Unemployment occurs when labor, a factor of production, is not being fully utilized due to the unavailability of suitable jobs. It is strictly defined as a situation where people who are willing and able to work cannot find employment.

Short run and long run unemployment:

Classical theory – short run unemployment is a temporary phenomenon; wages will fall and the labor market will move back into equilibrium

Long run – unemployment will be ‘voluntary’. Unemployment in the long run may remain stubbornly high because of imperfections in the market.


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