© VAN SCHAIK PUBLISHERS

Chapter 21:
Unemployment
 Learning outcomes

Once you have studied this chapter, you should be able to

• Describe the costs of unemployment
• Distinguish between different types of unemployment
• List some possible causes of structural unemployment
• Discuss the policies that can be used to reduce unemployment
• Explain what the Phillips curve means and how it is related to the
aggregate supply curve
• Explain what an incomes policy is
© VAN SCHAIK PUBLISHERS
 Unemployment
Expanded definition

• The number of unemployed persons expressed as a

% of the total number of people willing and able to
work.
• The % is called the unemployment rate

© VAN SCHAIK PUBLISHERS

 Unemployment
Strict definition
• Those people within the economically active population
(15-64 years) who
• Are not in paid employment and self employment
• Were not working during the seven days prior to the
interview
• Wanted to work and were available to start work within a
week of the interview, and had taken active steps in
looking for work
© VAN SCHAIK PUBLISHERS
 Unemployment
• Unemployment measured by expressing the number
of unemployed persons as a % of labour force
• Level of unemployment is a stock concept-measured
at a particular period date.
• There are continuous flows as people enter and leave
the unemployment pool.

© VAN SCHAIK PUBLISHERS

 Unemployment
number of unemployed persons 100
• Unemployment rate = ——————————————— x ——
labour force 1
• Labour force= working age population (number) of employed and
unemployed people

© VAN SCHAIK PUBLISHERS

 Exercise
Use the data in the table below to answer the questions that follow.

• Determine the size of the labour force.

• Determine the unemployment rate.
• Determine the labour force participation rate
 Exercise
1. Size of the labour force.
Labour force= employed +
unemployed
= 16+7=23
• Determine the size of the labour force.
2. Determine the unemployment rate
• Determine the unemployment rate.
• Determine the labour force participation Unemployed x100
rate Labour force
7 x 100 = 30.4 %
23
 Exercise

3. Determine the labour force

participation rate
=Labour force X 100
• Determine the size of the labour force. EAP
• Determine the unemployment rate.
• Determine the labour force participation = 23 X 100
rate
45
= 51 %
 Reasons for entering
unemployment pool
• New entrants into the labour market
• Leaving a job in order to look for another job
• Laid off- work ending because employer cannot afford
to offer employment anymore
• Retrenchment, dismissal-no chance of returning

© VAN SCHAIK PUBLISHERS

 Reasons for moving out of the
unemployment pool

• Getting a job
• Laid off- being recalled
• Stop looking for work as a result of discouragement

© VAN SCHAIK PUBLISHERS

 Costs of Unemployment to
individuals
• Loss of income, shock and frustration
• Hunger, cold, ill health and extreme conditions, death
• Psychological costs-low self-esteem, loss of
confidence
• Loss of experience and human development
• Leads to other social ills such as crime
• People may become unemployable

© VAN SCHAIK PUBLISHERS

 Types of Unemployment
• Frictional unemployment
• Seasonal unemployment
• Cyclical unemployment/demand deficiency
unemployment
• Structural unemployment

© VAN SCHAIK PUBLISHERS

 Types of Unemployment

Frictional unemployment
• Caused by people moving from one job to another, or
new entrants into the job world-may be temporary
Seasonal unemployment
• Occupations requiring workers for a part of the year-
Farming activities, Christmas, Easter periods

© VAN SCHAIK PUBLISHERS

 Types of Unemployment

Cyclical/ demand deficiency unemployment

• Caused by recession in the economy leading to lack
of demand giving rise to unemployment

© VAN SCHAIK PUBLISHERS

 Types of Unemployment
Structural unemployment
• Occurs when jobs disappear due to structural
changes/ unemployment resulting from industrial
reorganization, in the economy such as
• Changes in production methods or techniques
• Changing consumer preferences
• Decline in particular industries
• Lack of education, training and skills
© VAN SCHAIK PUBLISHERS
 Policies to reduce
Unemployment
• Unemployment is created when the growth in the labour
force is larger than growth in the number of job opportunities.
• This is attributed to supply of labour exceeding the demand
for labour.
• To combat unemployment, steps should be taken to limit the
supply of labour while increasing the demand for labour

© VAN SCHAIK PUBLISHERS

 Supply side Policies to reduce
Unemployment

• Reducing population growth

• Stricter immigration controls
• Education and training to improve labour quality-to
curb the oversupply of unskilled and semi-skilled
labour

© VAN SCHAIK PUBLISHERS

 Demand side Policies to
reduce Unemployment
• Raising aggregate demand for goods and services
• Increasing government expenditure
• Stimulation of consumption and investment spending-
lowering interest rates and taxes
• Stimulating demand for exports
• Special employment programmes
• Promotion of small businesses
• Tax incentives and subsidies
© VAN SCHAIK PUBLISHERS
 Unemployment in the
Keynesian models
• Assumption-level of employment is positively related to the
level of production
• Growth in employment is positively related to growth in
production
• As production increases, so does employment
• As employment increases, so does production

© VAN SCHAIK PUBLISHERS

 Unemployment in the
Keynesian models

Employment Production

© VAN SCHAIK PUBLISHERS

 Unemployment

• Unemployment in the Keynesian and AD-AS models

Figure 21-1 An aggregate production function
(Textbook page 404)

© VAN SCHAIK PUBLISHERS

 Unemployment and inflation: the
Phillips curve

• This relationship was coined by a New Zealand economist in

the 1950s called AW Phillips
• He conducted a study and found out that there is an inverse
relationship between inflation and unemployment
• This is illustrated in what is called the Phillips curve

© VAN SCHAIK PUBLISHERS

 Unemployment and inflation: the Phillips
curve
• Increase in aggregate demand usually leads to an increase
in production
• Increase in production leads to increase in employment
levels ( decrease in unemployment)
• Increase in aggregate demand also leads to increase in
prices (inflation)

© VAN SCHAIK PUBLISHERS

 Unemployment and inflation: the Phillips
curve

• Increase in aggregate demand also leads to increase in

prices

Production

Demand Employment

Prices/
© VAN SCHAIK PUBLISHERS inflation
 Unemployment and inflation: the Phillips
curve

• Decrease in aggregate demand leads to decrease in

production (and income) as well as decrease in price of
goods
• Decrease in production leads to decrease in
employment(increase in unemployment)
• There is therefore an inverse relationship between
inflation and unemployment illustrated as follows:
© VAN SCHAIK PUBLISHERS
 Unemployment and inflation: the
Phillips curve

© VAN SCHAIK PUBLISHERS

 Unemployment and inflation: the Phillips curve

Figure 21-2 The Phillips curve

• This relates to unemployment

and inflation rate
• Lower inflation is related to
higher unemployment
• Higher inflation leads to lower
unemployment

© VAN SCHAIK PUBLISHERS

 Phillips curve

https://www.youtube.com/watch?v=zatnIhwmu1c
 Stagflation

• Stagflation is a unique economic condition characterized

by a combination of stagnant economic growth, high
unemployment, and high inflation.
• This phenomenon contradicts the traditional relationship
between inflation and unemployment, known as the
Phillips curve, which suggests an inverse relationship
between the two variables.
• Stagflation can occur due to various factors:
© VAN SCHAIK PUBLISHERS
 Stagflation

• Cost-Push Inflation: Factors like rising production costs,

such as wages or raw material prices, can lead to cost-
push inflation.
• When businesses face higher costs, they may pass them
on to consumers in the form of higher prices, leading to
inflation.
• If demand remains weak due to stagnant economic
growth, this inflationary pressure can persist without an
increase in output, thus increasing unemployment
© VAN SCHAIK PUBLISHERS
 Important concepts
• Unemployment
• Frictional unemployment
• Seasonal unemployment
• Cyclical unemployment
• Structural unemployment
• Phillips curve
• Stagflation
• Incomes policy

© VAN SCHAIK PUBLISHERS