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Difference Between Furlough and Unemployment

The rate of unemployment globally is currently high. While this can be attributed to the widespread coronavirus crisis, other factors such as global recession, high-interest rates and financial crisis can also affect this. When companies face a financial crisis, they may be forced to undertake cost-reduction measures such as furloughs, reduction in force and layoffs. While these terms are often used interchangeably, they have differences. Understanding these terms is important not only for employers and employees as they are essential when complying with legal requirements. In this article, we look at the difference between furloughs and unemployment. 

What is Furlough?

This is a mandatory leave of absence from work whereby a worker is required to return to work but at a reduced work schedule. Furloughs are often implemented when an employer is cash strained such that they cannot afford to pay all workers, during a slow period where there is less work for all employees and during government shutdowns. 

It enables an employer to avoid or reduce terminating employees through the reduction of the work schedule. 

When an employee is under furlough, they may be required to take unpaid time off. This can be a specified number of days or weeks, hours throughout the work period or several months. For instance, an employer may reduce a person’s working hours or require employees to take unpaid leave. 

However, employers must ensure they do not go against set employment laws when undertaking furloughs. Furloughs may be long term or short term. 

What is Unemployment?

This refers to the lack of jobs for individuals who are employable and are seeking employment opportunities. As one of the indicators of economic performance, unemployment is measured by the employment rate by dividing the number of unemployed persons by the total workforce. 

The term, however, does not refer to people who are unemployed but are not looking for work because of issues such as retirement, pursuing higher education, personal issues, disability or those who have not sought employment opportunities in the past for weeks. 

Among types of unemployment include:

  • Frictional unemployment- This refers to workers who are in between jobs and is caused by employees looking for jobs that are most suitable for the skills they possess.
  • Demand deficient unemployment- Often common during recessions, it occurs when the production is reduced due to a reduction in the demand for a firm’s services or products. It is the largest cause of unemployment globally. 
  • Structural unemployment- This occurs when skills that workers have do not match the demands of the work opportunities available. It is also caused by the inability of workers to reach the geographical location of a job due to issues such as visa restrictions. 
  • Voluntary unemployment- This is the voluntary process where a worker leaves a job due to the failure of fulfilling financial expectations. 

Unemployment can be caused by global recessions, high-interest rates, various government policies and financial crises. The impact of high rates of unemployment is felt by the workers and the economy leading to a global recession. 

Similarities between Furlough and Unemployment

  • Both refer to the lack of employment opportunities

Differences between Furlough and Unemployment

Definition

Furlough refers to a mandatory leave of absence from work whereby a worker is required to return to work but at a reduced work schedule. On the other hand, unemployment refers to the lack of jobs for individuals who are employable and are seeking employment opportunities.

Causes

Furloughs are implemented when an employer is cash strained such that they cannot afford to pay all workers, during a slow period where there is less work for all employees and during government shutdowns. On the other hand, unemployment is caused by the failure of a job fulfilling financial expectations to a worker, a reduction in the production rate or when skills that workers have do not match the demands of the work opportunities available.

Voluntary/ Involuntary

While furloughs are involuntary, unemployment can be voluntary such as where a worker leaves a job due to the failure of fulfilling financial expectations.

Furlough vs. Unemployment: Comparison Table

Summary of Furlough vs. Unemployment

Furlough refers to a mandatory leave of absence from work whereby a worker is required to return to work but at a reduced work schedule. On the other hand, unemployment refers to the lack of jobs for individuals who are employable and are seeking employment opportunities. While furloughs are involuntary for workers, unemployment can be voluntary such as where a worker leaves a job due to the failure of fulfilling financial expectations Both affect the consumers’ purchasing power leading to a recession or a depression if left unresolved. 


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References :


[0]Economics. Pearson Education India. https://books.google.co.ke/books?id=eSrDB3F3W7gC&pg=PA583&dq=types+of+unemployment&hl=en&sa=X&ved=2ahUKEwiq9s_emOvtAhUKnxQKHenFAzIQ6AEwBHoECAEQAg#v=onepage&q=types%20of%20unemployment&f=false

[1]Indiana University. Furlough. U.S. Office of Personnel Management, 1983. https://books.google.co.ke/books?id=WeQFYgcJYA0C&pg=PP7&dq=Furlough&hl=en&sa=X&ved=2ahUKEwi_0OinmevtAhWQ2hQKHU9rDsoQ6AEwAHoECAAQAg#v=onepage&q=Furlough&f=false

[2]Perlman R. & Hughes J. The Economics of Unemployment: A Comparative Analysis of Britain and the United States. Cambridge University Press, 1984.https://books.google.co.ke/books?id=UOiE6L7C21EC&pg=PA30&dq=types+of+unemployment&hl=en&sa=X&ved=2ahUKEwiq9s_emOvtAhUKnxQKHenFAzIQ6AEwAXoECAcQAg#v=onepage&q=types%20of%20unemployment&f=false

[3]Image credit: https://www.picpedia.org/chalkboard/images/unemployment.jpg

[4]Image credit: https://commons.wikimedia.org/wiki/File:Furloughed_-_a_worker%27s_diary_shows_%22furlough%22.jpg

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