CHAPTER 10

MACROECONOMIC PROBLEMS
Unemployment
MACROECONOMIC PROBLEMS
⚫ Definition: number of people who can work but are not
working, or not having suitable jobs and looking for other
jobs.
⚫ Unemployment rate is the number of unemployed people
expressed as a percentage of the labor force.
⚫ Measurement: It can be calculated using the following
formula:
⚫ Unemployment rate = No of unemployed x 100
Labor Force
POPULATION IN 2015: ABOUT 31 MILLIONS
POPULATION GROWTH RATE: 1.3%

2010 2011 2012 2013 2014

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Types and Causes of Unemployment
1. Residual Unemployment
⚫ people who are virtually unemployable on a permanent
basis. These are people who find it difficult or impossible
to cope with the demands of modern production methods
and the disciplines of organized work.
⚫ OR
⚫ Unemployment that remains in period of full employment
as a result of those mentally, physically or emotionally
unfit to work.
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2. Frictional Unemployment
⚫ short-term unemployment and results from normal
turnovers in the economy.
⚫ three main groups of people who belong to this type of
unemployment.
⚫ i) People who look for a job for the first time, such as
fresh graduates and school-leavers.
⚫ (ii) People who are temporarily between jobs
(job-hoppers).
⚫ (iii) Re-entrants
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3. Structural unemployment
⚫ unemployment due to changes in the structure of the economy
and lack of labor mobility.
⚫ This is when the skills of an employee are no longer needed.
⚫ Example is a mismatch between the skills the workers have and
the skills required by the employers.

4. Cyclical Unemployment
⚫ Unemployment that is directly related to swings in the business
cycle.
⚫ caused by recession or economic slowdown due to deficiency of
aggregate demand.
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5. Hidden/Disguised Unemployment
⚫ refers to people who are actually employed, but are not
productive.
⚫ Hidden unemployment is quite common in traditional
agriculture, where several family members work on a
small plot of land.
6. Seasonal Unemployment
⚫ unemployment that occurs during certain time and season
of the year. It usually affects workers in agriculture,
tourism-related occupations, education and some other
industries.
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7. Technological Unemployment
⚫ Technological Unemployment is caused when the
individuals lose their jobs due to the technological
advancement.
⚫ workers are replaced by machines. Simply, the
substitution of manpower with technology results in
technological unemployment.
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Natural Rate of Unemployment and Full Employment

⚫ Natural rate of unemployment occurs when the typical

unemployment rate is about 4 percent or when all the
unemployment is frictional in nature.
⚫ Full employment occurs when the unemployment is equal
to the natural rate.
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Effects of Unemployment
1. Individual effects
⚫ Unemployed people usually have low self-esteem. They
feel useless and that they are a burden to their family and
society. This could result in increasing rates of drug
addiction, suicide, mental problems and depression.
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2. Social effects
⚫ crime rate usually increases and more cases of robbery,
burglary, homicide, domestic violence, and family split-ups.
⚫ poverty rate would also increase.
3. Economic Effects
⚫ output produced is below the potential or maximum output
level, leading to a loss of output and also a loss of income,
which also means a lower economic growth rate.
⚫ As a result, there is a need for a higher government spending
to reduce unemployment rates and to help the unemployed.
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Measures to Reduce Unemployment
1. Expansionary Fiscal Policy:
⚫ By implementing a deficit budget program. Increase in
government spending and reducing tax will increase the
income and disposable income.
⚫ Increase in income will lead to an increase in aggregate
demand. Thus production and aggregate supply will also
increase leading to an increase in demand for labor. So
unemployment is reduced.
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2. Expansionary Monetary Policy
⚫ This involves an increase the money supply and
availability of loans so that the level of spending and
aggregate demand will increase.
⚫ An increase in aggregate demand will stimulate
production and aggregate supply. Thus more workers
are employed.
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An increase in money can be achieved by:
⚫ (i) increasing the amount of new money issued by Bank
Negara Malaysia.
⚫ (ii) making loans less expensive and easy to obtain, by:
- lowering interest rates on loans,
- lowering the cash, legal and liquidity ratios,
- buying of government securities through the open market
operation and
- relaxing the hire purchase regulations.
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3. Direct measures
To reduce unemployment by:
⚫ (i) Disseminate information on job vacancies to the
unemployed
⚫ (ii) Provide more training or retraining to increase the
skills of workers
⚫ (iii) Encourage people to be self-employed. Example,
encourage graduates to become entrepreneurs.