UNEMPLOYMENT

CAUSES, EFFECTS AND REMEDIES

 Lesson Objectives
• Explain the concept of full employment
• Define unemployment and its measurement
• Explain the causes of unemployment
• Analyse the effects of unemployment
• Discuss the policies for controlling unemployment
 Concept of Full Employment
• At full employment, all those within the legal working age who are willing
and able to work at the going wage rate have jobs.
 In reality 100% employment cannot be achieved as there will always be
unemployed people due to labour turnover, movement between jobs and
incapacity to work
 Full employment of resources exist when an economy is producing any
combination of output that lies on its production possibility boundary.
 Benefits of Full Employment
• When all those who are willing and able to work have jobs:
• Households are able to earn income and provide for their basic needs-reduces absolute
poverty and improves living standards
• More income taxes from the employed and indirect taxes from increased spending on goods
and services
• Government revenue that would have been used to pay unemployment benefits can not be
used to improve education, healthcare and roads
• The economy produces the maximum possible level of GDP
 Unemployment: Definition and Measurement
• Definition
Unemployment refers to a situation where people who are within the legal working age and are fit
and willing to work are actively looking for work at the existing wage rate but cannot find work
• The Unemployment Rate
The unemployment rate is a measure of the number of people out of work at a particular point in time
expressed as a percentage of the total working population/labour force
The working population or labour force is the sum of the number of persons in the working age
with jobs and those who are actively seeking for a job but currently do not have one. It is the
economically active population of a country
 Calculating the Unemployment Rate
• Thus the unemployment rate is a ratio of the number of people classified as
unemployed to the labour force.

• Unemployment Rate = # of Unemployed Persons x 100

Labour Force
Note: the labour force/working population is the sum of those currently employed
and those who are unemployed but are actively looking for work
 Labour Force Participation Rate (Activity
Rate)
• Labour Force Participation Rate (Activity rate)-this is the percentage of the
working age population that is actually in the labour force (working or activity looking
for work). It is a measure of the extent of an economy’s working population that is
economically active.
• Labour Force Participation Rate = Labour Force x 100
Total Adult Population
• Dependent Population: total number of people who are not economically active (not
in the labour force). It includes children, students, retirees, stay-at-home parents,
prisoners, those who cannot work due to health challenges and those who have chosen
to live off benefits,
 Causes/Types of Unemployment
 Technological Unemployment
 the introduction of new machinery/better technology displaces labour
 Agriculture is one industry that has suffered from this type of unemployment as production has become more
capital intensive
 When new machines were made available to plough, sow and harvest barley the hours of labour required to
grow barley on one hectare of land went down from 156 to 12
 Seasonal Unemployment
 Some people tend to work at some times of the year but not necessarily others because the demand for a good
or service is seasonal. Hotels, resorts, airlines are fully booked during summer but will lay off workers later
 E.g. agricultural workers may find more work in spring and summer than in the winter – an agricultural worker
that cannot find work in the winter is said to be seasonally unemployed.
 Causes/Types of Unemployment
 Frictional
 Temporary unemployment while people are out of a job and searching for another
 Some of this frictional unemployment may be seen as voluntary unemployment as some people may
deliberately leave jobs to look for a better one.
 Frictional unemployment is considered to be least problematic because people are always seeking better jobs
 Some may be involuntary when people are made redundant
 Labour immobility
 Occupational immobility – workers cannot take up a job in another occupation because they are not skilled in that
other occupation e.g. a miner could not become an accountant without training.
 Geographic immobility – workers do not want to move to regions where work may be available because they do
not want to move away from their family or the area where the jobs are available is very expensive to live in.
 Causes/Types of Unemployment
 Structural Unemployment
 This happens when there a permanent decline in an industry. A depletion of gold or oil reserves will cause structural
unemployment as workers will be laid off
 The emergence of China as a manufacturing powerhouse has resulted in structural unemployment in US and Europe as
firms have shift production facilities to China which offers lower production cost.
 Workers who are structurally unemployed need to undergo training to acquire new skills to make them employable.
Structural unemployment is the most difficult type of unemployment to remedy because workers are very often
unwilling to retrain and start all over from the lower pay scale of a different occupation
 Regional unemployment exists when a particular region in a country suffers higher than average unemployment. This
occurs due to the decline in a specific industry located in that region.
 A depletion of gold reserves in Obuasi in Ghana will cause structural unemployment as miners will be laid off. The
severity of it will result in regional unemployment as related firms who depend on the custom of miners e.g. restaurants,
taxi drivers, etc. will also lay off workers.
 Causes/Types of Unemployment
• Classical/ Real Wage Unemployment
• Imposition of minimum wage legislation or trade union action that raise wage rates increase cost
of production for firms who may lay off workers protect profit margins
• High Unemployment benefits
• A high level of unemployment benefits might encourage voluntary unemployment because it does
not provide an incentive for the jobless to look for work
• The labour market is imperfections
• an unemployed person may remain so because he/she lacks information about existing opportunities
for which they are well qualified. This is because the labour market is not perfectly competitive
 Causes/Types of Unemployment

 Cyclical/Demand deficient/Keynesian Unemployment

 Unemployment caused by inadequate total spending. As aggregate demand
falls, firms are unable to sell their output and are forced to reduce production
and lay off workers.
 It is associated with an economic downturn/recession
 When the economy is in a recession and total demand for goods and services
is falls, production falls as well and demand for labour will be low and
unemployment will be high
 Effects of Unemployment

 Unemployment is expensive for the economy

 Government pays out enormous sums of money in benefits which increases as
unemployment increases. There is a huge opportunity cost to paying benefits
 Less people will be paying taxes giving less money to spend on education,
healthcare and roads
 Working people have to pay higher taxes to support the unemployed
 Costs of Unemployment
• Costs to the unemployed and their dependants
• Loss of income that could have been earned had the person been in a job this increases
absolute poverty as the unemployed are unable to afford basic necessities
 People may forget their skills or their skills may become out dated resulting in long term
unemployment
• They feel degraded by the whole process of signing on, receiving benefits and not being able
to support themselves or their families.
• The unemployed are more likely to suffer stress, depression, marital breakdown, suicide,
physical illness and mental instability.
 Effects of Unemployment
 Lower total output
 Factors of production are lying idle (production inside PPF). Real GDP is below potential
GDP. This reduces income per capita and reduces living standards
 The idle resources could be used to produce goods and services that would improve our
standard of living
 Idle human capital results in productive inefficiency
 Costs to the community
 Neighbourhoods with higher levels of unemployment are more likely to suffer higher crime
 Firms are more likely to relocate from such areas further worsening the unemployment
 Costs of Unemployment
• Political Effects
• Rising youth unemployment increases the risk of political instability and crime
• The government becomes unpopular and may be blamed for poor economic management
• Political parties have lost elections because of rising unemployment
 Controlling Unemployment
 Expansionary Fiscal Policy Increasing
 Tax cuts increase disposable income resulting in rising household spending
 Cutting corporate taxes increases incentivises investment, growth and
job creation
 Rising government spending increases AD
 Rising total spending motivates firms to increase production increasing
the availability of jobs and firms seek to meet rising total spending
 Controlling Unemployment
• Expansionary Monetary Policy involving increasing money supply and
reducing interest rates.
• Reduces savings and increases household spending
• Lower cost of borrowing make households take more mortgages and use credit cards
more often resulting in rising spending which stimulated firms increase production
and hire more workers
• Firms invest more due to cheaper cost of capital which increases profitability of
investment. More jobs are created as firms build new factories and expand existing
ones.
 Controlling Unemployment
• Exchange Rate Policy- the reduction in the interest rate causes a
depreciation of the country’s currency
• Exports become cheaper and imports more expensive compared to locally produced
substitutes
• If exports and imports are elastic, net exports will rise increasing AD
• Rising export spending and increased preference of local products compared to
imported substitutes causes local firms to increase production resulting in rising job
opportunities.
 Controlling Unemployment
• Supply Side Policies
• Training and retraining schemes – to help people to learn new skills and move to new occupations
( for the structurally unemployed and those with no employable skills).
• Labour market reforms that reduce the ability of trade unions to increase wages. As wage rates drops,
cost of production falls enabling firms increase total output and increase employment
• Abolition of minimum wage legislation reduces wage rates and lowers cost of production
• Reforming the benefit system – cutting unemployment benefit below the lowest paid job creates an
incentive for people to look for jobs instead of living off welfare
• Equipping government job centres to collect information about job vacancies and making this
information available to eligible job applicants
• Supporting small businesses to grow to create more jobs.
 Trade-offs between Inflation and
Unemployment
• Trade-off in macroeconomic objectives occur when a government policy aimed at achieving a
specific outcome negatively impacts some other economic objective(s).
• The use of contractionary fiscal and monetary policy to achieve price stability results in a rise in
unemployment and a fall in real GDP.
• Similarly, the use of expansionary fiscal and monetary policy to achieve economic growth and
reduce unemployment leads to higher rate of inflation.
• However, there is no trade off between GDP growth and full employment on the one and price
stability when supply side policies are used.
• A government policy to increase GDP growth and employment through the exploitation of non-
renewable resources may negatively impact environmental sustainability