UNEMPLOYMENT.

Introduction
Unemployment reflects individuals who are not working but are searching for work. Like GDP,
unemployment OR employment also serves as an indicator of economic well- being. Definition
of concepts
Working age
In Uganda this includes all persons between the age of 14 and 64 years (ILO; 15 - 64 years).
Employed
This includes all working age paid employees, people who worked in their own business,
both full time and part- time, and those who were temporarily absent from work because
of illness or vacation.
Unemployed
This refers to the number of people in the country who are willing and able to work but cannot
find jobs within the reference period (1 week). It also includes those who were temporarily laid
off and waiting to be recalled.
Labor force
This refers to the current supply of labor for the production of goods and services in exchange for
pay or profit. It includes both the employed and unemployed but actively looking for jobs. In
Uganda’s context, it includes the currently active population aged 14 to 64 years who were
employed or unemployed during the last 7 days.
Labor Force = Number of Employed + Number of Unemployed

Those not included in labor force: full-time students, homemakers, retired people.

The unemployment rate

Unemployment is measured by the unemployment rate which can be represented by the symbol
U, and it is expressed as a percentage of the labor force multiplied by 100%.
The overall Unemployment Rate (UR) was 9.4 percent in 2012/13 with the females experiencing
higher unemployment rate (11%) than males (8%) (UBOS Statistical Abstract, 2016)

The Labor Force participation Rate (LFPR) measures the proportion of the country’s working
age population that engages actively in economic activities. It is measured as the ratio of all
economically active persons (labor force) aged 14-64 years to the total number of persons aged
14-64 years.

Example:
Working age 16,400,000
Unemployed 814,000
Employed 12,959,000
Not in labor force 2,624,000

The state of unemployment in Uganda

According to the UNHS 2012/13, the labor Force Participation Rate (LFPR) was 52.8. The
overall Unemployment Rate (UR) was 9.4 percent in 2012/13 with the females experiencing
higher unemployment rates (11%) than males (8%).

Relationship between unemployment and GDP

This relationship is explained by Okun’s law of unemployment which was first published by
Okun in the early 1960s. The law states that “for every 2 percent increase in actual GDP
above potential, unemployment falls by 1 percent below the natural rate”. This implies that
to achieve a 1 percentage point decline in the unemployment rate in the course of a year, real
GDP must grow approximately 2 percentage points faster than the rate of growth of potential
GDP over that period.

Output depends on the amount of labor used in the production process, so there is a positive
relationship between output and employment. Total employment equals the labor force minus
the unemployed, so there is a negative relationship between output and unemployment (of course
conditional on the labor force).

Types of unemployment
1. Frictional unemployment
This results from the normal labor turnover. The sources of these are:
- Young people who enter the labor force and search for jobs
- Those who leave their jobs because they are dissatisfied with the job or working
conditions, or because they were sacked.
- This can also be as a result of imperfect information in the labor market because job
seekers do not know of the existing jobs.

2. Structural unemployment.
This is unemployment caused by structural adjustments in an economy. When the pattern of
the demand for goods changes; the pattern of the demand for labor force changes too. So
until labor adjusts fully, structural unemployment develops.
Such unemployment can be defined as unemployment caused by a mismatch between the
structure of the labor force (in terms of skills, occupations, industries, or geographical
locations) and the structure of the demand for labor.
It can also be as a result of technological transformation in the economy- new products, new
industries, new opportunities for some and reduced opportunities for others.

3. Cyclical unemployment/ Keynesian unemployment or demanddeficient

unemployment.
This refers to that type of unemployment that occurs whenever total demand is insufficient to
purchase all of the economy’s potential output leading to a recessionary gap in which actual
output is less than potential output.
Cyclical unemployment = No. of persons currently employed – No. of persons who would be
employed at potential output. It is the unemployment that deviates from the Natural Rate. The
natural rate of unemployment is that rate that an economy experiences even during normal times
(in the absence of a recession). It is the economy’s long-run rate of unemployment (when the
labor market is in equilibrium) that exists when national income is at its potential level and
which if maintained will result in a stable rate of inflation. It is a combination of frictional and
structural unemployment that persists in an efficient, expanding economy when labor and
resource markets are in equilibrium.

Note: when cyclical unemployment is zero, all existing unemployment is either frictional or
structural, and the rate of unemployment is the non-accelerating inflation rate of unemployment
(NAIRU). This is the rate of unemployment below which the inflation rate rises.

4. Disguised unemployment.
This is unemployment where individuals are working but are not fully employed. In such a
situation, more people are engaged in work than required which makes their marginal
productivity essentially insignificant or zero. E.g.
- All family members working in a small family restaurant
- A large number of workers working on a small piece of land etc.

5. Seasonal unemployment
This is periodic unemployment created by variations in seasons for particular industries.

6. Classical or real-wage unemployment

This occurs when the real wage for a job are set above the market-clearing level leading to a
surplus in the labor market. This can be as a result of government intervention to set a
minimum wage, or labor unions.

7. Open unemployment (apart from disguised, all the other types are open
unemployment).
 Open Unemployment Open unemployment is a condition in which a large section of people
have no work to do. They are able and willing to work but there are no jobs.

8. Hardcore unemployment
It refers to that type of unemployment among people who have been without work for a long
time and are the least likely to find jobs. It is where individuals have been unable to find
employment for an extended period of time because they face high barriers.

9. Casual Unemployment:
This occurs when a person is employed on a day-to-day basis but due to short-term contracts,
shortage of raw materials, fall in demand, change of ownership etc. they become
unemployed.

10. Chronic Unemployment:

If unemployment continues to be a long term feature of a country, it is called chronic
unemployment. Rapid growth of population and inadequate level of economic development on
account of vicious circle of poverty are the main causes for chronic unemployment.

11. Hidden unemployment

This is the amount of unemployment which is not reflected in the official statistics because of
the way they are compiled. It is constituted by: discouraged workers, the underemployed, and
those whose skills are underutilized.

12. Residual unemployment.

This describes the unemployment that arises when people are unwilling to work or unable to
work owing to a disability. Such unemployment does not usually features in the country’s
statistics.

13. Underemployment
This is where workers employed contribute less than their full capacity e.g. underutilizing skills
because less qualification is required or employed on parttime basis.
FULL EMPLOYMENT
Full employment or equilibrium employment

This refers to efficient use of labor and other resources in the economy. Full employment does
not mean zero unemployment or absence of unemployment. It is important to note that zero
unemployment is undesirable as it could be a sign of a stagnant economy. Some unemployment
is natural, expected and healthy for the economy. People are trying to make their lives better
resulting into natural labor turnover in the labor market.
In other words, at full employment other forms of unemployment such as frictional and structural
unemployment are present due to imperfect information and structural changes.

VOLUNTARY AND INVOLUNTARY UNEMPLOYMENT

All the types of unemployment discussed above can be categorized into voluntary and
involuntary unemployment. Voluntary unemployment
This is unemployment which occurs when some people of the labor force simply choose not to
work at the market wage rate. These might prefer leisure or other activities to work at the
prevailing wage rate. These may be low productivity workers who prefer leisure to low paid
work. Illustration:

Involuntary unemployment
This is where qualified workers who are willing and able to work at the prevailing wage rate are
unable to get jobs.
Illustration

General causes of unemployment

1. Insufficient demand for goods and services in the economy – cyclical (according
to Keynesian economists)
2. Structural problems such as technological transformation, restructuring and
downsizing etc
3. Slow growth in the agricultural sector.
 4. Underdevelopment of the economy.
5. Immobility of labor.
6. High wage gap between the rural and urban
7. Defective system of education.
8. Improper manpower planning.
9. Inappropriate technology.
10. Slow growth of the industrial sector
11. High population growth than the growth in employment opportunities
12. Dependence on few exports and exportation of raw materials

Costs of unemployment (to be discussed in class)

1. Reduces output and aggregate income
2. Increases inequality between the employed and the unemployed
3. Brain drain
4. Rural urban migration
5. It kills innovation and creativity of individuals
6. Psychological problems – depression. Boredom, loss of respect, despair. 7. etc

Measures to reduce unemployment

1. Increase in information flow
2. Providing financial support
3. Export promotion-
4. Diversification
5. Value addition
6. Market creation
7. Rural development