Job acceptances and the labour force
An effective way to illustrate the differences between various types of unemployment is to use the AJ-LF model. AJ stands for job acceptances, and LF stands for the labour force.
It is assumed that the labour force includes all those individuals who are of working age and able to work. This represents the nominal labour supply. However, not all workers may choose to accept jobs at any wage rate, so the number of workers prepared to accept jobs is assumed to be lower at all wage rates. The gap between the labour force (LF) and those accepting jobs (AJ) is caused by individuals being voluntarily unemployed. In other words, they could accept work if they chose to.
The natural rate of unemployment
The labour market will be in equilibrium at wage rate W, with QL workers employed. However, with the labour force larger than the numbers prepared to accept jobs at this rate, there exists a certain level of voluntary unemployment which may be defined as the natural rate of unemployment (NRU).
Showing Keynesian demand deficient unemployment
The AJ-LF model can also be used to illustrate how unemployment can rise during a recession. here, the shift from D to D1 reflects falling demand for labour and, assuming the wage rate is slow to adjust downwards, there is Keynesian unemployment of QL to QL1.
Showing Classical unemployment
The J-LF model can also be adapted to illustrate Classical unemployment which comes about when wages are pushed artificially above the market wage rate – say by an aggressive trade union.
If the wage rate is pushed up from W to W1, demand for labour contracts and labour supply extends, creating a surplus of labour at the higher rate. Wage rate W1 is, therefore, a non-market clearing wage rate. This diagram can be used to illustrate the potential effects of a national minimum wage.