UNEMPLOYMENT

The population of an economy is divided into two categories, the economically active and
the economically inactive.
The economically active population (labour force) or working population refers to the
population that is willing and able to work, including those actively engaged in the
production of goods and services (employed) and those who are unemployed. Whereas,
unemployed refers to people who are willing and a capable of work but are unable to find
suitable paid employment.
The next category, the economically inactive population refers to people who are neither
working nor looking for jobs. Examples include housewives, full time students, invalids,
those below the legal age for work, old and retired persons.

The unemployment rate is expressed as a percentage of the total number of persons

available for employment at any time. The rate of unemployment may be calculated:

Unemployment rate = (Unemployed persons / Labour force) x 100

In this section the types and causes of unemployment would be considered and how its
impact may be linked to other economic variables.

Types of Unemployment
The main types of employment are structural, frictional, seasonal, cyclical, residual,
technological and disguised unemployment.

Structural Unemployment
Structural unemployment occurs when there is a change in the structure of an industry or
the economic activities of the country. As an economy develops over time the type of
industries may well change. This may be because people's tastes have changed or it may

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be because technology has moved on and the product or service is no longer in demand.
The main causes are as follows:
− Changes in demand - if there were to be a decrease in the demand for a produce (due
to changes in people’s taste or cheaper imports available) and if this change were more
permanent, the supply of such a product must be reduced. Fewer workers would then
be required. Retrenched may not be readily absorbed into other industries and thus
become unemployed.
− Changes in supply - the faster the changes taking place in people's tastes and demand
and supply, the more structural unemployment there may be and an industry has to
adapt more quickly to change due to depletion of raw materials required.
− The regional structure of industry - if industries that are dying are heavily concentrated
in one area, then this may make it much more difficult for people to find new jobs.
Both the shipbuilding and mining industries were heavily concentrated and some areas
have taken many years to adapt and reduce the level of structural unemployment.

This type of unemployment is also known as the chronic unemployment or the Marxian
or long-term unemployment. It is mostly to be found in the underdeveloped countries of
Asia and Africa. This type of unemployment is due to the deficiency of capital resources
in relation to their demand. The problem in the underdeveloped countries is to get rid of
this age-old chronic unemployment by accelerating the process of economic growth.
In other words, structural unemployment results from a mismatch between the demand
for labour and the ability of the workers. IT does not affect the particular industry that can
have adverse repercussion on related industries as well.

Frictional Unemployment
This type of unemployment is caused by industrial friction, such as, immobility of labour,
ignorance of job opportunities, shortage of raw materials and breakdown of machinery,
etc. Jobs may exist, yet the workers may be unable to fill them either because they do not
possess the necessary skill, or because they are not aware of the existence of such jobs.
They may remain unemployed on account of the shortage of raw materials, or mechanical
defects in the working of plants.

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On average it will take an individual a reasonable period of time for him or her to
search for the right job. This creates unemployment while they look and this type of
unemployment is normal and temporary in nature. The more efficiently the job market is
matching people to jobs, the lower this form of unemployment will be. However, if there
is imperfect information and people don't get to hear of jobs available that may suit them,
then frictional unemployment will be higher.
Therefore, the better the economy is doing, the lower this type of unemployment is likely
to occur. This is because people will usually be able to find a job that suits them more
quickly when the economy is doing well.

Seasonal Unemployment
This is due to seasonal variations in the activities of particular industries caused by
climatic changes, changes in fashions or by the inherent nature of such industries. The ice
factories are closed down in winter throwing the workers out of their jobs because there
is no demand for ice during winter. Likewise, the sugar industry is seasonal in the sense
that the crushing of sugar-cane is done only in a particular season. Such seasonal
industries are bound to give rise to seasonal unemployment.

Cyclical Unemployment
This type of unemployment (also known as Keynesian unemployment or the demand
deficient unemployment) is due to the operation of the business cycle. This arises at a
time when the aggregate effective demand of the community becomes deficient in
relation to the productive capacity of the country. In other words, when the aggregate
demand falls below the full employment level, it is not sufficient to purchase the full
employment level of output. Less production needs to be carried out which ultimately
leads to retrenchment of workers. Cyclical or Keynesian unemployment is characterised
by an economy wide shortage of jobs and last as long as the cyclical depression lasts.

Residual Unemployment
This type of unemployment is caused by personal factors such as old age, physical or
mental disability, poor work attitudes and inadequate training.

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Technological Unemployment
This type of unemployment is caused by changes in the techniques of production.
Technological changes are taking place constantly, leading to the discovery of new
production methods involving a good deal of mechanization. This naturally results in the
displacement of labour and finally, unemployment.

Disguised Unemployment
This type of unemployment is to be found in the backward and the underdeveloped
countries of Asia and Africa. The term ‘disguised unemployment’ refers to the mass
unemployment and underemployment which prevail in the agricultural sector of an
underdeveloped and overpopulated country. For example, if there are four persons trying
to cultivate an area of land that could be cultivated as well by three persons, then only
three of these persons are really fully employed and the remaining fourth person
represents disguised unemployment. The people in underdeveloped countries are
outwardly employed but actually they are unemployed, the reason being that agricultural
production would suffer no reduction if a certain number of them are actually withdrawn
from agriculture.

This can also be seen when the growth of the labour force exceeds the amount of
investment made. The lack of investment is due to shortages in real factors such as
shortage of skilled labour, managers, right type of entrepreneurs, etc. As a result, there is
over supply of labour available and these excess labour are ‘employed” (to be exact,
underemployed) in jobs when there is already enough workers. Therefore, the marginal
productivity of such labour is low. This type of disguised unemployment is caused by the
chronic shortage of capital resources in relation to the rapidly growing population.

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 Effects of high rates of unemployment

High and persistent unemployment has presented a major challenge for the economy in
two major areas. One such area, it has eroded the funding base and secondly, it has
increased the demands on government through the use of welfare programs because of
the consequences for poverty and inequality resulting from high unemployment.

The following is an analysis of the effects that unemployment has on the economy. One
such effect is the social costs, these include increasing poverty, personal hardships,
depression, decay of unused skills, increase in crime (mostly among the young) as well as
family disputes and broken marriages. Unemployed individuals become more and more
dissatisfied and resort to riots and demonstrations.

Secondly, the economic costs that are produced from unemployment. Due to
unemployment, the economy’s GNP will be less than the potential GNP, that is to say;
what is possible of full employment. This difference is known as the GNP gap. The gap is
positive but can be slightly negative if the actual GNP exceeds potential GNP and this can
be possible only when the employed labour works overtime or firms run their plants
beyond their efficient level of capacity.

Unemployment is an economic problem involving loss of output and income. To measure

the economic costs of unemployment, we can consider either:
1. Low output to the economy- which is measured by taking the average worker’s
productivity, then multiply it by the number of unemployed individuals
2. Loss of income to factors of production – which is measured by taking the
average annual wage and then multiply it by the number of individuals.

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 Controlling measures for unemployment

Keynes’s solution to unemployment was higher public spending, which would add to
incomes and through the multiplier process, lead to more jobs. Based on this statement, a
large increase in government spending will lead to an increase in output. Increasing
output can only come about with more individuals a resources being used. The
underlying argument in Keynesian’s economics is that demand creates supply (national
income).

The multiplier principle (k) asserts that an autonomous increase in aggregate demand
(AD) may lead to a multiple or more than proportionate increase in income (output). The
rise in AD is also called an injection, which can be investments, public spending, exports
and even autonomous consumption. For an example, if investments increase by $10M,
the national income may rise by $30M. In this case the value of k is 3.

To further illustrate multiplier principle (k process); the following assumptions must be

made. Firstly, it is a four sector economy with the households, producers, government
and foreign trade sectors. Secondly, there are unemployed resources in the country,
thirdly, the marginal propensity to tax (MPT) is at 0.2 and the marginal propensity to
import (MPM) is 0.1. This means that every time someone earns an extra additional
income of $100, he will save $20, pay taxes of $20 and buy imports of $10. He will only
spend $50 on locally produced goods. Next, the economy is in equilibrium, meaning that
output is not fluctuating and lastly, the government decides to spend $200M on public
projects. The government expenditure of $200M serves as an injection into the economy.
It will cause a multiple increase in output and employment. This process can be shown in
the table below:
Year Δ Income Δ Savings Δ Taxes Δ Imports Δ Consumption
0.2 0.2 0.1
1 $200M $40M $40M $20M $100M
2 $100M $20M $20M $10M $50M
3 $50M $10M $10M $5M $25M

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In the first year, the economy produces output worth $200M because of the government
expenditure, of this income $40M is saved by the economy, $40M is taxed away and
$20M is spent on imports. Expenditure in the second year rises by $100M and the process
repeats itself.

This multiplier process can be summarised as;

ΔY = k x ΔJ
Therefore, ΔY = 2 x $200M
ΔY = $400M
Note that the value of k is 2 because
1
K=
MPS + MPM + MPT
Which gives the value of 2.
This can graphically represented as shown below
Government spending raises
AD AD1 AD0 to AD1. The economy
AD0 grows from OYe1 to OYe2.
Thus more employment has
been created.
Unfortunately, the
Δ$200M Keynesian theory of
employment prescribes no
$400M remedies to get rid of this
O Ye1 Ye2 Income type of unemployment. The
classical economists,
however, did suggest some remedies to deal with this chronic type of unemployment.
They emphasized more saving and capital formation to deal with chronic unemployment.
They suggested increased rate of savings out of current income so as to build up the
necessary capital base for the development of new industries in the economy. This was
the classical prescription for the liquidation of chronic unemployment. The prescription

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is, no doubt, efficacious, but the underdeveloped countries found it hard to translate it
into practice, due to the chronic shortage of capital resource.

However, this Keynesian solution primarily deals only cyclical unemployment. Other
solutions are used to resolve the supply side of things, in other words to deal with
frictional, structural, seasonal and voluntary unemployment.

Structural unemployment is long term and it is caused by several factors such as high cost
of living, technology changes and skills becoming redundant. The solution is not aa easy
one. For one increasing demand as Keynesians suggest will not help because these
workers are unemployable and the jobs created will not be filled.
The solution is to identify new industries and then to retrain workers in the relevant skills.
Singapore has done this successfully, when the port had to modernize its services in
keeping with competitiveness. Therefore, thousands of workers were retrenched because
the human capital was displaced because of technology. Recently, the rise in standard of
living and the higher cost of living has eliminated some of the low value manufacturing
industries. However, Singapore has not suffered from these redundancies because new
service industries were created and more employment was formed.

Some countries that are welfare economies have voluntary unemployment. The two main
characteristics of such an economy are high personal taxes and attractive benefits to the
unemployed and those in need of financial assistance. This type of financial assistance
discourages hard work, enterprise and in some cases total employment. Those who
choose the last option are able to survive because they are entitled to attractive
government benefits and the gap between the employed income and the benefits is not
very wide. Therefore, this changes individual’s attitude towards work and some prefer to
remain unemployed. They give excuses and are insincere in their search for employment.
In the long run the government will have to reform the entire system and check the
abusers to the system and conduct its own medical test on those who claim to be invalids.
Secondly, the government should withdraw all support to those who refuse to take up a
job offer without any valid reason.

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Subsequently, the government needs to reduce the benefits level to an amount which is
lower than the minimum wage and thereby widen the gap between the employed and
those receiving financial assistance. Another method of widen the gap is by lowering
income taxes, which would cause personal disposable income to rise.

The frictional unemployment can be removed by adopting the following two measures;
the setting-up of Employment Exchanges, and the provision of re-training facilities. The
Employment Exchanges would eliminate the workers’ ignorance about new job
opportunities. The implementing of retraining facilities to the employees would enable
them to secure jobs in new industries.

The remedy for seasonal unemployment is to create subsidiary jobs for the unemployed
workers near their places of residence in the off-season.

The remedy for technological unemployment is to regulate the technological changes in a

planned and phased manner.

In cases of a surplus population, the surplus should be withdrawn from agriculture and
put to alternative jobs in the urban as well as in the rural areas. This disguised
unemployment, represents a hidden source of savings potential which can be converted
into productive capital for the development of a country’s economy.