MADRAS SCHOOL OF SOCIAL WORK

SOCIOLOGY PROJECT

“Unemployment”

By,

Poonam Ashok
 CONTENTS

Introduction
Types of unemployment
Causes and effect of unemployment
Conclusion
 Introduction

Unemployment occurs when a person is available to work and seeking work but currently
without work. The prevalence of unemployment is usually measured using the
unemployment rate, which is defined as the percentage of those in the labor force who are
unemployed.

Most economic schools of thought agree that the cause of involuntary unemployment is
that wages are above the market clearing rate. However, there are disagreements as to
why this would be the case: the economists argue that in a downturn, wages stay high
because they are naturally 'sticky', whilst others argue that minimum wages and union
activity keep them high. Keynesian economics emphasizes unemployment resulting from
insufficient effective demand for goods and services in the economy (cyclical
unemployment). Others point to structural problems, inefficiencies, inherent in labour
markets (structural unemployment).

Classical or neoclassical economics tends to reject these explanations, and focuses more
on rigidities imposed on the labor market from the outside, such as minimum wage laws,
taxes, and other regulations that may discourage the hiring of workers (classical
unemployment). Yet others see unemployment as largely due to voluntary choices by the
unemployed (frictional unemployment). Alternatively, some blame unemployment on
disruptive technologies or Globalization. There is also disagreement on how exactly to
measure unemployment.

Different countries experience different levels of unemployment; traditionally, the USA

experiences lower unemployment levels than countries in the European Union, although
there is variant there, with countries like the UK and Denmark outperforming Italy and
France and it also changes over time (e.g. the Great depression) throughout economic
cycles.
Types of unemployment

Cyclical unemployment

This refers to unemployment that rises during economic downturns and falls when the
economy improves. Keynesians argue that this type of unemployment exists due to
inadequate effective aggregate demand. It gets its name because it varies with the
business cycle, though it can also be persistent, as during the Great Depression of the
1930s.

Some consider this type of unemployment one type of frictional unemployment in which
factors causing the friction are partially caused by some cyclical variables. For example,
a surprise decrease in the money supply may shock participants in society.

In this case, the number of unemployed workers exceeds the number of job vacancies, so
that if even all open jobs were filled, some workers would remain unemployed. This kind
of unemployment coincides with unused industrial capacity (unemployed capital goods).

Keynesian economists see it as possibly being solved by government deficit spending or

by expansionary monetary policy, which aims to increase non-governmental spending by
lowering interest rates.

Classical economics rejects the conception of cyclical unemployment, seeing the

attainment of full employment of resources and potential output as the normal state of
affairs. However, it accepts the theory to some extent as full employment can never be
reached

This type of unemployment is the most serious one. This arises when demand for most
goods and services fall. To the Economist, the country is in recession.

When demand falls, less production is needed and consequently fewer workers are being
demanded, in such a case mass unemployment can be expected.
Frictional unemployment

This unemployment involves people in the midst of transiting between jobs, searching for
new ones; it is compatible with full employment. It is sometimes called search
unemployment and can be voluntary. New entrants (such as graduating students) and re-
entrants (such as former homemakers) can also suffer a spell of frictional unemployment.

Frictional unemployment exists because both jobs and workers are heterogeneous, and a
mismatch can result between the characteristics of supply and demand. Such a mismatch
can be related to skills, payment, work time, location, attitude, taste, and a multitude of
other factors. Workers as well as employers accept a certain level of imperfection, risk or
compromise, but usually not right away; they will invest some time and effort to find a
better match. This is in fact beneficial to the economy since it results in a better allocation
of resources. However, if the search takes too long and mismatches are too frequent, the
economy suffers, since some work will not get done. Therefore, governments will seek
ways to reduce unnecessary frictional unemployment.

Policies to reduce frictional unemployment include:

• educational advice;
• schooling and training facilities;
• information on available jobs and workers;
• combating prejudice (against certain workers, jobs or locations);
• incentives and regulations (e.g. when the frictionally unemployed receive
benefits);
• relocation of industries and services;
• facilities to increase availability and flexibility (e.g. daycare centers);
• aid or grants to overcome a specific obstacle (e.g. if a handicapped worker is
employed);
• reduction of the gap between gross and net wages (e.g. by taxing consumption
instead).

Frictional unemployment coincides with an equal number of vacancies. Numerically, it is

therefore maximal when the labor market is in equilibrium. When for instance demand
far exceeds supply, the frictionally unemployed will be few as they will get many job
offers.

The frictions in the labor market are sometimes illustrated graphically with a Beveridge
curve, a downward-sloping, convex curve that shows a fixed relationship between the
unemployment rate on one axis and the vacancy rate on the other. Changes in the supply
of or demand for labor cause movements along this curve. An increase (decrease) in labor
market frictions will shift the curve outwards (inwards).

Another type of frictional unemployment is seasonal unemployment, where specific

industries or occupations are characterized by seasonal work which may lead to
unemployment. Examples include workers employed during farm harvest times, or those
working winter jobs on the ski slopes or summer jobs such as life-guarding at outdoor
pools and agricultural labor.

Structural unemployment

Structural unemployment involves a mismatch between the sufficiently skilled workers

looking for jobs and the vacancies available. Even though the number of vacancies may
be equal to the number of the unemployed, the unemployed workers lack the skills
needed for the jobs — or are in the wrong part of the country or world to take the jobs
offered. It is a mismatch of skills and opportunities due to the structure of the economy
changing. That is, it is very expensive to unite the workers with jobs. One possible
example in the rich countries is the present combination of the shortage of nurses with an
excess labor supply in Information Technology. Unemployed programmers cannot easily
become nurses, because of the need for new specialized training, the willingness to
switch into the available jobs, and the legal requirements of such professions.

Structural unemployment is a result of the dynamics of the labor market and the fact that
these can never be as flexible as, e.g., financial markets. Workers are "left behind" due to
costs of training and moving (e.g., the cost of selling one's house in a depressed local
economy), plus inefficiencies in the labor markets, such as discrimination or monopoly
power.

Structural unemployment is hard to separate empirically from frictional unemployment,

except to say that it lasts longer. As with frictional unemployment, simple demand-side
stimulus will not work to easily abolish this type of unemployment.

Much technological unemployment (e.g. due to the replacement of workers by machines)

might be counted as structural unemployment. Alternatively, technological
unemployment might refer to the way in which steady increases in labor productivity
mean that fewer workers are needed to produce the same level of output every year. The
fact that aggregate demand can be raised to deal with this problem suggests that this
problem is instead one of cyclical unemployment. As indicated by Okun's Law, the
demand side must grow sufficiently quickly to absorb not only the growing labor force
but also the workers made redundant by increased labor productivity. Otherwise, we see a
jobless recovery such as those seen in the United States in both the early 1990s and the
early 2000s.

Seasonal unemployment may be seen as a kind of structural unemployment, since it is a

type of unemployment that is linked to certain kinds of jobs (construction work,
migratory farm work). The most-cited official unemployment measures erase this kind of
unemployment from the statistics using "seasonal adjustment" techniques.
Seasonal unemployment

In this case, like that of cyclical unemployment, the number of job-seekers exceeds the
number of vacancies. However, the problem here is not aggregate demand failure. In this
situation, real wages are higher than the market-equilibrium wage.

In simple terms, institutions such as "the minimum wage" deter employers from hiring all
of the available workers, because the cost would exceed the technologically-determined
benefit of hiring them (the marginal product of labor). Some economists theorize that
this type of unemployment can be reduced by increasing the flexibility of wages (e.g.,
abolishing minimum wages or employee protection), to make the labor market more like
a financial market

Hidden unemployment

Hidden, or covered, unemployment is the unemployment of potential workers that is not

reflected in official unemployment statistics, due to the way the statistics are collected. In
many countries only those who have no work but are actively looking for work (and/or
qualifying for social security benefits) are counted as unemployed.

Those who have given up looking for work (and sometimes those who are on
Government "retraining" programmes) are not officially counted among the unemployed,
even though they are not employed. The same applies to those who have taken early
retirement to avoid being laid off, but would prefer to be working.

The statistic also does not count the "underemployed" - those with part time or seasonal
jobs who would rather have full time jobs. Because of hidden unemployment, official
statistics often underestimate unemployment rates.

Hardcore unemployment

Hard core unemployment refers to those individuals who might be considered

unemployable because of some personal characteristic, such as mental or physical
disability, anti social behavior or drug abuse.
 Causes and Effects of Unemployment
In the set up of a modern market economy, there are many factors, which contribute to
unemployment. Causes of unemployment are varied and it may be due to the following
factors:

• Rapid changes in technology

• Recessions
• Inflation
• Disability
• Undulating business cycles
• Changes in tastes as well as alterations in the climatic conditions. This may in
turn lead to decline in demand for certain services as well as products.
• Attitude towards employers
• Willingness to work
• Perception of employees
• Employee values
• Discriminating factors in the place of work (may include discrimination on the
basis of age, class, ethnicity, color and race).
• Ability to look for employment

Unemployment affects the development of the society in many ways. Individuals are
effected the most when there is high unemployment:

(1) the employed feel less secure;

(2) workers are less willing to leave unsatisfactory jobs;

(3) divisions in society increase;

(4) the prospect of equality of opportunity decreases.

(5) Some local areas can develop a culture of despair.

Various attempts have been made to link unemployment to many social ills such as ill-
health, premature death, attempted and actual suicide, marriage breakdown, child
battering, racial conflicts and football hooliganism.
 CONCLUSION
Unemployment always hits individuals the hardest. The jobless lose their self respect,
purpose, sense of achievement and, of course, income. It is not just the individuals
themselves that are hit, their families also suffer with them. Homes and cars repossessed,
arguments at home, perhaps even excess borrowing prolonging the suffering even when
another job is found.

To compound the problems, the longer a person is unemployed the harder it becomes to
find a job. The long term unemployed can really suffer as employers are unwilling to take
a chance on someone that no one else was willing to hire.

There is also an important impact on society and the economy as a whole.

The main impact unemployment has on society and the economy is the productive power
that it withholds - i.e. any person who is unemployed could be doing something
productive and thus contributing to the economy as a whole.

Unemployment also has a direct cost to the government in the form of any unemployment
benefits paid to the unemployed and in lost tax earnings. This is a double whammy
(additional cost and lost income) that can have serious consequences on the rest of the
economy as the government is forced to fund unemployment benefits either from
increased taxes or borrowing. The increased taxes suppress consumption, which in turn
may lead to increased unemployment (people spending less, less revenues for companies,
companies forced to lay people off). Increased borrowing by the government can have
similar effects as the government takes more money than normally out of the financial
markets, thus having an upwards pressure on interest rates, which results in higher cost
for companies, less profits and more layoffs.

So unemployment is basically always bad for the economy, however, it can never be
zero. This is because at any one point in time there will be individuals who are truly
between jobs, even for as little as a week or a month. The 'normal' unemployment figure
will vary from country to country, but is generally considered to be around 2-3% (of the
workforce).

The real evil is when unemployment reaches double figures (10% or more) and includes a
large number of people who are unable to find a job for a long time. This can become
structural unemployment - a large number of people who become more or less
unemployable. We all suffer from unemployment - whether employed or not.