How is demand deficient unemployment defined?

Demand deficient unemployment happens when the aggregate demand (AD) in an economy is insufficient to provide jobs for everyone who wants to work. It typically occurs during a recession or downturn in the economic cycle when output falls, leading to job losses and increased unemployment.

When aggregate demand is low, firms reduce production due to a lack of sales. This reduction in production means that fewer workers are needed, leading to layoffs and thus increasing unemployment. This is demand deficient unemployment.

The level of demand deficient unemployment will vary directly with the business cycle. During an economic upturn or boom, demand deficient unemployment will tend to fall as firms increase production to meet rising demand. Conversely, during an economic downturn, it will tend to rise.

The 2008-2009 global financial crisis resulted in a significant increase in demand deficient unemployment. As a result of the crisis, aggregate demand fell significantly across many economies, leading to decreased production and increased unemployment.

Similarly, the COVID-19 pandemic caused an enormous drop in demand across many sectors, particularly those heavily dependent on person-to-person contact such as hospitality, travel, and leisure. This caused a surge in demand deficient unemployment, with many workers in these sectors losing their jobs due to the drop in demand.

In summary, demand deficient unemployment is a type of unemployment that occurs when there is insufficient aggregate demand in the economy to provide jobs for everyone who wants to work. It often varies with the business cycle, increasing during economic downturns and decreasing during upturns. Examples from recent history include the global financial crisis and the COVID-19 pandemic, both of which led to significant increases in demand deficient unemployment due to substantial drops in aggregate demand.