing any work whatsoever.

There may be others who are underemployed, i.e. they may be doing inferior jobs because they may not be able to get work suitable to their qualifications. The problem of it is basically the problem of urban areas.

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