This action might not be possible to undo. Are you sure you want to continue?
LECTURE 21 UNEMPLOYMENT
18 February 2011
1. 2. 3. 4. 5. 6. 7. 8. 9. Introduction ± Discussion of Definitions Types of Unemployment Unemployment and poverty Statistics on the Labour Force Why unemployment is a serious problem? Factors producing growing unemployment Government policies to influence unemployment Solutions to unemployment Unemployment and inflation
18 February 2011 PETER PARIAG 2
Introduction ± Discussion of Definitions
Labour Force µOf the population 15 years old and over covered in the survey period, all persons engaged in, or willing and able to be engaged in the production of economic goods and services are classified as being in the labour force¶. µThese include employees, as well as employers and the self employed¶. The labour force is therefore comprised of all persons who either had jobs (the employed), or, if they did not have jobs, were willing and able to work ( the unemployed).
18 February 2011 PETER PARIAG 3
Employed and the Unemployed
EMPLOYED (have jobs) 1. Employees 2. Employers 3. Self- employed Persons with jobs All persons who worked for pay for any length of time during the survey week. Persons who are temporarily absent from work because of vacation, illness, industrial dispute or some similar cause. Persons who worked without pay on a family farm or business or as a learner.
18 February 2011
UNEMPLOYED ( did not have jobs) 3 criteria must be satisfied: 1.Without work 2.Currently available for work 3.Actively seeking work. Without work ± were not in paid employment during the survey week Currently available ± were available
for paid or self employment during the survey week.
Actively seeking work ± had taken steps during a specified period to seek paid employment or self employment.
LbuFre hrc rss aor oc Caatei ti c LABOUR FORCE CHARACTERISTICS Pplao1yaso advr outi n5er ldnoe ( ok g gPplao) WinAe outi n r LbuFre aor o e c ( cnmayAtiv Pplao) Eooicl c e outi n NinaorFre o Lbu o t c ( cnmly ativpplao Eooic Inc eouti n a Epyd moe l Uepyd nmoe l Sdn tuets Hskee o eepr u s Rr d ee ti Dale isbd Dnt ido WtWk a o n r Oe thr Sees ekr OeUmoe thr n pyd el PETER PARIAG 5 18 February 2011 .
Discouraged workers. structural. Economists used to classify unemployment by source: frictional. leave the labour force. More importantly. 18 February 2011 PETER PARIAG 6 . demand-deficient or classical. it includes people spending short spells in unemployment as they hop between jobs in a dynamic society. pessimistic about finding a job.The Labour Market The participation rate is the fraction of the population of working age who are in the labour force. The unemployment rate is the fraction of the labour force without a job. It includes people whose handicaps make them hard to employ.
Need to speed up information. Friction in the labour market. ± ± Geographical immobility Occupational immobility PETER PARIAG 7 18 February 2011 . Structural unemployment ± arises from the mismatch of skills and job opportunities as the pattern of supply and demand changes. 3. Frictional Unemployment ± is the irreducible minimum unemployment in a dynamic society. Normal or Transitional Unemployment ± the time taken to match employees with employer. 2. It reflects the time taken to acquire human capital.Types of Unemployment 1. Persons are between jobs. shopping around ± voluntary unemployment. Difficulty of matching shortage of a given type of labour.
Types of Unemployment 4. Technological Unemployment ± A form of structural unemployment which occurs when new technologies are introduced: ± Old skills are no longer required ± There is likely to be a labour saving aspect. with machines doing the job that people use to do. 18 February 2011 PETER PARIAG 8 . Seasonal Unemployment 5.
the demand for output and jobs is high and unemployment low. recession.Types of Unemployment 6. decline. recovery then boom again. Cyclical Unemployment Domestic and foreign trade go through cycles of boom. the demand for output and jobs falls. 2. During recovery and boom. 1. and unemployment rises to a high level. During decline and recession. 18 February 2011 PETER PARIAG 9 .
deficient Unemployment. 18 February 2011 PETER PARIAG 10 .Types of Unemployment 7.This refers to Keynesian unemployment. 8. Demand. Aggregate demand is deficient because it is lower than full employment aggregate demand. Classical Unemployment ± describes the unemployment created when the wage is deliberately maintained above the level at which the labour supply and labour demand schedules intersect. It maybe caused either by the exercise of trade union power or by minimum wage legislation which enforces a wage in excess of the equilibrium wage rate. when aggregate demand falls and wages and prices have not yet adjusted to restore full employment.
are prepared to accept wages currently being obtained by employed persons. Transitional Frictional Seasonal Structural 18 February 2011 11 .Types of Unemployment 9. Keynes concerned with involuntary unemployment. Involuntary Unemployment ± people wish to work. Voluntary Unemployment Short Term Transitional Frictional Seasonal PETER PARIAG Long Term Structural Persistent general unemployment. are willing to be mobile and are properly qualified but nevertheless cannot find jobs. This situation exists because there is insufficient aggregate demand or planned expenditure in the economy.
Equilibrium unemployment (also called the natural rate of unemployment) is the unemployment rate when the labour market is in equilibrium. she wishes to be in the labour force but does not yet wish to accept a job.Equilibrium Unemployment. A worker is voluntarily unemployed if. at a given level of wages. An involuntarily unemployed worker would accept a job offer at the going wage rate. 18 February 2011 PETER PARIAG 12 .
Equilibrium Unemployment Real wages A W1 W E B F AJ LF C LD N N2 18 February 2011 N1 PETER PARIAG Number of workers 13 .
and the numbers of workers willing to accept job offers at any real wage. labour demand. the size of the labour force. EF is the natural rate of unemployment. and AJ show. respectively. 18 February 2011 PETER PARIAG 14 . When the labour market clears at E. This unemployment is entirely voluntary. the people in the labour force not prepared to take job offers at the equilibrium wage W. LF.Equilibrium Unemployment The schedules LD. AJ lies to the left of LF both because some labour force members are between jobs and because optimists are hanging on for an even better job offer.
in the long run. 18 February 2011 PETER PARIAG 15 . and the natural rate of unemployment AC now shows the amount of unemployment chosen by the labour force collectively by enforcing the wage W. In this instance. above the equilibrium wage W.Classical Unemployment If union power succeeds in maintaining the wage W1. classical unemployment is included in equilibrium unemployment. the labour market will be at A.
2. unwarranted aspirations and unwillingness to accept available employment. not necessarily idle. they could be productively engaged on family farm or business. Much of the problem of unemployment is really the problem of the unemployed themselves ± their attitudes. 18 February 2011 PETER PARIAG 16 . Most of the young are not interested in manual work.Unemployment and Poverty The belief that unemployment necessarily means poverty is false. Unemployment in the sense of the lack of paid employment. 1. Unemployed youths are able to get along being members of households. Poverty affects both the employed and the unemployed. 3. Unemployment may not mean poverty ± the majority of young dependents.
4. but can have serious costs for the society as a whole. Unemployment does not negatively affect just the individual or his family. This need is an integral part of humanity. It may mean poverty for those affected by it. 3. 2. Lies in the importance of creative productive work for human beings. Because of its negative psychological impact on the individual. 18 February 2011 PETER PARIAG 17 .WHY UNEMPLOYMENT IS A SERIOUS PROBLEM 1. as human beings.
Unemployment can lead to a rise in crime and other anti-social manifestations. 6. 18 February 2011 PETER PARIAG 18 . 7. Unemployment also means an economic cost to society when its existence implies an opportunity cost through lost potential output. social unrest and hopelessness for the unemployed. Unemployment also means misery.WHY UNEMPLOYMENT IS A SERIOUS PROBLEM 5.
the value of leisure. expectation of obtaining a better job.The Private Cost of Unemployment When individuals are voluntary unemployed they reveal that they do better by being unemployed than by taking a job offer that they face at the going wage rate. The private cost of unemployment ( the wage foregone by not working) is less than the private benefits of being unemployed. a lower disposable income by being out of work. Private benefits include transfer payments from government. 18 February 2011 PETER PARIAG 19 . These future benefits must be set against the current cost.
18 February 2011 PETER PARIAG 20 . people are suffering more and the case for helping them is stronger.The Private Cost of Unemployment When people are involuntary unemployed. When unemployment is involuntary. These people are worse off being unemployed. Involuntary unemployment mans that people would like to work at the going wage but cannot find a job because there is excess labour supply at the existing wage rate. the cost changes. The distinction between voluntary and involuntary unemployment matters because it may affect our value judgement about how much attention to pay to unemployment.
In a changing economy it is important to match up the right people to the right job. Since the economy is producing below capacity. Involuntary unemployment may entail more human and psychological suffering than voluntary unemployment 18 February 2011 PETER PARIAG 21 . Involuntary unemployment has an even higher social cost. Since the private benefit exceeds the social benefit.The Social Cost of Unemployment When unemployment is voluntary an individual receives transfer payments during unemployment but these transfers give no corresponding benefit to society as a whole. too many people may be voluntarily unemployed. it is literally throwing away output that could have been made by putting these people to work.
Principal reason : Technology ± the introduction of advanced capital intensive technologies from abroad which are most inappropriate to the factor endowment of the country. The bias of taste towards imports 3.Factors producing Growing Unemployment DEMAND SIDE: Private sector: 1. 2. The structural fragmentation among firms 18 February 2011 PETER PARIAG 22 .
finances consumer durables to the detriment to the productive sectors. 5. Savings required for investment. taxation as a deterrent to enterprise and output. as a result raises the tax on firms. 6.e. 18 February 2011 PETER PARIAG 23 . The monetary system services the import ± export trade.Factors producing Growing Unemployment DEMAND SIDE: Private sector: 4. The tax structure of firms ± government unable to obtain enough revenue. Lack of savings ± the inability to mobilize domestic savings. i.
There exist a divergence between the rate of growth of the economy and the rate of growth of employment due to the pattern of final demand. The present type of development planning is oriented towards economic growth rather than towards employment creation. 18 February 2011 PETER PARIAG 24 .Factors producing Growing Unemployment DEMAND SIDE: Government: The burden of employment falls on the government The level of employment depends on the revenue from the private sector.
The rapid movement from rural to urban areas and away from certain agricultural oriented jobs to relatively wellpaid jobs in mining. etc. tourism. 1. The rapid rate of growth of those of working age as a result of the high rate of population growth 15 years earlier. 2. 18 February 2011 PETER PARIAG 25 . The job aspiration is of a particular type. government.Factors producing Growing Unemployment SUPPLY SIDE: The factors which affect the rapid growth of the number seeking jobs.
The increasing rate of female participation in the labour force. 4.Factors producing Growing Unemployment SUPPLY SIDE 3. This is as a direct result of the skill composition of the labour force. The rapid growth in the supply of labour seeking certain jobs but not others. 18 February 2011 PETER PARIAG 26 . associated largely with the expansion of secondary educational opportunities and the ³ emancipation of women´.
Creating more jobs ± Job creation. (b) Reduce unemployment without creating jobs ± OJT. but it is possible to : (a) Create more jobs without reducing unemployment. Either at reducing the number of persons unemployed down to an ³acceptable´ level ± reducing unemployment 2. 1 and 2 should mean the same thing.Government Policies to Influence Employment AIMED AT: 1.YTTEP 18 February 2011 PETER PARIAG 27 .
Develop the following labour intensive industries: 1. Construction 3. diversification 3. Fishing 2. Re-organize Agriculture ± through land reforms. ownership. Tourism 5.Some Possible Solutions To Unemployment 1. Re-organize the Educational System 2.decentralize 18 February 2011 PETER PARIAG 28 . Curb the rural ± urban drift . Block out unnecessary imports 4.
in general. 18 February 2011 PETER PARIAG 29 . A curve known as the Phillips curve can be drawn linking inflation and unemployment. Phillips discovered (1958) a statistical relationship between unemployment and the rate of inflation which implied that. The shape of the curve (concave) means that the lower the level of unemployment. The curve crosses the horizontal axis at a positive value for the unemployment rate. the higher the rate of increase in inflation. the rate of inflation fell as unemployment rose and vice-versa.Linking Inflation and Unemployment A.W. This means that zero inflation will be associated with some unemployment. It is not possible to achieve zero inflation and zero unemployment at the same time.
THE PHILLIPS CURVE 1. Lower inflation associated with higher unemployment 0 Unemployment rate Phillips Curve 18 February 2011 PETER PARIAG 30 . Higher inflation associated with lower unemployment Inflation rate 2.
and use demand management policies to take the economy to that point ± i. µto strike a balance¶ between acceptable levels of inflation and employment.What the Phillips Curve Suggests to Government The existence of a relationship between inflation and unemployment of a type indicated by the Phillips Curve suggests that government should be able to choose some point on the curve. 18 February 2011 PETER PARIAG 31 . according to its preference.e.
a government must therefore be prepared to accept a certain level of inflation as a necessary µevil¶.What the Phillips Curve Suggests to Government If achieving full employment is an economic policy objective. The Phillips Curve relationship between inflation and unemployment broke down at the end of the 1960s when Britain began to experience rising inflation with rising unemployment 18 February 2011 PETER PARIAG 32 .
6 19.8 5.0 .4 17.6 20.2 16.0 18.5 19.5 10.3 3.8 18.2 15.RATES OF INFLATION AND UNEMPLOYMENT IN T&T YEAR RATE OF INFLATION RATE OT EMPLOYMENT 1990 1991 1992 1993 1994 1995 1996 1997 11.0 3.8 8.3 3.8 6.
5 4.0 14.2 13.6 5.9 12.0 6.8 10.4 3.3 7.7 6.1 12.YEAR RATE OF INFLATION RATE OF EMPLOYMENT 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 5.1 10.8 3.6 3.2 5.6 .2 8.4 10.5 10.2 3.5 4.9 8.
µInflationary expectations¶ means the rate of inflation that is expected in the future. based on inflationary expectations.Refinements to the Phillips Curve An explanation of rising inflation rates combined with rising unemployment was put forward. This µnatural rate hypothesis¶ is supported by monetarist economist. The inflationary expectations of the work force will be reflected in the level of wage rises that is demanded in the annual round of pay negotiations between employers and workers 18 February 2011 PETER PARIAG 35 .
36 PETER PARIAG .Inflationary Expectations of the Work Force Expected Inflation 3% 3% 3% 5% 18 February 2011 Wage demand 3% 4% 3% 7% Rate of Inflation 3% 4% 5% 7% Action outcome Mission accomplished Increase in real wage 1 % Mistake made by work force Follow up action.
If policy makers try to reduce unemployment below this rate. In the long run there is no trade off between inflation and employment. they will bring about an inflation that explodes into even faster rates of price increases. to produce a refinement of the Phillips curve There exist a µnatural rate of of unemployment.The Natural Rate Hypothesis The natural rate hypothesis incorporates these views on inflationary expectations. 18 February 2011 PETER PARIAG 37 .
The Expectation Augmented Phillips Curve 8 Prices And Inflation Wages (%) 3 N The Natural Rate Hypothesis N 2 4 PC1 18 February 2011 PETER PARIAG 38 PC2 Unemployment Rate (%) .
Unemployment rate = 4% and 0% price and wage inflation. 18 February 2011 PETER PARIAG 39 . and the new unemployment level now associated with 3% inflation.The Natural Rate Hypothesis The economy is characterized by the Phillips curve PC1. Unemployment reduced to 2% of the Labour force. There is a movement along the Phillips curve.
because the Phillips curve has shifted from PC1 to PC2. the short run Phillips curve has shifted outwards from PC1 to PC2. In effect. As employers realize that they are paying higher wages as well as receiving higher prices. 18 February 2011 PETER PARIAG 40 . the unemployment rate rises to 4% again.The Natural Rate Hypothesis In the mean time the period of positive inflation has generated inflationary expectations and 4% unemployment is now associated with 3% inflation. and as workers realize that the real value of their wages has not risen.
18 February 2011 PETER PARIAG 41 .The Natural Rate Hypothesis The workers who were initially brought out of unemployment by the higher wages. which will shift upwards as inflationary expectations increase. unemployment will revert towards its natural level.e. Monetarist economists state that the long run Phillips curve is vertical at the natural rate of unemployment i. return to unemployment. In the long run. NN . The natural rate of inflation will be determined by the short run Phillips curve.
The Natural Rate of Unemployment Wage X We Y The natural rate of Unemployment = Ony .Onx D 0 Nx Ny Number employed 42 S1 S2 18 February 2011 PETER PARIAG .
There is µnatural unemployment¶ equal to ONy .The Natural Rate of Unemployment The demand for labour is labeled D The supply of workers available to take jobs at different wages is S1. At any given wage there are more potential workers than shown by S1. S2 shows the supply of workers who are capable of taking jobs.ONx 18 February 2011 PETER PARIAG 43 . This is because a number of them are prevented from being available to take up employment by frictions such as lack of information and immobility.
THANK YOU THE END 18 February 2011 PETER PARIAG 44 .
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.