M3 – Basic Microeconomics

The Economics of Unemployment

Introduction
Unemployment is a term referring to individuals who are employable and seeking a job
but are unable to find a job. Furthermore, it is those people in the workforce or pool of
people who are available for work that does not have an appropriate job.
Unemployment is a key economic indicator because it signals the ability (or inability) of
workers to readily obtain gainful work to contribute to the productive output of the
economy. More unemployed workers mean less total economic production will take
place than might have otherwise. High, persistent unemployment can signal serious
distress in an economy and even lead to social and political upheaval.
Specific learning Objective
Identify and explain the factors affecting unemployment.
Pre task
Download and watch the video on status of Unemployment in the Philippines
https://youtu.be/sdsz-t540WI
While task
Read the lecture-handouts on The Economics of Unemployment Module 3 Lesson
1.pdf download

MODULE 3 LESSON 1 LECTURE IN

MICROECONOMICS: LABOR AND EMPLOYMENT

1. Human resources are the key to economic development

 The government and the private sector have the capabilities to provide employment
opportunities to members of the labor force who are looking for work
 Those who take part in employment relationships must work out mutually satisfactory
arrangements

1. Workers – responsibilities, privileges and opportunities

2. Employers- job description, compensation package and working conditions
3. Labor problems represent conflict on social reality with social ideals that normally rise out of
employment
4. Unemployment

 A person is considered unemployed if he is at least 15 years old, willing and able to work
but cannot find work
 Unemployment is not only considered an economic problem but is also a social problem
because it can lead to petty crimes and political unrest

Causes of Unemployment

1. Rapid changes in technology

2. Recessions
3. Inflation
4. Disability
5. Business cycles
6. Changes in tastes as well as alterations in the climatic conditions.
7. Attitude towards employers
8. Willingness to work
9. Perception of employees
10. Employee values
11. Discriminating factors in the place of work (may include discrimination on the basis of age,
class, ethnicity, color and race)
12. Ability to look for employment

Types of unemployment
Unemployment, or being unemployed, is the outcome when an individual is looking for a
job but cannot find one.
While it's a negative event for both the individual and the economy, a person can
become unemployed in several ways:

1. Voluntarily leaving a job.

2. The individual was fired or laid-off from a job.
3. The individual's job was phased out for a variety of reasons; currently technology is a big
factor in job replacement-related unemployment.
4. The individual left the workplace for personal reasons, like maternity leave, injury or illness.
5. Structural unemployment

 Structural unemployment occurs when certain industries decline because of long term
changes in market conditions.
 A change in technology renders the skill and talents of some workers obsolete
 This form of unemployment is largely defined as unemployment that results from perceived
value and skills that an individual brings to a job against the needed, different skills required
by an employer to do the job correctly.
 Job skills are, after all, dynamic, and over time new skills replace current but aging skills no
longer needed by an employer. These newer skills are required by employers to succeed in
the marketplace.

2. Cyclical unemployment

 Caused by the fall of business activities in the economy

 Cyclical unemployment is similar to structural unemployment in that the business cycle is
highly dynamic too, and changes all the time. When the economy is on the upswing,
companies hire more workers, and the unemployment rate spikes upward. Conversely,
when the economy is spiraling downward, the unemployment rises, as companies let
workers go, and stop hiring at an accelerated rate, as they would in robust economic
periods.
 When business cycles are at their peak, cyclical unemployment will be low because total
economic output is being maximized. When economic output falls, the business cycle is low
and cyclical unemployment will rise.

3. Regional unemployment

 When structural unemployment affects local areas of an economy, it is called ‘regional’

unemployment. Geographical immobility makes regional differences more extreme.
 Regional unemployment a form of structural unemployment associated with the decline of
certain industrial activities such as shipbuilding and steel production that is heavily
concentrated in particular regions of the country.

4. Classical unemployment

 Classical unemployment is caused when wages are ‘too’ high. This explanation of
unemployment dominated economic theory before the 1930s, when workers themselves
were blamed for not accepting lower wages, or for asking for too high a wage. Classical
unemployment is also called real wage unemployment.

5. Seasonal unemployment

 Periodic unemployment created by seasonal variations in particular industries, especially

industries such as resorts and construction that are affected by the weather
 Seasonal unemployment exists because certain industries only produce or distribute their
products at certain times of the year. Industries where seasonal unemployment is common
include farming, tourism, and construction.
6. Frictional unemployment

 Caused by interruption in production for technical reasons, or when workers are temporarily
laid off due to renovation works
 Frictional unemployment, also called search unemployment, occurs when workers lose their
current job and are in the process of finding another one. There may be little that can be
done to reduce this type of unemployment, other than provide better information to reduce
the search time. This suggests that zero unemployment is impossible at any one time
because some workers will always be in the process of changing jobs.

7. Voluntary unemployment

 Voluntary unemployment is defined as a situation when workers choose not to work for one
reason or another, workers may elect not to participate in the labour market. There are
several reasons for the existence of voluntary unemployment including excessively
generous welfare benefits and high rates of income tax.

Structural unemployment and labour mobility

Labour immobility is likely to increase structural unemployment. This is because those
industries that are growing and need labour, often called sunrise industries, are not
necessarily able to employ the same workers who have been displaced in the declining,
sunset industries.
Sunrise Industry - Emerging industry that is gaining favor with investors and is
expected to be an engine of future economic growth through steadily rising generation
of employment and profits, and comparatively lower environmental costs. (construction,
manufacturing, tourism and services: BPOs, healthcare: mall-based diagnostics and
tele-health centers)
Sunset Industry - Older industry that continues to be important to an economy but is
losing favor with investors due to its steadily falling employment generation capacity and
profits, and comparatively higher environmental costs. (agriculture, livestock, mining,
logging, aquaculture)
Types of labor immobility

1. Geographical immobility
o Geographical immobility occurs when workers are not willing or able to move from
region to region, or town to town. Geographical mobility is made worse by immense
house price variation between regions.
o Other factors also contribute to geographical immobility, such as strong social and family
ties, and parents being unwilling to disrupt their children’s education by changing
schools. The stresses of moving home can also be a deterrent to mobility for some.
2. Industrial immobility

 Industrial immobility occurs when workers do not move between industries, such as moving
from employment in motor industry to employment in the insurance industry. Industrial
immobility has affected many other industrial countries, as the growth of service industries,
and the decline of manufacturing industries, has increased the need for mobility.

3. Occupational immobility

 Occupational immobility occurs when workers find it difficult to change jobs within an
industry. For example, it may be very difficult for a doctor to retrain to be a dentist.
 Industrial and occupation immobility are most likely to happen when skills are not
transferable between industry and job.
 Information failure also contributes to labour immobility because workers may be immobile
because they do not know where all the suitable jobs for them are.
 A resulting problem with labour market immobility is that it can create regional
unemployment, which is a type of structural unemployment. This means that a change in the
structure of industry leaves some people unable to respond by changing job, industry, or
location and as a result, they remain temporarily or permanently unemployed.
 Immobility can also lead to rising labour costs, as firms have to increase wages to
encourage workers to re-locate.

2. Underemployment is another problem

 An underemployed is an employed person who works for less than 40 hours per week
despite the fact that he wants to work for more hours
 Visible underemployment – number of people working less than 40 hours per week and
wanting additional work
 Invisible underemployment – number of people working 40 hours or more per week and still
wanting additional work

1. Issues concerning labor problems

2. Inadequate wages – earnings that fail to provide a minimum comfortable living

 May result to poverty, a condition where a family receives insufficient income to purchase or
meet the recommended minimum nutrient requirements and basic needs
 Evidences of inadequate wages – deterioration of the purchasing power of the peso and
existence of slum area

2. Industrial and labor management conflict

 Evidences include workers are on-strike, employers resort to lockouts

 Prolong strikes and lockouts would mean less production, less sales and less income for
both parties

3. Economic insecurities – threats of interruptions in earnings or in one’s work

 Evidences include illness, accidents, retirements, strikes, lockouts, technological

advancements, wars and calamities
 Increasing population – has the tendency to grow by geometrical progression
 Evidences include more families below the poverty line, higher rates of out-of-school youth
and early marriages

- Ways to regulate population growth

 Preventive checks – reduce the birth rate

1. Higher income group – moral restraint

2. Lower income group – birth control

 Positive checks – increase the death rate

1. War, famine, misery and plague became inevitable because the preventive checks were not
effective
2. Starvation – ultimate and unavoidable check

1. Possible solutions to unemployment

2. Increase government programs and projects on infrastructure, health, education and
defense
3. Encourage more local and foreign investors

 Call Centers/Business Process Outsourcing (BPO) is the act of giving a third-party the
responsibility of running what would otherwise be an internal system or service. For
instance, an insurance company might outsource their claims processing program or a bank
might outsource their loan processing system.

 Real Estate Business - With the development of private property ownership, real estate has
become a major area of business investments. Examples include Ayala Land Incorporated
(One Serendra, Avida Nuvali), SM Development Corporation (Mezza, Princeton, Blue and
Sea Residences), Robinsons Land Corporation (Crowne Plaza, Holiday Inn and Cybergate
Complex), Filinvest Land Incorporated, Vista Land (Camella, Crown Asia, Brittany)

3. Overseas job placement – the opportunity to live and work abroad. Example of professions
include caregivers, nurses and teachers
Post task

References
https://corporatefinanceinstitute.com/resources/knowledge/economics/unemploy
ment/ (Links to an external site.)Links to an external site.
https://www.investopedia.com/terms/u/unemployment.aspLinks to an external site.
Module 3
Lesson 2: The Economics of Inflation
Introduction
Inflation is a force that affects everyone’s lives—even if they’re not aware of it. When
prices rise too much—or prices rise but paychecks don’t—people see a negative effect
on their purchasing power and quality of life. That’s the most immediate way inflation
affects us all.
Specific learning Objective
Identify and explain the different factors affecting Inflation
Pre task
Watch the video on the status of Inflation in the Philippines https://youtu.be/4E2t8gej2vo
While task
Read the lecture on The Economics of Inflation Module 3 Lesson 2.pdf download

Inflation Defined
Inflation can be defined as a sustained or continuous rise in the general price level or,
alternatively, as a sustained or continuous fall in the value of money. Several things
should be noted about this definition. First, inflation refers to the movement in the
general level of prices. It does not refer to changes in one price relative to other prices.
These changes are common even when the overall level of prices is stable.2 Second,
the prices are those of goods and services, not assets. Third, the rise in the price level
must be somewhat substantial and continue over a period longer than a day, week, or
month.3

Gross National Product (GNP) Deflator

What Is the Gross National Product (GNP)
Deflator?
The gross national product deflator is an economic metric that accounts for the effects
of inflation in the current year's gross national productLinks to an external site. (GNP) by
converting its output to a level relative to a base periodLinks to an external site..
The GNP deflator can be confused with the more commonly used gross domestic
product (GDP) deflatorLinks to an external site.. The GDP deflator uses the same
equation as the GNP deflator, but with nominal and real GDP rather than GNP.

Understanding the Gross National Product

(GNP) Deflator
The GNP deflator is simply the adjustment for inflationLinks to an external site. that is
made to nominal GNP to produce real GNP. The GNP deflator provides an alternative
to the Consumer Price IndexLinks to an external site. (CPI) and can be used in
conjunction with it to analyze some changes in trade flows and the effects on the
welfare of people within a relatively open market country.
The CPI is based upon a basket of goodsLinks to an external site. and services, while
the GNP deflator incorporates all of the final goods produced by an economy. This
allows the GNP deflator to more accurately capture the effects of inflation since it's not
limited to a smaller subset of goods.

What Is Inflation?
Inflation is the decline of purchasing powerLinks to an external site. of a given currency
over time. A quantitative estimate of the rate at which the decline in purchasing power
occurs can be reflected in the increase of an average price levelLinks to an external
site. of a basket of selected goodsLinks to an external site. and services in an economy
over some period of time. The rise in the general level of prices, often expressed as a
percentage, means that a unit of currency effectively buys less than it did in prior
periods.
Inflation can be contrasted with deflationLinks to an external site., which occurs when
the purchasing power of money increases and prices decline.

What Is Deflation?
Deflation is a general decline in prices for goods and services, typically associated with
a contraction in the supply of money and credit in the economy. During deflation, the
purchasing power of currency rises over time.

What is Consumer Price Index (CPI)?

The Consumer Price Index (CPI) is a measure that examines the weighted
averageLinks to an external site. of prices of a basket of consumer goods and services,
such as transportation, food, and medical care. It is calculated by taking price changes
for each item in the predetermined basket of goodsLinks to an external site. and
averaging them. Changes in the CPI are used to assess price changes associated with
the cost of livingLinks to an external site..
The CPI is one of the most frequently used statistics for identifying periods of inflation or
deflationLinks to an external site.. It may be compared with the producer price
indexLinks to an external site. (PPI), which instead of considering prices paid by
consumers looks at what businesses pay for inputs.

Post task
Online Quiz in The Economics of Inflation.
References
https://www.masterclass.com/articles/what-is-inflation-in-economics (Links to an
external site.)Links to an external site.
https://www.economicshelp.org/macroeconomics/inflation/definition/Links to an external
site.