30. Unemployment

1. Introduction to Unemployment

Unemployment refers to the condition where individuals who are actively seeking jobs are unable to find work. It is a critical economic indicator, often used to assess the health and performance of an economy. High unemployment usually indicates underutilization of labor resources, while low unemployment can signal a strong, thriving economy.

2. The Labor Force

Definition: The labor force consists of all individuals who are of working age, willing, and able to work. It includes both employed and unemployed individuals who are actively looking for work.

Factors Affecting Labor Force Size:

• Total population of working-age individuals

• Number of people pursuing higher education beyond the school leaving age

• Legal and actual retirement age

• The proportion of women participating in the workforce

• Social, cultural, and economic attitudes toward work

3. Full Employment

Definition: Full employment is a theoretical concept where all available labor resources are utilized in the most efficient manner. It does not mean zero unemployment, but rather the absence of involuntary unemployment.

Includes:

• Frictional Unemployment

• Structural Unemployment

• Voluntary Unemployment

These types are considered natural and unavoidable in a healthy economy.

4. Types of Unemployment

Understanding different types of unemployment helps in diagnosing economic problems and designing suitable policy responses.

A. Frictional Unemployment:

• Short-term unemployment caused by individuals transitioning between jobs.

• Examples: recent graduates, people changing careers.

• Occurs due to imperfect information and time delays in job searching.

B. Structural Unemployment:

• Results from long-term changes in the economy’s structure.

• Caused by a mismatch between workers’ skills and the needs of employers.

• Two major issues:

  • Occupational immobility: Difficulty in acquiring new skills for new industries.

  • Geographical immobility: Inability to move to areas where jobs are available due to housing, family, or schooling constraints.

C. Cyclical (Demand-Deficient) Unemployment:

• Occurs during periods of economic downturn or recession.

• Caused by reduced aggregate demand for goods and services.

• Firms reduce output and lay off workers.

• Can lead to long-lasting unemployment if not addressed.

5. Changes in the Employment Structure

As economies grow and develop, the structure of employment shifts due to technological, social, and economic changes.

Key Trends:

• Shift from primary (agriculture) and secondary (manufacturing) sectors to tertiary (services) sector.

• Increasing employment in formal sectors and white-collar jobs.

• Greater participation of women in the labor force due to changing social norms.

• Downsizing of public sector employment as economies shift to market-driven models.

6. Causes of Unemployment

a. Frictional: People temporarily unemployed while moving between jobs.

b. Structural: Caused by long-term shifts in industry and technology.

c. Cyclical: Due to economic contractions, reduced consumer demand, and firm closures.

Other contributing factors may include:

• Technological advancements replacing human labor.

• Globalization and offshoring of jobs.

• Lack of education or vocational training.

7. Consequences of Unemployment

A. Personal Consequences:

i. Loss of Income:

• • Reduction in living standards.

  • Increased reliance on savings or credit.

  • Difficulty maintaining essential payments like rent or mortgage.

ii. Mental and Physical Health:

• Increased stress, anxiety, and depression.

• Loss of self-esteem and motivation.

B. Economic Consequences:

i. Negative Multiplier Effect:

• • Job losses reduce consumer spending.

  • Local businesses suffer from decreased demand.

  • Can lead to further job losses and regional economic decline.

ii. Loss of National Output (GDP):

• Idle labor = lost productivity.

• Larger output gap leads to deflationary pressures.

• Persistent unemployment can create “hysteresis,” where long-term unemployment becomes structural.

iii. Fiscal Costs:

• Reduced tax revenue (income tax, consumption tax).

• Increased public spending on unemployment benefits and welfare programs.

• Potential increase in the budget deficit.

• May lead to higher taxes or cuts in public services.

8. Measuring Unemployment

There are two principal methods:

A. Claimant Count:

• Measures those claiming unemployment benefits (e.g., Job Seekers Allowance).

• Requires individuals to prove they are actively seeking work.

• Excludes people not eligible for or not claiming benefits (e.g., homemakers, students).

• May underestimate actual unemployment.

B. Labour Force Survey (ILO Standard):

• Conducted quarterly on a sample of 40,000 households (approx. 80,000 individuals).

• Individuals are classified as unemployed if they:

• Have been out of work for the last 4 weeks,

• Are available to start work within the next 2 weeks,

• Are actively seeking work or available to work for at least one hour per week.

• Provides a more comprehensive and internationally comparable measure.

• Usually shows higher unemployment than Claimant Count.

9. Correcting Unemployment

A. Fiscal Policy (Reflationary Policies):

• Tax Cuts:

  • Lower income tax increases disposable income and consumer spending.

  • Reduced corporate tax encourages business investment and expansion.

• Government Spending:

  • Direct job creation through infrastructure and public services.

  • Stimulates demand and multiplier effects.

B. Monetary Policy:

• Interest Rate Cuts:

• Makes borrowing cheaper.

• Encourages consumer spending and business investment.

• Increased Money Supply:

• Boosts liquidity, consumer confidence, and aggregate demand.

• Exchange Rate Policy:

• Devaluation can increase exports by making domestic goods cheaper overseas.

• Leads to increased production and employment.

10. Summary of Key Concepts