What’s it: Voluntary unemployment is a situation where a person chooses not to work. This is related to choice and preference, not because a job vacancy is unavailable. In other words, individuals deliberately choose to be unemployed despite available jobs.
Several reasons explain why people choose to be unemployed. For example, individuals do not take a job because wages are low and insufficient to meet living expenses. Or they do not match the available job positions. Generous unemployment benefits can also be why they choose not to work.
Does voluntary unemployment count as a labor force?
The labor force represents the productive age population currently employed or unemployed but actively looking for work.
Individuals who are voluntarily unemployed are counted in the labor force. They may be actively looking for work. However, for example, because they have not found a better job that matches their skills, they decide to be unemployed for a while until they find the right one.
Economists distinguish between voluntarily unemployed individuals and groups such as housewives and students. Both groups may be of working age and, therefore, able to work. But, the former is counted in the labor force. In contrast, the latter does not count as the labor force. Although the latter have the ability to work, they are not actively looking for work.
The same case is relevant for those taking care of children or other family members. They may also be of productive age. However, they are not in the labor force because they are not actively looking for work.
What is the difference between voluntary unemployment and involuntary unemployment?
Voluntary unemployment is different from involuntary unemployment. Although, sometimes, we find it difficult to distinguish between the two.
Voluntary unemployment occurs because of our choices or preferences. For example, we find several jobs according to our expertise. However, because the salary was below our standards, we decided not to apply. Or, we don’t take a job because it’s boring even though the skills and salary match our qualifications.
Meanwhile, involuntary unemployment occurs because jobs are unavailable. We didn’t find any job openings, even though we searched. So, the problem comes from unavailable jobs. Or, some jobs may be available, but we do not have the qualifications required by the employer.
Most frictional unemployment is voluntary. Unemployed workers continue looking for a suitable paying job rather than taking whatever job they find. Finally, it took them long enough to find the right job. And, as long as they haven’t found the right one, economists include them as unemployed.
Why does voluntary unemployment occur?
Several reasons explain why people choose not to work, despite the opportunity. First, we don’t apply because the vacant job offers low pay or doesn’t meet our standards. For example, the salary is not enough to cover our expenses. So, because the salary is low, we look for alternatives until we find the right one.
In economic theory, our standard salary is called reservation salary or reservation wage. It represents the minimum wage we are willing to accept for taking a job. If the market wage is lower than the reservation wage, we voluntarily choose to be unemployed. But, conversely, if the wage in the market is equal to or higher than our reservation wage, we take the job.
Second, we may turn down certain jobs because their pay or benefits don’t match our expectations. So, we have applied for a job, but during negotiations, the company offered us a salary below our standard. As a result, we choose not to take this opportunity.
Finding the right job may not be so financially demanding. For example, we have sufficient savings to cover expenses during unemployment. So, we will not take a job if the salary does not match our expectations.
Third, the marginal tax rate is too high. As a result, it prevents people from seeking higher-paying jobs. High tax rates reduce the effective pay they take home. They may think, why to work if what we should earn we do not enjoy but are paid as taxes.
Fourth, a job search takes a long time. Finally, we gave up. In this case, our preference for not working appears as voluntary unemployment.
Fifth, generous unemployment benefits. For example, the government offers high unemployment benefits, perhaps exceeding our minimum cost of living. We think we are already financially prosperous on unemployment benefits rather than taking low-paying jobs. In the end, we choose to remain unemployed. Long story short, generous perks reduce people’s incentives to take jobs.
Sixth, people are unemployed voluntarily because they cannot find suitable jobs. The available vacancies may not match their skills or qualifications.
Or, the job is in accordance with the skills, but too trivial and boring. So they don’t take it. For example, a professional accountant is looking for a job in the finance department. Say he found a vacancy. And it offers a job as a financial bookkeeper. Even if he has the qualification but doesn’t suit his preferences, he may not take it because he prefers to work as a financial analyst or in corporate finance.
How to reduce voluntary unemployment?
Reducing voluntary unemployment may be more difficult than involuntary unemployment. That’s because the reason for choosing not to work is preference. And everyone has different preferences.
For example, raising wages is a solution to recruit voluntary unemployed people. But what is the proper high salary standard? Everyone has a different reservation wage. Thus, wages may be high for one person but not for another.
Likewise, some people have preferences about the jobs they are willing to accept. For example, a professional may not want to work as a technical worker. Or in the previous example, a professional accountant would rather work as a financial analyst than a financial bookkeeper.
However, in some cases, voluntary unemployment can be reduced by increasing incentives. First, the government lowers the marginal tax rate. A lower rate makes work more attractive than free time. It incentivizes people to take jobs.
The tax rate also reduces reservation wages. For example, people consider tax rates when calculating reservation wages, not just living expenses. Thus, if rates fall, people are willing to accept certain jobs they previously did not want because high taxes reduce their take-home pay.
Second, the government reformed unemployment benefits. If generous benefits incentivize the unemployed not to work, reducing them should have the opposite effect. Lower benefits encourage people to look for work to support their living expenses. They can no longer rely on benefits because they are insufficient to meet their daily needs.
Third, making information about job vacancies more available is another way. It increases the available options. Thus, it is easier for people to find the right job.