EMPLOYMENT AND UNEMPLOYMENT

Employment- Refers to the engagement in any type of productive income generating activity. It
includes public and private wage employment and personal employment such as farming. It can
also be defined as the engagement of a person to some productive work or to some legal income
generating activity.

Full employment refers to a situation where all people who are willing and able to work are employed.
This concept does not however exist in real life world.

Unemployment-This refers to a situation where people are willing and capable to work at he
existing wage rates but cannot secure jobs. Unemployment cannot simply be defined as the
number of people without jobs. Such a wide definition would include children who are too young
to work, pensioners who are retired and others who choose not to take up paid unemployment.
Such groups of people should be omitted from the unemployment figures. Short-term
unemployment (where people are unemployed for a period of less than four weeks) should be
excluded from the official figures of in order that the statistics be useful to policy makers.
Though short-term unemployment is represents a cost to the Exchequer and a loss of output, it is
particularly distressing to the people concerned and for the economy, it may be a reflection of
greater mobility of labour between jobs hence more efficient use of labour.
Therefore, Unemployment refers to the number of people in a country who are willing and able
to work but are unable to find jobs.

The number of unemployed consists of those who are of working age but who are without work and are
available for work at current wage rates. If the figure is to be expressed as a percentage then it is a
percentage of the total labour force. The labour force is defined as those in employment plus those
unemployed
Unemployment rate =Number of people unemployed x 100%
Work-force
Example if 22.5 million people were employed the 2.5 million were unemployed then the unemployment
rate would be: 22.5 +2.5=25

Types of unemployment
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1. Disguised /Hidden unemployment:
This occurs when the work available to a given work force is insufficient to keep it fully employed so that
some members of the work force could be withdrawn without loss of output. This is a type of
unemployment whereby the services and skills of people who are in paid payment are
underutilized. This maybe because they are not working fulltime or are not doing jobs which
make full use of their abilities.
2. General unemployment:
This is that unemployment which is wide spread throughout the economy and not confined to particular
regions or category of labour.
3. Voluntary unemployment
Is a situation in which workers refuse to accept a cut in the real wages, so that the prevailing real
wage is above the market clearing level. This is a type of unemployment where a person is able to
work, work is available but he is unwilling to work at the given wage rate. Some degree of
unemployment will always exist because some people do not want to find work due to idleness or their
chosen way of life.
4. Frictional unemployment (Search unemployment)
This is a type of unemployment which occurs because workers are searching for jobs which suit
them best. The workers are unemployed for a period of time while they are looking for a new job.
Some of these workers may have quit their jobs voluntarily or may have been made redundant from
their previous jobs while others may have been sacked for one reason or another while others
may have voluntarily quit their jobs. The economic theory of job- search sees the employed
person as continuing the job-search (that is, remaining unemployed) so long as wage offers are
less than a certain reservation wage. A reservation wage is the minimum wage that the
individual is prepared to accept for a job. Normally the lower the search costs, the higher the
reservation wage and therefore the longer the spell of unemployment.
The information is imperfect thus employers may not be fully informed about what jobs are available
and what they entail. Both employers and workers therefore have to search, employers searching for the
right labour and workers searching for the right jobs. Searching for jobs takes time.
5. Seasonal unemployment
This is a type of unemployment that occurs when some workers loose their jobs because of a
seasonal fall in the demand for their services. In the winter months, for example, many building

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workers find themselves without work because of bad weather and in the tourism industry, many
workers are laid off during off-peak season.
Regular seasonal unemployment is caused by annual variations of seasons which affect seasonal
activities in sectors such as agriculture, tourism etc. in this sector during the peak seasons the demand for
labour would be very high and unemployment level would drop during the off peak or low seasons. There
would be a drop in labour demand and the unemployment rate would rise.
6. Structural unemployment
This is a type of unemployment that is caused by changes in the structure of demand for goods
and services and by technological changes such as automation, both of which affect the
composition of the demand for labour. For example, consider a region within a country that
specializes in shipbuilding. Suppose the world demand for ships decreases and shifts for more
efficient producers overseas. The shipbuilders therefore become unemployed. Structural
unemployment persists mostly because of the geographical and occupational immobility of
labour and also lack of information on opportunities available elsewhere. Similarly,
technological progress (advances in automation) has led to unemployment by reducing the
labour-capital ratios.
This occurs where the structure of the economy changes, unemployment in some industries may
expand while in others it may contract. There are two main reasons for this:
 A change in the pattern of demand: Some industries experience declining demand and this may
be due to changes in consumers’ tastes. In addition certain goods may go out of fashion or it may be due
to from competition from other industries.
 A change in the method of production/ technological unemployment
New techniques of production often allow the same level of output to be produced with fewer workers.
This is known as labour saving technical process unless output expands sufficiently to absorb surplus
labour, people would be redundant. This creates technological unemployment.
7. Demand -deficient unemployment
This type of unemployment is associated with the business cycle. During the period of recovery and boom
the demand for output and labour is high and unemployment is low during recession and depression
years, the demand for output and labour fall and unemployment rises.
8. Residual unemployment
This is a label given to that group of people who are unemployed due to mental or physical
disabilities which may limit the number of job opportunities available for them and make it very
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difficult for them to find work. Some firms attempt to employ a certain number of workers from this
group but not opportunities exist.
9. Classical unemployment (Excessive real wage unemployment)

SL
W Unemployment SL=Supply of labour
W1 DL= Demand for labour

W*

DL
D D
N N* N Number of workers
Classical unemployment is where trade unions use their monopoly power to drive wages above the
market clearing level; it could also be caused by government introducing minimum wage legislation. For
example, the introduction of price floors creates a situation where the supply of labour exceeds demand
for labour thus creating unemployment.
10. Involuntary unemployment
A situation which a worker is unable to find a job at the going wage rate/prevailing wage rate.
11. Keynesian unemployment:
Unemployment due to lack of effective demand for goods and services which
people could have been employed to produce. Keynesian unemployment can be
reduced by the use of monetary or fiscal policy to increase effective demand.
The costs of Unemployment
Unemployment is harmful because it imposes costs on the society. The cost of unemployment to
a nation can be categorized under three headings; the social cost the cost to the Exchequer and
the economic cost.
a) The social cost of unemployment
The social cost of unemployment is incalculable. For an individual, the demoralizing effect
depends upon whether the period of unemployment is short term or long term. Short-term
unemployment may have no serious effect on an individual; long term unemployment can be
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devastating. The aged may believe that they are unable to find jobs because they are too old. Job
seekers become more and more pessimistic about their chances of finding work, so their
innovation is reduced and their chances of succeeding in finding jobs become more remote. The
long term unemployed also become bored, idle, loose their friends and suffer from depression.
There is also increased family tensions, leading in some cases to violence, divorce and family
break-ups. Unemployment can also lead to social evils such as vandalism, crime and prostitution.
b) The cost to the Exchequer
The cost of both voluntary and involuntary unemployment to Exchequer is more readily
quantifiable than the social. It consists of the following three components
i) Benefits which have to be paid to the unemployed: these include unemployment benefit,
housing benefit, government contributions to redundancy payments, old age pensions.
ii) The loss of tax revenues which would otherwise have been received: this consists mostly of
income tax, but also includes lost indirect taxes because of the reduction in spending.
iii)The loss of national insurance contributions which would otherwise have been received.
c) The economic cost
So far as the economic cost is concerned, unemployment represents a waste of resources and
means that the economy is producing a lower rate of output than it could do if there were full
employment. The loss of the output of goods and services as a result of unemployment is called
the output gap. This means that the society experiences a lower standard of living than would
have been possible without rising levels of unemployment.
CAUSES OF UNEMPLOYMENT
Causes of unemployment can be discussed under three headings:-
1. Natural unemployment
The level of natural unemployment refers to the level of unemployment i.e number of persons
who are unemployed even when the labour market is in the long run equilibrium i.e when total
demand for labour is equal to the supply of labour at the prevailing level of real wage rates. In
this situation, people may be unemployed because:-
i) They are between jobs and are taking time to search for the most appropriate job with the
highest wage (search unemployment)

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ii) The industry in which they have traditionally worked has experienced a structural decline or
has been influenced by technological advances (structural unemployment)
iii) There has been a seasonal decline in the demand for their labour services (seasonal
unemployment)
iv) They are regarded as being ‘unemployable’ for one reason or another (residual
unemployment)
The sum of frictional (search), structural, seasonal and residual unemployment equals the
total amount of natural rate of unemployment in the economy.
Natural unemployment:

W AJ W=Wage
LF N=Number of workers

W* E F

LD
N* Number of workers
LD = labour demand,
LF= the size of labour force
AJ = the number of workers willing to accept job offer at any wage rate
AJ lies to the left of LF because some labour force members are between jobs and because others are
waiting for better job offers when the labour market clears at E, EF is the natural rate of unemployment
that is people in the labour force that are not prepared to take job offers at the equilibrium unemployment
this include: Frictional unemployment (Search unemployment), Structural Disguised
unemployment, Seasonal unemployment
2. Demand -deficient unemployment
This type of unemployment is associated with the business cycle. During the period of recovery and boom
the demand for output and labour is high and unemployment is low during recession and depression
years, the demand for output and labour fall and unemployment rises.
3. Lack of capital

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The shortage of capital is the hindrance in the establishment of more industries and due to this reason,
more employment opportunities are not created.
4. Lack of education and training facilities
Sometimes, employment opportunities are available for skilled and trained persons. The lack of
education and training facilities may be another reason for employment.
5. Rapid population growth
The rapid increase in population compared to the overall growth of the economy and the available
resources leads to unemployment. In many countries, the employment opportunities are not increasing at
the rate of increase in labour supply.
6. Use of inappropriate technology in developing countries.
Most developing countries use capital intensive techniques of production i.e techniques that make use of
more machines and less labour which displaces human labour and reduces chances of people getting jobs.
7. Seasonality of jobs.
This is especially important in developing countries where the agricultural sector is dominant. Changes in
weather leads to seasonality in agricultural production which causes seasonal unemployment. Seasonality
of jobs also affects the tourism sector whereby unemployment tends to be high during off-peak seasons
8. Rural to urban migration
The massive movement of the young and energetic people from the rural to urban areas leads to urban
unempoyment owing to the limited job creation capacity in the urban areas
9. Inappropriate education system
The education systems in most developing countries were adopted from developed countries. These
education systems are geared towards white collar jobs and this does not conform to realities in
developing countries most of which have high populations and low rates of white collar job creation in
the formal sector.
10. Lack of product market
11. Job selection
12. Inadequate co-operant factors of production
Alternative government policy measures to solve unemployment
Policy measures to solve unemployment can be divided into two:-
a) Demand-side policies(demand-management policies)
These policies include Fiscal and monetary policies which are intended to increase aggregate
demand and, therefore, equilibrium national income. The principal policy instruments are:-
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i) Government expenditure
ii) Taxation
iii) Stock of money in circulation.
If unemployment is caused by a general deficiency of aggregate demand, then it may appropriate
to increase aggregate demand (for example, by increasing government expenditure, cutting
taxation or expanding money supply to shift the AD curve to the right and so create additional
income and employment. Whether fiscal or monetary policy would be more effective for this
purpose depends on the interest elasticity of investments and the interest elasticity of the demand
for money. However, fiscal and monetary policies can only have a lasting effect on employment
if the long run AS curve is not vertical.
b) Supply side policies
Supply side policies are intended to increase the economy’s potential rate of output by increasing
the supply of factor inputs, such as labour inputs and capital inputs, and by increasing
productivity. Labour market policies designed to reduce natural unemployment include:-
i) Improvements in information dissemination- Lack of information is likely to cause natural
unemployment in two ways:- First unemployed workers may take a long time to find suitable
jobs if they are not made aware of all the available opportunities e.g most of the job searches
have been computerized thus reducing job search periods. Secondly, in many instances,
employers may fail to provide sufficient information about the nature of the jobs they offer and
the working conditions. In this case, workers who accept jobs soon drop them again when they
turn out unexpectedly to be unsuitable. The government can improve the quality of information
by financing and upgrading the services provided by employment offices and job centers and by
persuading employees to provide detailed and truthful job descriptions for all the applicants.
ii) Provision of retraining schemes-To reduce occupational immobility of labour, the government
may finance retraining schemes for those unemployed workers who wish to acquire new skills
which have the greatest demand in the market.
iii) Assistance with family relocation-To reduce geographical immobility of labour, the
government should not only provide information concerning recreational facilities, schools and
the quality of life in other parts of the country, but also provide financial help to cover costs of
relocation.

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iv) Special employment assistance for youths- This can be done by strengthening of vocational
training, the expansion of work related studies(such as business practice, catering and
information technology and giving subsidies to firms engaged in promoting youth employment.
v) Subsidies to firms which reduce working hours rather than the size of the work-force. This
may help to reduce the structural unemployment caused by the displacement of workers by new
technology. Adoption of new technology should not be discouraged, but firms and trade unions
should be encouraged to work towards a reduction in average weekly working hours rather than
a reduction in the size of the work-force.
Other measures to solve unemployment include
1. Use of appropriate technology
The Government should adopt pricing policies that encourage the use of appropriate technology.
This can guide investments towards labour intensive technologies in different sectors which are
appropriate to labour surplus economies of many less developed contries. Labour-intensive
techniques must be adopted in such countries in order to absorb more people.
2. Decentralization of Industries and markets
Industries must be established in different regions of a country. The establishment of industries
in various parts of the country will provide employment opportunities to greater number of
people. It will also induce people not to migrate to other areas of the country.
3. Diversification of economic activities
The diversification of agricultural and industrial production can be also agricultural and
industrial goods are produced then there will demand for more workers. As a result, creation of
alternative employment opportunities will increase. This reduces seasonal unemployment in
areas that relies on tourism and agricultural activities.
4. Greater use of natural resources
Greater use of natural resources can also increase the employment opportunities. In most of the
countries including Kenya, there are uncultivated lands. If these lands are brought under
cultivation then more and more people can be employed.
5. Use of fiscal and monetary Policies
The Government can use fiscal and monetary policies to create more employment opportunities.
Central bank can encourage advancing more loans to those projects which can provide

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employment to greater number of people. Similarly, the expansion of public work programmes
can solve the problem of unemployment to a greater extent.
6. Education and training facilities
To meet great demand for skilled and educated people, education and training facilities should be
provided to the individuals to enable them to increase their knowledge and technical skill.
7. Control of population growth
The rapid increase in population is the main cause of unemployment in less-developed countries.
The Government should take some steps such as encouraging family planning and educating the
population on the need for small families to control the population growth in an effort to solve
the unemployment problem in the long run.
8. Encouraging employment creation in the private sector
Government policy can support private sector development by creating an enabling environment
for the private sector to develop. This includes providing incentives such as micro-financing to
offer capital to small and medium term enterprises, developing infrastructure, provision of cheap
land, lowering the tax rates on profits, offering subsidies e.t.c
9. Encouraging foreign direct investment.
This can be achieved by providing a conducive political and economic environment to encourage
the inflow of foreign capital.
10. Encouraging the use of domestic goods
This tends to create employment domestically. Considerable use of foreign inputs and goods
should be reduced since such usage generates employment abroad and not domestically.
11. Intensive rural development by the government.
 Providing appropriate education and training that provides relevant skills & knowledge
 Delocalization of firms to reduce urban unemployment which is brought about by rural-urban
migration
 Ensure there is political stability to boost foreign investors confidence
 Protect local industries from unfair foreign competition.

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