UNEMPLOYMENT

Employment is the total of people with a job.

It is made up of employees, those working for businesses and self-employed.

Unemployment is the number of people out of work.

The level of people unemployed change all the time

Economists measure not only the level of unemployment but also the rate of
unemployment.

The level refers to the number of people who are unemployed, whereas the rate
unemployment is the number of people unemployed as a percentage of the number
of people in the labor force.

Unemployment exists when potential workers are without jobs.

People are unemployed when they are able and willing to work but they cannot find
jobs.

The total working age population (16 to 65) can be divided into 2 broad categories.

People who are either not willing or not able to work are said to be economically
inactive.

For example, full time students, homemakers, severely disabled people, early
retirees, criminals and those certified mentally insane.

These people are not regarded as unemployed.

who are considered unemployed, there are the:

Voluntarily unemployed -

These are people who classify themselves as unemployed but are not prepared to
take the jobs on offer. This may be because they are hoping for a better job offer or
because the money they are receiving on unemployment benefit is not much more
than what they would be paid in employment.

Involuntarily unemployed -

These are people who would be willing to work for the going wage rate (or lower)
but are unable to find employment.
Full employment
Full employment is often considered to be achieved when unemployment falls to 2-
3%.

The natural rate of unemployment, It is level of unemployment exists when

aggregate demand for labour equals to aggregate supply of labour at the current
wage rate.

Measuring Unemployment
In practice, measuring unemployment is not a simple task because it can be difficult
to decide which groups should be included and to assess who is genuinely looking
employment.

There are two main measures of unemployment in the United Kingdom and both
focus on those who are involuntarily unemployed.

Claimant unemployment
These includes as unemployed anyone who is registered for Jobs Seekers Allowance
(JSA) (unemployment benefit).

This is the easiest measure to calculate because the statistics are instantly available.

However, it misses out on some involuntarily unemployed people.

i. People who are seeking work but are not registered for job seekers allowance
Because they have alternative means of support (parents, spouse, savings) or
are too proud to be seen accepting benefits
ii. Job seekers over 55. These are given income support (government pension) and
as such are not eligible for unemployment benefits.
iii. Those on government training schemes. They receive a separate allowance.

As this measure is based on those receiving benefits it changes every time there is a
change in the criteria for qualifying benefit.
The Labour Force Survey (LFS) Measure
The alternative measure which now receives more government attention is the
Labour Force Survey (LFS) measure.

This is based on a household telephone survey which collects a range of information

on the labour force including:

employment
earning of worker
personal characteristics (age, gender)
educational qualification
unemployment (how long, what was the last job)

In deciding who is unemployed, from the responses given, this measure uses the
International Labour Office (ILO) definition. This defines as unemployed anyone who:

is without a job
is available to start work in the two weeks following the LFS interview, and
either has looked for work four weeks prior to the LFS interview or was waiting to
start a job they had already obtained.
This is a more inclusive measure and is used in many countries making international
comparison easier.

However, the data are more expensive and time consuming to collect the data.

When the number of people unemployed goes down, the number of people
employed usually increases. Although these figures usually do move in opposite
directions, they frequently do not move proportionately.

For example, unemployment may fall by 30 thousand while employment rises by

only 25 thousand in the same month. This situation can occur because there are a
number of reasons why people cease to be unemployment.

As well as examining the number of people unemployed, the government is also

concerned with the duration of unemployment.

An unemployment rate of 3% consisting of people who are out of work on average

for two years is a bigger problem than an unemployment rate of 10% of people
being out of work on average for a month.
The Costs of Unemployment to Society
1. The main cost of unemployment to an economy is the opportunity cost of lost
output. When an economy has unemployed workers, it is not using all its resources
and is therefore not attaining its potential output.

2. When people are out of work, governments tend to receive less revenue in the
form of income and indirect taxes. Income taxes are lower because fewer people
earn salaries and indirect taxes are lower because people are spending less.

3. While tax revenue tends to decline, government expenditures may also be higher
because higher unemployment means more claims for unemployment benefits. As a
result, other areas of government spending such as education and healthcare may
also suffer. Unemployment also generates other pressures on government
expenditures. When people are out of work they are more likely to suffer from poor
physical and mental health. For example, there is a higher incidence of TB, in poor
households than middle or high-income households.

4.Financial worries and the loss of self-esteem can contribute to mental ill health, in
some cases resulting in suicide and the breakdown of relationships. As a result,
unemployment can increase government expenditure on health services and single-
parent support.

5. The fall in income can reduce the health and educational performance of the
children from poor families. This may have long term implications for health care
needs and the quality of the future labour force.

6. There is also some evidence of a link between the level of unemployment and
crime. Young men are particularly prone to unemployment. When they are out of
work, they may feel alienated from society and turn to crime to gain a higher income
and perhaps even a certain degree of status.

The Costs of Unemployment to The Individual

Most people who become unemployed experience a fall in income and standard of
living. In addition, some may experience a lost of status and pressure on other
relationships.

Unemployment also results in additional financial costs. When people are out of
work they may spend more time at home, which may increase their heating and
lighting bills. Applying for jobs and going for interviews also requires additional
expenditure.
 In addition, the longer the people are unemployed, the more they miss out training,
practice and promotion and the more difficult they will find it to gain employment.
This is especially so for jobs that requires specialized manual skills or up to date
knowledge.

However, being unemployed may have some benefits. It allows some people to
reappraise their skills and ambitions and to gain a more rewarding job.
Unemployment may also allow some individuals to increase their human capital for
example, by going back to university to obtain an MBA.

Unemployment also helps firms to keep existing wage rates down and make
workers more willing to accept new production methods and/or stricter work
practices.

Migration and unemployment

Anti immigration always claims immigration causes unemployment
Migrants earn wages and spend in local thats create more jobs
Migrants are more flexible than local workers
Migrants are always underemployment partly they just want to get the job quickly
and dont spend time searching for job.

Causes of Unemployment
Monetarist believe that even at the natural rate of unemployment, when the labour
market is in equilibrium some people still will unemployed.

This category known as Frictional and Structural unemployment

1) Frictional Unemployment

This is a result of the natural workings for an economy. At any point in time,
companies decline and new companies start up. During certain periods of year, fresh
graduates flood the job market. During the first few years of a persons working life
they tend to switch jobs frequently.

All this results in some workers being temporarily displaced at any point in time. The
reason for this temporary period of unemployment is because it takes time for the
worker to search for an appropriate job and/or to adjust his wage expectations.
Frictional unemployment is often voluntary.
2) Structural Unemployment

This results from a change in the fundamental structure of an economy. There are two
types of structural changes:

Geographical shift in comparative advantage. Industries tend to move geographically

in pursuit of the lowest costs of production. Since labour is not as mobile as capital,
the workers left behind may find it difficult to find employment in their home
country.

As technological advancement occurs, some workers may find it difficult to find

employment because their skills become outdated. For example, office clerks being
replaced by computers.

Structural unemployment tends to last longer and is more difficult to cure because it
takes time to retrain workers and/or to attract new industries to a depressed area.

Example of structural unemployment is international trade.

Its occur when workers lose their jobs because demand switches from their
industries to more competitive foreign industries.

3) Seasonal Unemployment

Seasonal unemployment refers to workers who out of work between periods of

employment example actors, roof repairers.
Seasonal unemployment is demand for workers fluctuates according to the time of
year. Example tourist guide, fisherman.

4) Demand deficient unemployment

The demand for labour is a derived demand, if the economy goes into recession, the
demand for goods and services will fall. (ADL shift left). If workers resist wage cuts,
disequilibrium unemployment of Q1 to Qe will exist.
 Even if wage rates fall, disequilibrium unemployment may persist.

This is because a cut in wages would reduce demand for goods and services, which
would cause firms to cut back their output further and make more workers
redundant

Policies to stimulate employment

In short run government can use Fiscal & Monetary policies to stimulate AD and
reduce unemployment.

These are mainly measures to boost total labour demand (reduce cyclical
unemployment)

Lower interest rates (a monetary policy stimulus)

A lower exchange rate (helps exporters)
Lower direct taxes (fiscal stimulus to spending power)
Government spending on major capital projects (e.g. improving the transport
infrastructure)
Employment subsidies (including the New Deal programme) designed to
reduce the cost to a business of employing additional workers
Incentives to encourage flows of foreign investment in the UK particularly
in areas of above average unemployment

In the long run supply side policies is the best solution.

These are measures to improve labour supply (reduce frictional and structural
unemployment)

Increased spending on education & training including an emphasis on

lifetime-learning)
Improved flows of information on job vacancies
Changes to tax and benefits to improve incentives
Measures designed to make the labour market more flexible so that workers
have the skills and education that gives them improved employment options
Exercises
1) Define Unemployment

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2) Define economically inactive people

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3) Find the unemployment rate given that a survey by the BLS reveals 30 people employed 10 people
unemployed, and 40 people out of the labor force.

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4) List the 4 major types of unemployment and the 4 major reasons for that unemployment.

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ii)________________________________________________________________________________
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iii)________________________________________________________________________________
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iv)________________________________________________________________________________
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5) List 5 costs of unemployment.

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iii) _______________________________________________________________________________

iv) _______________________________________________________________________________

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