CHAPTER 7 Unemployment (2024)

CHAPTER 7
UNEMPLOYMENT
Objectives
 Describe the cost of unemployment.
 Distinguish between different types of unemployment.
 List some possible causes of unemployment.
 Discus the policiesthat can be used to reduce
unemployment.
 Explain what the Philips curve means and how it is
related to the aggregate supply curve.
 Explain what an income policy is.
Unemployment and its costs
Unemployment can be defined using two definitions: strict
and expanded definitions. One is said to be unemployed if
one is willing and able to work but could not find job.
We also calculated unemployment rate: unemployed

persons as a percentage of labour force.
Unemployment rate = unemployed X100%
Labour force
Cost of unemployment
Unemployment is costly to unemployed individuals, the society as whole and even to
the country.
Unemployed individuals may suffer loss of income, shock, frustration, ill health and
even death.
Psychological cost including loss of self-confidence and esteem, psychological
disorders, divorces, and criminal activities.
Loss of experience, skills, and knowledge (human capital) and human development.
Loss to society – unemployment may give rise to crime, demonstrations, riots, and
other forms of violent unrest.
Unemployment benefits and other social welfare programs increases financial
costs/burden to government (loss of tax revenue)
Loss of GDP/production due to unemployment –potential output that the unemployed
people could have produced, which is referred to GDP gap.
Types of unemployment
We look at the 4 types of unemployment:
1, Frictional Unemployment (search unemployment):
This type of unemployment arises because it takes time to find a
job or to move from one job to another.
Frictional unemployment is unavoidable and therefore
temporary.
It exists even when there is full employment.
2, Seasonal Unemployment:
 arise because of the seasonal nature of certain jobs.
For example in the agricultural sector, tourism etc, where jobs
maybe seasonal.
3, Cyclical (demand deficiency) unemployment:
 Arises due to changes in the business cycle.
Business cycle is the up and downward swing in economic
activities.
During recession, there is a general downturn in economic
activities. This leads to a fall in investment, aggregate demand
(AD), employment and income.
4, Structural Unemployment:
Unemployment that occurs due to structural changes in the
economy (i.e. changes in technology and a mismatch between
workers qualification and job requirement)
See PG. 402 and box 21-1 Pg. 403 for examples.
Policies to reduce unemployment.

Note: In order to provide a solution to a problem, it is always important to understand its
cause(s).
Unemployment increases when the growth in labour force is greater than the number of job
opportunities.
Unemployment usually originates from the supply side (due rapid increase in the supply of
labour) and the demand side of labour (due to slow or declining demand for labour).
Causes and policy of unemployment from the supply side of labour includes:
Rapid population growth – policy measure could be, to reduce population growth – but it
is a long term approach.
Increase in immigration – policy measure is to provide a strict immigration policy.
Over supply of mainly unskilled and semi-skilled labour causing structural
unemployment. – policy measure is to improve quality of labour through education and
training.
Cause and policies of unemployment from the demand side of

labour
Low aggregate demand and the use of capital intensity production may
lead to a decreasing demand for workers.
Policies to reduce unemployment from the demand side includes:
 Increasing aggregate demand (AD) by increasing government
spending (G), Consumption spending by households (C), investment
spending by firms (I) and increase demand for exports. Promote
economic activities that are more labour intensive. Special
employment program (e.g., the expanded public works programme),
however expensive and may not provide lasting solutions.
Promoting small businesses and the informal sector.
Provide tax incentives or subsidies to employers.
Level of employment, production
The relationship between the level of employment and
production is explained by the aggregate production function.
Which states that, ‘’the level of employment is positively or
directly related to the level of production in the economy”.
See fig. 21-1 PG. 404.

On fig. 21-1, the level of real production and employment
increases up to point Y1N1- full employment. Meaning no excess
capacity to expand production.
Unemployment and inflation: the Philips curve
The Philips curve shows the relationship between aggregate demand
(AD), production, prices level (inflation) and employment. See table 21-2
Pg.405.
Philips curve Fig.21-2 Pg. 405 – indicates a negative relationship
between general prices (inflation) and unemployment. (i.e., when
inflation increase, unemployment fall and vice versa.
However, if both inflation and unemployment increase, results to a
rightward shift of the Philips curve as shown on fig. 21-3 Pg. 405, an
indication of stagflation.
Look at income policy Pgs 405 – 406
Thank you.

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CHAPTER 7

We also calculated unemployment rate: unemployed

Policies to reduce unemployment.

Cause and policies of unemployment from the demand side of

See fig. 21-1 PG. 404.

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