ABSTRACT
This chapter concerns the causes of unemployment and with how various government policies affect, in an either intended or unintended manner, the level of unemployment. It analyzes the flows of individuals between the various labor market states, to understand the determinants of unemployment level. The chapter examines the types of unemployment: frictional, structural, demand-deficient, and seasonal. An exhaustive study of data on wages and regional unemployment rates within 12 countries found that after controlling for human capital characteristics of individual workers, there was a strong negative relationship between regional unemployment rates and real wages in all countries. The Stock-Flow Model of a labor market that emphasizes the importance of considering the flows between labor market states as well as the number of people in each labor market state. One important influence on the cost of being unemployed, and hence on the reservation wages of unemployed workers, is the presence and generosity of governmental unemployment insurance (UI) programs.
