Individual countries usually measure unemployment as the number of people claiming benefit. This is usually an artificially low number, as they also have rules to prevent certain groups claiming benefit, and require the jobless to jump through various hoops to get on the list. Furthermore, unemployment figures in general fail to register the scale of underemployment in the economy; people doing jobs which do not make full use of their skills, for which they are over qualified, people working part-time who would be willing to work full time. Historically, the largest group of people who might want to work but are not counted as unemployed are married women, who would enter and leave the labour market with changes in demand, and whom employers would find it easier to fire than the men folk. This maybe somewhat less true today with the rise of part time work, but serves to demonstrate the difficulties is assessing how well the economy is operating relative to its full potential.

According to the International Labour Organisation, unemployment is defined as those who have been looking for work for at least four weeks, and are ready to take up a job in the next two weeks. Economists make reference to three kinds of unemployment. These are frictional, structural and demand-deficient unemployment.

Frictional Unemployment

Frictional unemployment is the inevitable result of churn in the economy, which exists even if everyone has all the right skills and there are more than enough vacancies with the right level of wages for everyone to be employed. It is simply the time it takes for a worker, having lost his job, to register at the job agencies, read the adverts in the papers or on the internet, write or update their CV, choose and apply for new positions, go to interviews, and take up a new position. This kind of unemployment is a real cost to the economy, as it is labour which could have been used to make something or do something useful instead floating around aimlessly. But it is beyond the scope of economists to deal with it. It can be reduced by making it easier for unemployed people to find out what jobs are available, by making the job agencies function more smoothly, and by giving unemployed people help in writing CV's and making themselves look more competent at interviews.

Structural Unemployment

Structural employment is caused by a mismatch of the skills workers have with the skills employers need. It is the result of structural changes in the economy - be it agrarian societies becoming industrial societies, or industrial economies turning into service based economies. Agrarian societies do not need their labour force to have many skills at all - in fact rulers may be suspicious of literate peasants, as literacy breeds socialism. Industrial economies desire a diligent and literate workforce, people who can read a manual and thereby operate a machine, but otherwise have no use for independent thought. Service based economies greatly value this creativity, as once the old manufacturing sector has shifted to the countries with lower wages, they rely on entrepreneurs creating new jobs in areas like information technology, music, art, films, restaurants, the financial services industry, and very hi-tech areas of manufacturing. This skills mismatch means firms are unwilling to hire labour which doesn't know how to do the job. The solution is either to improve education and training, with government sponsored schemes to give the unemployed new skills, and subsidise companies which put some effort into training their workers, or else to slow down structural change, by reducing wages and devaluing the currency, to prevent the old industries from collapsing, giving your economy more time to adapt to the changing circumstances.

Demand-Deficient Unemployment

The third kind of unemployment is demand-deficit unemployment, the sort Keynes was talking about. Keynes explained that as societies get richer, people like to save more of their income. Therefore, to make sure that money keeps circulating, a larger and larger portion of national income relies upon invest by companies. This is unfortunately much more unreliable than consumer spending - investment is not a function of current real income, but expectation of future profits. Furthermore, the mechanism by which investment is regulated, namely changes in the interest rate, cannot be relied upon in all circumstances. Nominal (money) interest rates cannot fall below zero, but inflation can. Therefore, when prices are falling in a recession, real interest rates are held very high, discouraging firms from investing. This has a knock on effect on consumer spending - why buy today, when prices will be lower tomorrow? Therefore, a collapse in demand causes firms to fire workers and/or go bust, creating a high level of unemployment. This poverty does not exist in spite of but because of the countries high wealth and very productive industry. The more advanced the economy, the greater the importance of investment, the less reliable demand, the more frequent and painful are the recessions, downturns in the economic cycle. As Keynes put it, poverty in the midst of plenty.

There are two solutions to this kind of unemployment. The Central Bank can and stimulate the economy not only by lowering interest rates, but also by increasing the money supply through buying bonds. A bond is a promise to pay a fixed amount of money every year. When the government buys bonds, it gives money to the private sector in exchange for a promise of future payment. By giving more and more money for a smaller and smaller future payment, the Central Bank can force money down the throat of the private sector. However, this manner of increasing the money supply still only raises demand through investment, which is still being discouraged by falling prices and so high real interest rates. Therefore, increasing the money supply does not work in severe recessions.

The government is a stabilising forces in recessions. It spends more on unemployment benefit, and collects fewer taxes as people are poorer and fewer have jobs. It can be even more helpful with a counter-cyclical spending policy, by engaging in more public works, and borrowing more money, essentially investing on behalf of the private sector. Because the government does not have to worry about making a profit, it succeeds where the private sector fails, and is viewed by Keynesians as the ultimate means of ensuring full employment.

Political Will

I have spent disproportionate time talking about demand-deficient unemployment because various political groups like to deny it exists for political reasons. Having a large pool of unemployment can be useful for some. It takes power away from the unions, keeps wages and inflation low, redistributing wealth from the poor to the rich, and from the young to the old. Unemployment carries with it a very high economic cost, people who could be working are not, it is a wasted resource, effectively throwing money down the drain. There are always means for the government to tackle high unemployment (above a few percent), if they don't it is because they don't want to, it conflicts with their other political goals, it is not because they can't, so Don't believe their lies!