MLS II-G, GROUP 1

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UNEMPLOYMENT
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What is UNEMPLOYMENT?
defined as a situation where someone of
working age is not able to get a job but would
like to be in full time employment

often used as a measure of the health of the

economy

The International Labor Organization (ILO)

definition of unemployment is those aged 16
or over are unemployed if they are:
1. Out of work, want a job, have actively sought
work in the last four weeks and are available
to start work in the next two weeks.
2. Out of work, have found a job and are waiting
to start it in the next two weeks.

 The most frequently cited measure of

unemployment is the unemployment rate.
This is the number of unemployed persons
divided by the number of people in the labor
force.

Causes of UNEMPLOYMENT?
1.
2.
3.
4.
5.

Frictional Unemployment
Structural Unemployment
Classical or Real Wage Unemployment
Voluntary Unemployment
Demand
Deficient
or
Cyclical
Unemployment

Frictional Unemployment
This is unemployment that occurs from the
inevitable time delays in finding new
employment in a free market (e.g. fresh
graduates)
This is unemployment caused by the time
people take to move between jobs

Structural Unemployment
This occurs due to a mismatch of skills in the
labor market, it can be caused by:
Occupational immobilities - difficulties in
learning new skills applicable to a new industry,
and technological change (e.g. an unemployed
farmer may struggle to find work in high tech
industries)
Geographical immobilities - difficulty in moving
regions to get a job

Technological change - there is the development

of labor saving technology in some industries,
then there will be a fall in demand for labor.

Structural change in the economy - The decline of

the coal mines due to a lack of competitiveness
meant that many coal miners were unemployed,
however they found it difficult to get jobs in new
industries such as computers.

Classical or Real Wage

Unemployment
This occurs when real wages are kept above
the market clearing wage rate, leading to a
surplus of labour supplied.
Classical unemployment is sometimes known
as real wage unemployment because it refers
to real wages being too high.

 At W2 the supply of labour (Q3) is greater

than the demand for labour (Q2).
Wages could be pushed above the equilibrium
level by minimum wages or trades unions.
This is sometimes known as disequilibrium
unemployment.

Demand Deficient or Cyclical

Unemployment
Demand deficient unemployment occurs
when the economy is below full capacity.
For example, in a recession Aggregate
Demand (AD) will fall leading to a decline in
output and negative economic growth.

 With a fall in output firms will employ less

workers because they are producing less
goods. Also some firms will go out of business
leading to large scale redundancies.

In recessions, unemployment tends to rise

rapidly as firms lay off workers.

Voluntary Unemployment
This occurs when people choose to remain
unemployed rather than take jobs available.
For example, if benefits are generous, people
may prefer to stay on benefits rather than get
work.
(Frictional unemployment is also a type of
voluntary unemployment as they are choosing
to wait until they find a better job)

Effects of Unemployment
On the Government:
Fewer tax revenues - Because fewer people are
working, there will be fewer people earning
enough income to pay tax.
Lower economic growth (GDP) - As fewer people
have jobs, firms wont be able to produce as many
goods and services. As a result, the output of
goods and services in the economy, GDP, will be
lower.

 Higher welfare costs - Unemployment in an

economy means that fewer people will be working
and more people will be claiming benefits
Higher supply-side costs - With unemployment in
an economy, more people wont be working.
These people need to be taught skills in order for
them to be employable by firms. The government
will have to spend more money on training the
unemployed so that they have the right skills to be
employed in a modern economy.

 on Firms:
Lower wage costs - Unemployment in an
economy increases the supply of labor available
for firms to employ. This creates a downward
pressure on wages as labor is less scarce and more
people are willing to get a job at a slightly lower
wage. This will have a positive effect on firms as
their variable costs will fall.
Larger pool of labor - Unemployment creates a
large pool of labour which gives firms more choice
of who to employ. This allows them to employ
workers with higher skills and more experience.

 Less demand for goods and services Unemployment in an economy means that a lot
more people will have less disposable income.
Therefore spending on most goods and services
will fall. As a result, firms will experience lower
sales revenue and will likely see a fall in profits.
Increase in demand for inferior goods - here are
some goods in an economy that people buy more
off when their incomes are lower these are
known as inferior goods.

 Higher training costs - As we have seen, many

firms will benefit from lower wage costs as a result
of unemployment. However, many firms may also
have to spend more resources on training new
employees because they have been out of work
for so long.

 On the people:
Lower standard of living - The people who are
unemployed will suffer a loss of income and will
either have to survive on private savings or on
benefits. As a result, they will be able to buy fewer
goods and services and will see a fall in their
standard of living.
Loss of skills
- When someone becomes
unemployed they will stop working and will start
losing their skills and ability to work. The longer
someone stays unemployed, the less employable
they will be.

 Loss of confidence/depression - People who are

unemployed will also suffer a loss of confidence in
their ability. Many people who become
unemployed will also suffer stress related illnesses
and depression.

World Statistics on
Unemployment

The following data were gathered from the

world bank (databank) where:
Unemployment, total (% of total labor force)
(modeled ILO estimate), 2013

Top 50 countries in the

world with high
Employment rates

Countries with least

Unemployment rate

The Country with the highest unemployment

rate among members of the Association of
Southeast Asian Nations (ASEAN), according to
a report of the International Labor
Organization (ILO) published in 2014 is

Major Causes of High Unemployment

in NCR
Rapid Population growth
Lots of people who never got to complete their
education
Unqualified graduates due to lack of skills
Rural migration
Repatriation/Deportation of OFWs