SALIMAH MUSHARRIF Ch.

17 EMPLOYMENT

Ch. 17 EMPLOYMENT

DEFINITION
“Unemployment generally refers to all those people between the ages of 16
and 65 or more willing and able to work, but are without a job.” In recent
years, however, this definition has officially been changed to ‘the number of
people registered as unemployed and claiming unemployment benefits.” It is
expressed as a proportion of the working population. [Employers and self
employed]. This shows a lower rate of unemployment.

UNEMPLOYMENT RATE % = NUMBER OF UNEMPLOYED X 100

WORKING POPULATION

OR

UNEMPLOYMENT RATE % = NUMBER OF UNEMPLOYED X. 100

LABOR FORCE

FULL EMPLOYMENT
The situation 100% employment is not possible, thus full employment refers to a
situation when the percentage of unemployed lies between 2% and 3 % or 97%
to 98% percent employment.

CAUSES OF UNEMPLOYMENT
i) Fall in demand
• Demand increases, production decreases, unemployment
increases
• Government spending decreases, incomes decrease, demand
increases, unemployment increases
• Inflation increases, exports Decrease, local production decreases,
unemployment did increases

ii) Technological advances

• Technology replaces manpower

iii) But imperfections in the labor market

• Trade unions may demand very high wages, cost of production
increases, production decreases and unemployment increases
• Unemployment increases when unemployment benefits are paid,
especially to low paid workers who would rather give up their jobs
and earn benefits easily. This is called voluntary unemployment.
• Compulsory insurance of workers by the government means that
the cost of hiring workers increases therefore producers are
unwilling to employ more workers.
• Minimum wage set is too high
• Workers are immobile

Page 1 of 4
SALIMAH MUSHARRIF Ch. 17 EMPLOYMENT

TYPES OF UNEMPLOYMENT
The different types of unemployment arise due to immobility of labor and are
temporary.

i) Residual unemployment
There are always people who due to their physical or mental disabilities cannot
cope with modern production methods

ii) Frictional unemployment

This arises when people cannot step from one job to another quickly and spend
time unemployed as they search for new jobs. Thus the word “friction” meaning
something that slows down or stops them from moving.
a) Search unemployment
People do not take the first job but search for one which better
meets their requirements
b) Casual unemployment
Some people are out of work between periods of employment,
example opera singer, actors, roof repairers etc.

iii) Seasonal unemployment

This happens in industries which produce seasonal goods such as farming,
buildings or tourist industry. In winter, say, in tourists resorts many shopkeepers,
camp or hotel workers are not needed and so laid off.

iv) Structural unemployment

IMP…Structural unemployment is only a problem if it converts to Regional
unemployment
This arises from long term changes in the structure of an economy. It happens
when the demand for a particular commodity falls greatly. Firms involved in the
production of this commodity have to shut down and lay off workers who have old
skills that are now unwanted example mining.
a) Regional unemployment
When the declining industry is concentrated in just one area, so that the region is
dependent on that industry it suffers heavy unemployment.
b) Technological unemployment
This occurs with the introduction of new technology example ATM’s reducing the
need for-counter personnel
c) International unemployment
This happens when workers lose their jobs due to a decrease in demand for local
products

Page 2 of 4
SALIMAH MUSHARRIF Ch. 17 EMPLOYMENT

v) Cyclical unemployment/ Demand Deficient Unemployment

IMP…It is important to remember that this is a matter of great concern
It is associated with the trade cycles that is, boom and slum, thus its name.
Cyclical or demand deficient unemployment occurs when the aggregate demand
in the economy is very low. When aggregate demand is low it brings a fall in
investment, government spending, exports and causes mass unemployment. A
country hit very hard by cyclical unemployment is said to be suffering from a
slump or recession. According to Keynes, reflationary, fiscal and monetary
policies will stimulate demand and therefore output and employment in the
economy. (reflationary policy is one aimed at increasing demand and output in
the economy)

For example as aggregate demand decreases, wages should fall because

production has decreased. But when this does not happen, or wages are set
above the free market price, unemployment increases because people will be
laid off by firms. So the government increases spending, lowers taxes and
interest rates.

It is in cyclical unemployment that stagflation occurs (both inflation and

unemployment exist at the same time in an economy). To help this, the
government needs to interfere, because productivity is low and the dependency
on government benefits [by the unemployed] is high.

CONSEQUENCES/EFFECTS OF UNEMPLOYMENT

Benefits

To those unemployed
 It gives people time to explore job opportunities and apply for them
 Provides leisure time
 The unemployed may be offered training and education by the
government so that they may gain a more rewarding job
 Unemployment benefits may be received
To society
 It creates more flexibility in the economy in the sense that if there is a pool
of unemployed workers and the economy needs to expand, it can do so
relatively quickly and easily
 It is said that unemployment decreases cost push inflation by lowering
wage claims, making workers more willing to learn new techniques and
trade unions are more reluctant to take action.

Page 3 of 4
SALIMAH MUSHARRIF Ch. 17 EMPLOYMENT

Costs

To the unemployed

Economic costs of unemployment

 Even though people have time for leisure they may not have the income
 Long periods of unemployment reduce the value of human capital since
their skills become rusty and they miss out on new training methods
 The longer a person is out of a job, the longer they are unlikely to find a
new job

Social costs
 Status lost due to social stigma
 It causes social adversities such as divorces, suicide, depression Etc
 Increase in crime rate
To society

 The main cost is the output lost. This is the opportunity cost of
unemployment. Even if unemployment later falls, the lost output cannot be
gained and people enjoy fewer goods and services than they could have
with higher employment.
 The country produces inside its PPC
 As unemployment is high, incomes are low so tax revenue is low. On the
contrary the government has to spend on unemployment benefits.
 The government spending decreases as taxes decrease, so that social
projects are not taken up and the standard of living further falls.
 The burden of the unemployed is not evenly borne by society, as the
minorities and those lacking skills will face higher unemployment.
 Crime increases

Cost for people in work

As unemployment benefits are paid and tax revenue is less, the working have to
pay higher taxes and bear the cost of unemployment.

ASSIGNMENT:
 ADVANTAGES OF LOW UNEMPLOYMENT
 SHOULD LOW UNEMPLOYMENT BE MAIN AIM OF GOVERNMENT
POLICY?
 HOW UNEMPLOYMENT IN THE ECONOMY CAN AFFECT A
GOVERNMENTS BUDGET?

Page 4 of 4