UNEMPLOYMENT

 Unemployment of labour refers to a situation where able bodied and employable

people are looking for jobs but can’t find them. Demand for labour will be less than
supply of labour.
 Unemployment becomes a macro economic problem that exists when the goal of full
employment is not achieved resulting in an economy operating on Pareto sub optimal
level and such an economy is therefore operating inside the PPC.
 The unemployment rate = number of people unemployed divided by working
population (16-65 years). This is expressed as a percentage.
 The labour force is the working population i.e., those who are economically active.
Within the labour force some are employed, and others are not employed.
 The level of unemployment refers to the total number of people who are unemployed
whereas the rate of unemployment is the number of unemployed people as a
percentage of the labour force.
 Unemployment is a clear example of inefficiency since the economy will not be
operating on its PPC.

Labour force participation rate.

 The participation rate is a measure of the active portion of an economy’s labour force.
 It refers to the number of people who are employed or actively seeking for work.
 The people are eligible to work. They can either be working or looking for work.

Labour force participation rate= active labour force/potential labour force multiplied by100

Example

 Population consist of the following:

1500 adults,800 have jobs,200 looking for jobs,200 retired early and 300 given up (
discouraged workers.
 Unemployment rate= unemployed/labourforce multiplied by 100
 Labourforce is made up of those who have jobs and are looking for jobs.
 Unemployment rate for this economy is 20%
 Labourforce participation rate = labourforce/adults (eligible population) multiplied by
100
 In the above example it would be 66,67%. Early retirements and an increase in
discouraged workers may lead to a lower labour force participation rate.
Measuring unemployment

i. Claimant count method

 It’s a measure of unemployment based on those people registered and claiming
unemployment benefits (job seeker’s allowance).
 People claiming the benefits must declare that they are out of work, capable of,
available for and actively seeking work, during the week in which their claim is made.

Advantages

 It’s easy and cheap to collect the information.

 It is also quick to calculate as it is based on the information already collected by the
government.

Disadvantages

 Although people claiming benefits must declare that they are available for work, it
nonetheless includes some people who are claiming benefits but are not actually
available or prepared to work.
 It also excludes some people who would like to work, and who are looking for work, but
who are not eligible for unemployment benefits, such as women returning to the labour
force after child birth.
 Figures obtained may be inaccurate as they understate or overstate the true figure.
 Governments have been accused of manipulating the claimant count by changing the
definitions of who and who is not included and the method is not internationally
recognised. Because of these problems, the claimant count has been superseded for
official purposes by the so called ILO (International Labour Organisation) unemployment
rate.

i. The survey method

 The ILO count is taken from a wider survey of employment called the labour force
survey (LFS). 60000 households, with over 100000 adults, are surveyed.
  The questionnaire used covers household size and structure, accommodation details,
basic demographic characteristics such as age, sex marital status and ethnic origin and
economic activity.
 To be counted as unemployed, an individual has to be without a paid job, be available
to start a job within two weeks and has either looked for work at some time in the
previous four weeks or been waiting to start a job already obtained.

Advantages

 The measure picks up some of the groups of people not included in the claimant count.
 The measure is based on internationally agreed concepts and definitions, so makes
international comparisons easier.
 More information is found on, for example, the qualifications job seekers have.

Disadvantages

 The data are more expensive and time consuming to collect than the claimant count
measure.
 The data are based on sample survey; they are subject to sampling error and to a
multitude of practical problems of data collection.

Comparison of the two methods

 The major difference between the two alternatives from a measurement perspective is
that the claimant count is a full count of all those who register, whereas the ILO
measure is based on a sample.
 However, both methods may understate overall employment because they don’t
include part time workers. Also, anyone on government training and work schemes will
not be counted even if they would want to work full time.
 The unemployment figure is a stock concept, it measures the number of people
unemployed at a particular moment.

Types/causes/ solutions of unemployment

 Unemployment can be divided into three main types which are frictional, structural and
cyclical. Each type has its causes.
 Frictional unemployment includes search, casual and seasonal unemployment.
 Structural unemployment includes technological, regional and international
unemployment.
 Frictional and structural unemployment arise largely due to problems on the supply side
of the economy.
a) Seasonal unemployment
 This is when people work during certain periods of the year and then are unemployed
during of peak time e.g. tour guides will find work during peak holiday times but may
be out of work for the rest of the year.
 Occurs in those industries which experience marked seasonal patterns of demand.
 Some jobs will be dependent upon the weather and seasons especially in developing
countries which rely on agriculture.
 During periods of the year people working in, for example, tourism, hospitality, building
and farming industries may be out of work.
 More examples include lifeguards and snow plow drivers.
 Workers need to be equipped with various skills so that they will be kept busy
throughout the year.
 Diversification can also help to reduce seasonal unemployment e. g in winter a farmer
will grow wheat and in summer maize.

b) Frictional unemployment-
 It is also known as temporary or transitional unemployment.
 It exists even when the economy is at full employment and occurs on a smaller scale.
 It is short term unemployment which occurs when workers are in between jobs.
 It results from frictions in the labour market which creates a delay or time lag during
which a worker is unemployed when moving from one job to another.
 A job vacancy exists somewhere and frictions in the labour market, caused by
geographical or occupational immobility of labour, prevents an unemployed worker
from immediately filling the vacancy.
 It follows that the number of job vacancies that exist can be used as a measure of
frictional unemployment. Frictional unemployment is part of a growing economy
and is a normal and health situation.
 Frictional unemployment consist of search and casual unemployment.
 Search unemployment arises when workers do not accept the first job or jobs on
offer but spend some time looking for a better paid job.
 Casual unemployment refers to workers who are out of work between periods of
employment including actors, supply teachers and construction workers.
  Frictional unemployment can be reduced by improving communication in an
economy, advertising job vacancies in the press, TV, making use of employment
urgencies.

c) Structural unemployment-
 It exists due to the geographical and occupational immobility of labour.
 The structure of economies is always changing with some industries and occupations
declining while other industries and occupations are developing and expanding.
 If workers cannot move easily from declining to growing sectors they will be
unemployed.
 Structural unemployment can take the forms of international, regional and
technological unemployment.
 International unemployment arises when workers lose their jobs because industries are
declining due to competition from foreign industries.
 Regional unemployment refers to a situation where industries and occupations decline
in particular areas of the economy.
 Technological unemployment occurs when industries and occupations disappear due to
advances in technology.
 Whereas frictional unemployment is short term, structural unemployment is more likely
to be long term and more serious. Drought, wars and cyclones can all lead to structural
unemployment.
 Structural unemployment occurs on a significantly larger scale
 To reduce structural unemployment, there is need for training and retraining of
workers, improving labour mobility and giving firms subsidies

d) Technological unemployment
 It’s a special case of structural unemployment which results from the successful growth
of new industries using capital intensive methods of production such as automation.
Labour becomes less competitive to other factors of production such as capital.
 With the introduction of modern and highly advanced technology, some people’s skills
become irrelevant and they are laid off. In the banking sector, the use of cash points,
telephone banking, e banking, switch and other plastic cards has reduced the number of
bank clerks.
 Technological unemployment is common in developed countries. To solve this type of
unemployment threes is need to train and retrain workers so that they can have the
skills necessary to the needs of the new environment.
 e) Demand deficient/ cyclical / Keynesian unemployment
 It is caused by a decline in total spending in an economy and is likely to occur in the
recession phase of the business cycle.
 As the demand for goods and services decreases, employment falls and unemployment
rises. This is because demand for labour is derived demand. Total final expenditure will
be less than that is needed to create work for the total working population. (Draw
business cycle and explain it).
 This type of unemployment can be solved by an expansionary fiscal and monetary
policy.
 Demand deficient unemployment occurs on a very large scale.

 The labour market is initially in equilibrium at wage rate W.

 Due to a fall in AD, firms reduce output and AD of labour shifts to ADL1. If workers resist
wage cuts, demand deficient unemployment XQ will exist.
 Even if wage rates fall, this type of unemployment may persist since a cut in wage rates
reduces AD

Policies to reduce unemployment

 a) Demand side policies
 To cure involuntary unemployment, the government can use expansionary fiscal and
monetary policy (transmission mechanisms). Increasing AD will help to reduce cyclical or
involuntary unemployment. However, at full employment an increase in AD will be
inflationary. (Diagram?)
b) Supply side policies
 To cure voluntary unemployment, the government has to make more people willing and
able to work. This can be done via supply side policies e.g
 More training to give more people skills
 A reduction in income tax so the gains of working compared to collecting
benefits are greater (i.e remove the poverty trap)
 Reduction in unemployment benefits to give people an incentive to look for work
 More information about job vacancies and help with applications
 Help(e.g financial) for people who are relocating
 Reduce barriers to people accepting jobs e.g there used to be closed shops which were
factories where only union members could work, this prevented non-union members
working.
 Policies at making people more willing or able to work, shift the job acceptance to the
right and voluntary unemployment falls (draw the diagram)
 Supply side policies aimed at getting more people willing and able to accept jobs at each
real wage shifts AS to the right hence increasing the full employment level.

Effects of unemployment- the effects and policies used to solve the problem depend on the
duration and type of unemployment.

Benefits of unemployment to those unemployed.

 The people have more time to explore job opportunities and apply for jobs ( frictional
and search unemployment)
 Being unemployed may also provide people with more time to pursue their leisure
activities
 The unemployed may also be offered training and education by the government which
may enable them to gain a more rewarding job.

Benefits of unemployment to society

 Unemployment creates greater flexibility. An economy will be able to expand relatively

easily and quickly if there is a pool of suitably qualified unemployed workers.
 Unemployment reduces demand pull and cost push inflation (how?)
  However, most economists argue that the costs of unemployment exceed any possible
benefits.

Costs of unemployment to the unemployed.

 Although people may have more time to pursue leisure they may be constrained from
doing so by lack of income.
 The unemployed also suffer a loss of status as a certain amount of social stigma is still
attached to being unemployed. The unemployed are likely to experience divorce,
nervous breakdowns, bad health and are more likely to attempt suicide than the rest of
the adult population.
 When people are out of work their skills become rusty and they miss out on training in
new methods. The longer the time a person has out of work, the harder they are likely
to find another job. Economists call this hysteresis.
 Poverty, reduced standards of living, drug abuse, crime rates, social unrest, prostitution.

Costs of unemployment to society.

 The basic economic cost of unemployment is forgone output. When an economy fails to
create enough jobs for all who are able and willing to work, potential production of
goods and services is irretrievably lost.
 Unemployment above the natural rate means that society is operating at some point
inside its PPC. Economists call this sacrifice of output the GDP gap- the difference
between actual and potential GDP.GDP gap= actual GDP-Potential GDP. It can be
negative (Actual GDP< Potential GDP) or positive (Actual GDP> Potential GDP).
 Unemployment depresses incomes and there by deprives the government of both direct
and indirect tax revenue. Whilst government revenue will fall as unemployment rises it
will have to increase its spending on unemployment related benefits.
 The burden of unemployment is not evenly borne by society. The young, people from
ethnic minorities and those lacking skills are more likely to experience unemployment

Non-economic costs

 Depression means idleness and idleness means loss of skills, loss of self-respect,
plummeting morale, family disintegration and socio political unrest.
 Widespread joblessness increase poverty heightens racial and ethnic tensions and
reduces hope for material advancement.
 At the individual level, research links increases in suicide, homicide, fatal heart attacks
and strokes and mental illness due to high unemployment