UNEMPLOYMENT
WEEK 6
What is Unemployment
Unemployment: the state of being willing and able to work but without a
job.
The level of unemployment should be distinguished from the rate of
unemployment.
The level of unemployment refers to the total number of people who are
unemployed whereas the rate of unemployment is the number of
unemployed people as a percentage of the labour force.
Full Employment and the Natural Rate of
Unemployment
Full employment is considered to be the highest level of employment
possible. It is often considered to be achieved when the unemployment
rate falls to 3%, although the rate may vary between countries.
Though it might be expected that it would be 0% unemployed, in practice,
at any particular time some people may be experiencing a period of
unemployment as they move from one job to another job.
Natural rate of unemployment: the rate of unemployment that exists when
the aggregate demand for labour equals the aggregate supply of labour
at current wage rate and price level.
Causes of Unemployment
I. Frictional Unemployment
II. Structural Unemployment
III. Cyclical Unemployment
Frictional Unemployment
Frictional unemployment is unemployment that arises when workers are
between jobs.
One form of frictional unemployment is search unemployment. This arises
when workers do not accept the first job or jobs on offer but spend some
time looking for a better paid job.
Casual unemployment refers to workers who are out of work between
periods of employment including, for example, actors and construction
workers.
Seasonal unemployment, demand for workers fluctuates according to the
time of the year. During periods of the year, people working in, for example,
the tourism, hospitality, building and farming industries may be out of work.
Structural Unemployment
As its name suggests, structural unemployment arises due to changes in the
structure of the economy. Over time the pattern of demand and supply will
change. Some industries will be expanding and some will be contracting.
If workers cannot move from one industry to another industry, due to a lack
of geographical or occupational immobility, they may become structurally
unemployed.
Structural unemployment can take a number of forms. One is technological
unemployment. In this case, people are out of work due to the introduction
of labor-saving techniques.
regional unemployment occurs when declining industries are concentrated
in a particular area of the country, the resulting unemployment.
Another form of structural unemployment is international unemployment.
This is when workers lose their jobs because demand switches from
domestic industries to more competitive foreign industries.
Cyclical Unemployment
Cyclical unemployment: unemployment that results from a lack of
aggregate demand.
As a result of a fall in aggregate demand, firms reduce the output and
aggregate demand for labour also falls. If workers resist wage cuts,
demand-deficient unemployment will exist.
Even if wage rates fall, this type of unemployment may persist. This is
because a cut in wages would reduce demand for goods and services as
people would have less money to spend, which would cause firms to
reduce both their output further and make more workers redundant.
Measurement of Unemployment
Labour Force: the sum of employed and the unemployed.
The labour force does not include people not in a paid job and are not
looking for work. This includes people who are studying, caring for children
or family members on voluntary basis, retired or who are permanently
unable to work.
Participation rate: the percentage of people in the working age population
that are in the labor force.
The Consequences of Unemployment
Unemployment has consequences for:
I. the unemployed themselves,
II. firms
III. the economy
Consequences of Unemployment on
Individuals
I. Workers who lose their jobs are likely to experience a fall in income.
II. They are likely to find it more difficult to get another job the longer they
have been out of work. This is because they will miss out on training, will get
out of touch with advances in technology and may lose confidence.
III. They may also experience a decline in their physical and mental well-
being. For a small number of people, there is a chance that a period of
frictional or structural unemployment may give them the opportunity to
search for a more rewarding job.
IV. Unemployment puts stress on personal relationships
Consequences of Unemployment on
Firms
I. Firms wanting to expand may have a greater choice of potential workers.
II. They may also benefit from workers not pressing for wage rises for fear of
losing their jobs.
III. They may, however, suffer from lower demand for their goods and services.
Consequences of Unemployment on
the Nation
I. The economy will experience an opportunity cost. Output will be below its
potential level. If the unemployed had been working, more goods and
services would have been produced and living standards would have
been higher.
II. The tax revenue received by the government will be lower than with a
higher level of employment.
III. If state benefits are paid by the government, there will be an increase in
government spending on the benefits which could have been put to other
purposes.
IV. Increase in crime rates
Challenges of Unemployment
Measurement
Class Discussion
END OF PRESENTATION
May the God of hope fill you with all joy and peace in believing, that you may
abound in hope by the power of the Holy Spirit (Romans 15:13)
