ADDIS ABABA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ECONOMICS

THE SOCIO-ECONOMIC CAUSE AND CONSEQUENCES OF

URBAN UNEMPLOYMENT IN ADDIS ABABA

STUDENT RESEARCH PROPOSAL SUBMITTED TO THE DEPARTMENT OF

ECONOMICS IN PARTIAL FULFILLMENT FOR THE REQUIREMENT OF

BACHELOR OF ART(BA) DEGREE IN ECONOMICS

BY:ASAMINO MULUGETA

ID NUMBER:BER/5111/08

ADVISOR: ATNAFU GEBREMESKEL(PHD)

MAY 2017

ADDIS ABABA, ETHIOPIA

 1.4 Significance of the study
The social and economic consequences that could arise in association with the

high and growing unemployment are cited and was added further in the study

and it is tried to put the situation in brief. Hence, the study is believed to be

relevant in that it could motivate government, non-government organizations

and community of large to take measures to help the unemployed for the time

being and to establish sustainable employment schemes in the future and it

could be helpful somehow to initiate policy makers design policy concerns,

which are necessary to tackle the problem.

Moreover, it benefits the unemployed to understand their situation and to take

measures to be being employed and play role in eliminating this complex

problem of unemployment in Addis Ababa city.

1.5 Scope of the study

Concerning the Scope(coverage) of the study particularly emphasis was given to

Addis Ababa city due to fact that the problem was making serious here in

Addis Ababa city due to the lack of financial resources and time, it would not
cover the area.

1.6 Methodology(research methodology)

1.6.1 Method of data collection and source of data

Several publications were referred and was in the preparation of this study and

most of the information in it is more dependents on the data(ideas) provided in

different years. Thus, it would be collected using appropriate method as much

as possible. The secondary data would have been gathered through careful

review of related document.

1.6.2 Method of data analysis

The data that gathers from respective source was organized and classified

according to their similarities. The analysis was descriptive method and

figurative discussion and also the data was analyzed by using frequency tables

and percentages, and graphical method. This study wholly entails the data

through method of analysis together with figurative discussions that draw

logical remarks.

1.7 Limitation of the study

One that was the most limiting factor for the study is that the data

requirements were not fully satisfied due to the lack of time series data on

unemployment which may make the study partial in coverage and unreliable in

some circumstances. These inadequacies of data problem of access to

information, and shortage of time have effect on quality and coverage of the

study. Hence, it is and obligation to concentrate on available data only and

give conclusions and suggestions based on it.

1.8 Organization of the paper

The research paper was structured to have four chapter arranged sequentially.

The first chapter consists of the introduction and methodology which are

pertinent for the study. Second chapter deals with theoretical and empirical

literature discussions. The third chapter focus on the deal with analization

and discussion . Finally the last chapter was present the conclusions and

recommendations that must be made on the basis of the main finding of the

research.

CHAPTER TWO

2.Literature Review

2.1 Definition and Concept

Many economists, different institutions and authorities have said much on the

issue of unemployment. To mention few, unemployed are those who have no

jobs while they are actively searching for job and are willing to be employed at

the going wage rate ( Smith, 1991.)

There are three important aspects to this definition:

First a person has to be qualified for job. A person is not involuntarily

unemployed if one seeks jobs that one is produced from obtaining because of a

lack of training experience, and education.

Second a person is not considered unemployed if he/she is not seeking a job

and willing to work at the market wage rate. Some may decide to with draw

their labor services because the prefer leisure to work at the market.

According to what Todaro (1994) wrote, we must take into account, in addition

to openly unemployed, the larger numbers of workers who may be visibly active

but in economic sense are grossly underutilized. He said that Edwards has

identified the following forms of labor under utilization or unemployment.

a) Open unemployment: both voluntary (who exclude themselves from some

jobs implying some other means of support than employment) and involuntary

(where workers are willing to work but unable to find jobs).

b) Under employed: those working less than they would like to do.
c) The visibility active but underutilized: Those who would not be under

employed or unemployed but who infact have found alternative means of

making time including:

I. Disguised unemployment: many people seem occupied on farms or employed

in government on a full-time basis though the services they render may

actually require much less than full time.

II. Hidden unemployment: Those who are engaged in second choice non-

employment perhaps notably education and household chores, primarily

because job opportunities are not available at the level of education attained or

for women, given social mores.

III. The prematurely retired: This is evident and apparently growing in civic

service because in many countries retirement ages are failing.

d) The impaired: Those who may work fulltime but whose intensity of effort

is seriously impaired through malnutrition or lack of common preventive

medicine.

e) The unproductive: Those who can provide the human resource necessarily

for productive work but who struggle long with inadequate complementary

resources..

Un employment is defined by the 13th international conferences of labor

statisticians (Geneva, 1982) and Godfrey (1985) that the unemployed

comprises all persons above the specified age who during the reference period

were:

a) Without work: i.e were not in paid or self-employment.

b) Currently available for work: i.e were available for paid employment or self-

employment.
c) Seeking working: i.e had taken specific steps in specified reference period to

seek paid or self-employment

2.2 Types of unemployment

Smith has identified among four types of unemployment:

2.2.1 Frictional unemployment

Rises because labor markets are inherently dynamic, because information flows

are imperfect, and it takes time to unemployed workers and employees to find

each other.

Some people will quit their job, to search the other employment. Moreover,

random fluctuations in demand across will cause some firms to lay off workers

at the same time the other firm will be seeking to hire new employees, because

information about the characteristics of those searching for work and the

nature of job cannot instantly be know or evaluated, it takes time for job

matches to be made between employeer and employers.

The level of frictional unemployment in an economy is determined by the flows

of individuals in to and out of the labor market and the speed by the prevailing

economic institutions and institutional changes.

Frictional unemployment is always present in the economy, resulting from

temporary transitions made by workers and employers or from workers and
employers having inconsistent or incomplete information. For example, a first-time
job seeker may lack the resources or efficiency for finding the company that has
the job that is available and suitable for him and as a result does not take other
work, temporarily holding out for the better-paying job. Another example of when
frictional employment occurs is when a company abstains from hiring because it
believes there are not enough qualified individuals available for the job, when in
actuality there is.
2.2.2 Structural unemployment
Structural unemployment arise because due to changes in the pattern of labor

demand cause mismatch between the skills demanded and supplied in given

area or cause an imbalance between the supply and demand for workers across

areas. If wages are completely flexible and if costs of occupational or

geographical mobiliteis were low, market adjustment would quickly eliminate

this types of unemployment.

Structural unemployment is a longer-lasting form of unemployment caused by
fundamental shifts in an economy and exacerbated by extraneous factors such as
technology, competition and government policy. Reasons why structural
unemployment occurs include workers' lack of requisite job skills or that workers
live too far from regions where jobs are available and cannot move closer. Jobs are
available, but there is a serious mismatch between what companies need and what
workers can offer.
2.2.3 Cyclical(Demand-Deficient unemployment)
Demand deficient unemployment occurs when the aggregate demand for labor

declines in the face of down ward inflexibility in real wage.

Cyclical unemployment is a factor of overall unemployment that relates to the

cyclical trends in growth and production that occur within the business cycle.
When business cycles are at their peak, cyclical unemployment will be low
because total economic output is being maximized. When economic output falls, as
measured by the gross domestic product (GDP), the business cycle is low and
cyclical unemployment will rise.
2.2.4 Seasonal unemployment
Seasonal unemployment is similar to demand deficient unemployment is that it

is induced by fluctuations in the demand for labor. Here, however, the

fluctuation can be regularly anticipated and follow a systematic pattern over

the course of year.

Seasonal unemployment occurs when people are unemployed at certain times of

the year, because they work in industries where they are not needed all year round.
Examples of industries where demand, production and employment are seasonal
include tourism and leisure, farming, construction and retailing.
2.3 Related Empirical studies
According to Todaro(1994), to day many developing countries are ploughed by
historically unique combination of massive rural-urban population movements,
stagnating economy and growing unemployment substantial unemployment in
LDCs economics is probably one of the most striking symptoms of their in
adequate development. In a wide spectrum of poor counties open
unemployment especially in urban areas affect the labour force.
Some empirical data by Todaro (1994) confirms the above facts that the

unemployment is high in developing countries.

Table 2.1 Unemployment rate in developing continents:

Unemployment rate
Continents year
1960 1970 1980 1990
All Developing 6.7 7.4 7.8 8.2
Africa 7.7 9.6 9.8 9.9
Asia 6.8 7.1 7.7 8.3
Latin America 4.7 5.1 5.8 5.5

Source: Todaro, 1994

As Todaro (1994) suggested, the rural-urban migration is also other cause for

the ongoing problem of unemployment in LDCs. It is in this context of slowly

growing urban employment opportunities accompanied by disproportionally

high rate of rural-urban migration that the chronic urban unemployment and

underemployment problem has emerged in developing countries particularly in

Africa.

Though the above suggestion on the cause of unemployment by the different

authors are more or less acceptable, educational system, non work status of

the society in adequate attention to agricultural and growing rural-urban

migration are some from the major causes of the problem in less developing

countries. This unemployment problem is not mater of absolute lack of useful

things that might be done but also a shortage of modern jobs in relation to the

number of jobseekers.

The different economists and policy makers recommended different strategies

and policies to eliminate the problem or improving employment in developing

countries. O.Edward (1984) recommended that product mix, appropriate

technologies, use of capital and rural-urban balance of job opportunities are

among the major strategies to eliminate the massive unemployment and

improving employment opportunities in less developing countries.

G.M.Ishumi (1990) argued that the growing urban unemployment in Kenya is

closely connected with. The high rate of urbanization and population growing

in recent years.

As P.Ghai(1990) discussed, like inother developing countries unemployment in

Kenya take on variety of forms. The dynamics of unemployment problem is

caused by soaring population growth, disappointing rate employment influx of

people from the country side into urban areas, which are familiar enough are

shared in some degree by most Africa countries though it is assumed alarming

proportion in Kenya.

From the table 2.2, the unemployed person and unemployment rate in Kenya

in the year 1994 was relatively higher is an the rest of the east African

countries. This conforms that unemployment has been a series probem in

Kenya. Table 2.2 unemployed persons and unemployment rate in Kenya in The

year 1994

Unemployed Un employment rate%

Kenya
M F Total M F Total
698.2 1760.7 2459.0 13.0 28.4 41.4
Source ILO, 2003
G.M Ishumi (1990) argued that the growing urban unemployment in Kenya is

closely connected with the high rate of urbanization and population growth in

recent years.

2.4 The state of unemployment in Ethiopia

Unemployment in Ethiopia is viewed by many intellectuals as very high and

more adverse in urban centers of the nations particularly in Addis Ababa.

One publication of MEDaC(1999) confers this idea. In general, open

unemployment in Ethiopia seems to be phenomenon being prevent in the Addis

Ababa with the majority of unemployed people young with modest levels of

formal education. Following table confirms this idea.

Table 2.3 youth unemployed:

Nation Year Share youth unemployed total unemployed

M F Total
1990 84.6 91.1 88.5
1993 76.9 91.8 82.2
Ethiopia 1994 80.2 91.9 85.1
1997 81.8 93.7 87.1
1998 83.2 95.5 88.6
1999 79.1 91.2 84.4

Source: ILO, 2003

The economy of Ethiopia has proven unable to accommodate the rapid growth

of labor force. Thus, unemployment became a serious problem in citys aras.

As many suggested, the primary reason is that the growth of the economy and

its capacity to create jobs have not keep peace with the population growth. In

fact only about 25,000 formal wage sector jobs are being annually created while

6000,000- 800,000 individual annually are entering the labor market (ILO,
1993). Though the above suggestins on the issues of unemployment in

Ethiopia are acceptable, there are other issues that have to be discussed

concerned the causes of unemployment such as educational system, over

growth in rural-urban migration and non-work status of the society in

agriculture and its consequences such as political, economical and social cost.

2.5 The theories of unemployment

2.5.1 Classical school theory of the unemployment

The essential feature of the theory is that the labor market forces of supply and

demand respond to changes in real wages. Thus, unemployment is the

consequences of real wages being an remaining too high to allow the labor

market to deer, government wage regulation and especially powerful trade

unions are identify as significant causal factors. Thus, unemployment in the

classical system hanges or not creating markets. The policy implication flowing

firm classical analysis of unemployment is that in order to reduce

unemployment it needs reduces government regulation and reduce trade union

power and make the labor (Smith).

2.5.2 Keynesian school theory of unemployment

This school of thought focuses, on fiscal policy regulation like tax cut by

creating the relationship between the government expenditure and

unemployment. Keynes argued that to expand national income and then

expand employment by reducing taxes, The tax cus was intended to stimulate

expenditure on consumption and investment and thus lead to higher income

and employment.(Mankiw, 2002).

The causes of the tax was followed by an economic boom which in the

unemployment rate fall. According to supply spiders, which workers are

allowed to keep a higher fractions of their earnings they supply substantially

more labor (Mankiw, 2000).

2.5.3 New Keynesians theory of unemployment

The new Keynesians also argued that most sometimes do not clear even when

individually and looking out for their own interest. Because of both

information problem and costs of changing prices lead to some price rigidties

and as result, create a possibility of fluctuations of employment. For example

in the labor market firms that cut wages not only reduce the cost labor but also

likely to wind up with poor quality labor force. Thus they will be reluctant to

cut wages. If it is cost for firms to change the prices they change and the wage

they pay the change will be infrequent, but if all firms adjusts prices and wages

infrequently, the economy wide level wages and prices may not be flexible

enough to avoid occasional periods of even high unemployment (Darbash;

1981).

2.5.4 New classical school theory of unemployment

The new classical school argue based on the assumption of market clearing.

There are no reason why firms or workers would not adjust wages or prices if

that would make them better off. Accordingly prices and wages adjust in

order to equate supply and demand in other words, market clear. The

implication of this assumption is: that there is no possibility for involuntary

unemployment. Any unemployed person who really wants job will offer from

some employer. Flexible adjustment of wages and price leaves all individuals

on work at the going wage and firms can produce and sell as much as they

want to the going price. (New classical theory).

2.6 Migration and development

As Todaro (2006) state that rural-urban migration was once viewed favorably in

the economic development literature. Internal migration was thought to be

natural process in which surplus labor was gradually with drawn from the

rural sector to provide needed man power for urban industrial growth. The

process was demand socially beneficial because human resources were being

shifted from locations. Where their social marginal product was often assume

to be zero to places where this marginal product was not only positive but also

rapidly growing as result of capital accumulation and technological

progress(Ibid). In contrast to this view point it is now abundantly clear from

recent least developed countries experience that rates for rural-urban migratin

continue to exceeds rates of rural job creation and to surplus greatly the

absorption capacity of both industry and urban social services no longer is

migration viewed by economists as beneficent process necessary to solve

problem of growing urban labor demand(Ibid). In Africa the magnitude of

rural-urban migrations has greatly exceeds the capacity of the modern

industrial sector to absorb the migrants so that it can only employee

productively small proportion of industrialization process itself. A process that

has typically field to produce growth of job opportunities at any things near the

rate of out growth. (Nodegwa and Powelson: 1973)

However, inspite of these rising level of over unemployment and even high level

of under employment, the rate of rural-urban migration shows no sign of

declaration. To the extent that many newly arriving migrants are likely to joint.

The growing pools of unemployed and to the extent that an increasingly large

proportion of these migrant represent the more educated segment of the society

whose productive potential in largely being dissipated.

The process of continued rural-urban migration at present levels can no longer

be said to represent describe economic phenomenon(Ibid).

Unemployment is the state of persons who is out of work and actively looking

for job. The term does not refers to people who are not seeking work because of

age, illness or mental or physical disability. Nor does it refers to people who are

attending school or keeping houses. Such people and classified as out of the

labor force rather that unemployed (world book ;2001).

Unemployment may include serious problem for both individual and society as

a whole. For the individual it means loss of income and increase of prolonged

unemployment, may result in loss of self respect. For society, it result in lost

production and, in some cases, criminal or other antisocial behavior until the

1900s most people considered laziness the main causes of unemployment , but

to day, they realize that men and women may be out of work through no fault of

their own(Ibid).

2.6.1 Relationship between unemployment with different factor linkage

between unemployment poverty and income distribution.

Those with out regular employment or with only scattered part time

employment are usually also among the very poor. Those with regular paid

employment in the public or private sector are typically among the middle to

upper income groups. But it would be wrong to assume that everyone who

does not have a job is necessarily poor while whos who work fulltime are

relatively will off. This is because there may be many unemployed urban

worker who are voluntarily unemployed in the sense that they are searching for

specific type of job perhaps because of high expectations based on their

presumed educational or skill qualifications. They refuse to accept jobs which

they feel have outside sourse of financial support (example) relatives friends or

local money leaders such people are unemployed be definition, but they may
not be poor (Todaro; 1994). Similarly, there are many individual who may work

full time interms of hours per day not may nevertheless earn every little

income. Many employed workers in these called urban informal sector (e.g

trader, petty service providers, workers in repair shops etc) may be so classified

such people are be definition fully employed but often they are still very

poor(Ibid). In spite of the above reservations about a too literal linkage between

unemployment and poverty, it remains true that one of the major mechanisms

for reducing poverty and in equality in less developed nations in the provision

of adequately paid, productivity employment opportunities for the very poor.

The creation of more employment opportunities should not be regarded as the

sole solution to the poverty problem(Ibid).

2.6.2 Linkage between education and migration and unemployment

Education appears to be an important factor both for migration and an

employment level. Today, the problem of unemployment has emerged as the

most striking symptom of lack of development in almost all developing

countries and the problem had reportedly concentrated among the educated

youth. (Alemayhu Ga and Berhanu N 1990).

In part, this counteraction of un employment among the younger age groups

reflect the disproportionate number of younger persons with in a population

which is turn a result of this rapid population growth and hence the labor

force.

Another explanation for the high proportion of young person among the

unemployed is the rapid expansion of education which promotes a large

number of school levels to aspire to urban wage, earning jobs for in excess of

the number of opportunities available(Ibid).

As urban labor supply continues to out pace demand, tow forces are set in

motions on the demand, side, jobs which were for merly filled by, say those

with primary schooling now require a secondary school certificate. On the

supply side, jobs aspirants now need to get same extra years of further

education in order to qualify for jobs which only a few years earliest were

being filled by those less education (Todaro 1994).

One migration types rural-urban migration in Ethiopia in significant type of

movement for spatial distribution of population the attraction to urban areas,

monthly to one primate city (Addis Ababa, is largely economic and due to rural-

urban income and quality of life differentiates (Befekadu, and Berhanu

1999/2000).

2.6.3 Employment and labor force issues

The main story regarding the labor market is the rapid growth of the work

force, as result of high population growth. Combined with fewer farming

opportunities for the next generation, and relatively slow creation of new jobs in

the modern sector this is resulting in growing unemployment and under

employment pressure. Economic activity rates in urban areas are relatively

low, and have been declining somewhat (from 66% in 1999 to 58% in 2003),

although this is to some extent reflection of growing school enrolments that

keep youth out of the labor force longer (MOFED, 2005/06).

The incidence of unemployment was relatively lower for those with non formal

education (9%) and holders of diploma and above (12%) unemployment, on the

other hand is very high, especially among youth surveys of the last 5 years

(1999-2004) in Ethiopia show that slight decline in urban unemployment

among males and slight increase among females, and also the duration of

unemployment has shortened. As in most countries un employment is highest

among youth (who have less marketable skills and experiences but who also

tend to live with their families, and often not subject to the same immediate

pressures of find work that apply to slightly order married men and women). It

is also generally higher among women than men of wage employment the

public sector still account for about 40% (source MOFED, 2005/06) wages and

low, and for less educated wages, in urban employment are just about at the

poverty line.

Wages rise dramatically with education levels while schooling clearly pays, in

the future it is likely that completing primarily and secondary education will be

less of guarantee of finding employment than it was rise past, as the labor

market becomes more saturated.

None the less with the expansion of educations, the average skill level of the

work force is increasing and this should pay off in productivity gains(Ibid).

There are big urban-rural formal-informal and gender gaps in employment and

wages labor mobility is limited especially between rural area and towns,

although there in increasing evidence of step migration, from smaller to larger

town. As in most countries, immigrants start out near the bottom of the
urban job market, but their evidence that their let improves over time(Ibid).

2.6.4 Urban poverty and population Dynamics

Currently (2004/05; 16% of the country total population or some 11.7 million

people, live in urban areas. The urban population is growing at rate of about

4.4% per year, and is estimated to reach 22 million people by 2020. It is

important to recognize the over whelming weight of Addis Ababa in the urban

picture in Ethiopia; Addis Ababa is true primate city, with about 3 million

people, 14 times higher than Dire Dawa, the second largest city in Ethiopia.

While final analysis will have to await the result of the 2004/05, there are some
indications that there has been a modest decline in urban poverty in recent

years. Moreover recent urban growth has been unprecedented, mainly as

result of rural-urban migration, resulting in growing welfare and housing

problems for the new urban poor and increasing urban unemployment.

(Source: MOFED, 2005/06)