Economics Handout Unemployment

Unemployment

This is a condition where workers who are ordinarily a part of the labour force are unable to find
work at prevailing wages

Unemployment rate

This is the percentage of the labour force that is not working. It is calculated as
unemployed/labour force * 100

Labour force

This is the number of persons who are employed plus those who are unemployed but are actively
seeking work. Labour force = employed + unemployed

Population

This includes persons who are in the labour force plus those who are of working age but not in
the labour force e.g. full time students and some disabled persons

Natural rate of Unemployment

This is the expected normal rate of unemployment that is consistent with all markets in an
economy being in equilibrium. It is sometimes taken as the sum of frictional and structural
unemployment (Insert diagram)

Full employment

This is a situation in which everyone who is willing and able to work can find a job

Labour force participation rate

This is the ratio of the labour force to the total working age population. It is calculated as:
Labour force/Population * 100 OR

It the proportion of individuals from the overall population who are in the labour force

Underemployment

This refers to those individuals who accept a job for which they are overqualified.
Underemployment also covers those employed on a part time basis, but wanting a fulltime job as
this also represents a situation where insufficient use is made of the person’s capacity.

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Potential labour force

This accounts for all those individuals in the economy who are of working age and are not
institutionalized

Example: the labour force of a country is 300,000 out of a population of 500,000. Given that the
amount of persons who are employed is 125,000calculate:

a. The unemployment rate

b. The labour force participation rate

Discouraged workers

These are persons without jobs and are not actively seeking employment and as such are
classified as not being a part of the labour force

Types of Unemployment

Frictional Unemployment

At any given time some workers are between jobs. Some will be moving voluntarily from one
job to another while others may have been fired or laid off and is now seeking reemployment.
Frictional unemployment is therefore defined as unemployment which arises as a result of the
time lag associated with moving from one job to another.

Frictional unemployment consists of search unemployment and wait unemployment. The reason
for these classifications is that workers are either searching for jobs or waiting to take up a job in
the near future. In most cases the frictionally unemployed are occupationally or geographically
immobile. Though there are jobs available, these unemployed persons do not have the skills to
match to the part of the country where the job is.

Structural unemployment

This occurs when there is a change in the structure of an industry. This structure of the economy
may change because of one of the following reasons:

● Improvement in technology which enables capital to replace labour

● Falling world demand for an exported good. As a result the export sector is forced to
reduce output and so employ less labour
● Technological progress can cause a product to be obsolete and so demand falls

Structural unemployment is the result of a mismatch between the skills required to perform a job
and the skills possessed by workers. Unemployment results when new industries do not create
enough jobs to employ those persons who were made redundant or because the new industry is a
different area or requires different skills.

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Cyclical Unemployment

This type of unemployment is caused by a decline in total spending. It typically begins in the
recession phase of the business cycle. As the demand for goods and services decreases,
employment falls and unemployment rises. Cyclical unemployment results from insufficient
demand for goods and services. As such, it is also referred to as demand deficient
unemployment. As aggregate demand declines, there will be a decline in its determinants (C, I,
G, X). As output is reduced, firms will employ less of all the factors of production, including
labour. For eg. The recession on Jamaican firms and the resulting high unemployment rates.

Real wage unemployment

This type of unemployment occurs when trade unions succeed in raising the wage rate above the
equilibrium level. At a wage above equilibrium level, the supply of labour exceeds demand for
labour. There will be a surplus of labour on the market and an increase in unemployment as
firms lay off workers in order to meet the increased wage bill. This is shown below in the
diagram.

Wages SL

Wu Total unemployment = Q2 to Q1

We

DL

Q1 Qe Q3 qty of labour

Increase in unemployment as a result of higher wages

Seasonal unemployment

This type of unemployment arises due to seasonal patterns in consumer demand in various
markets. As a result production and employment will follow the same pattern. Therefore, when
seasonal demand increases, there will be a reduction in unemployment e.g. Christmas season.
Conversely, when seasonal demand decreases, there will be a rise in unemployment.

Cost of unemployment

a. Lower output

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The basic economic cost of unemployment is foregone output. When the economy fails to create
enough jobs for all who are able and willing to work, potential production of goods and
services is irretrievably lost. The economy would be operating within its PPF.

b. Lower tax revenue

The government will lose tax revenue that would be earned through income tax from workers’
income. In addition high unemployment restricts the amount of consumer spending and
so consumption tax revenue will also fall.

c. Increased welfare payments

Government will have to allocate more of the country’s limited resources to welfare and
unemployment relief programmes. At lower unemployment rates, the government could
have diverted this fund to other areas.

d. Human cost of unemployment

Unemployment can negatively affect workers’ morale. This can result in anxiety, depression,
suicide and increase in crime and violence among other things.

Policies to Address Unemployment

a. Demand side policies:

● Fiscal Policy
● Monetary policy

b. Supply side policies

● Training and retraining
● Abolition of wage floors (minimum wage)
● Reduction of employees and trade unions rights