PRINCIPLES OF ECONOMICS

TOPIC:
UNEMPLOYMENT

PREP BY: KENANI, M 1

 Introduction

 Unemployment of labor refers to a situation whereby people

are willing and able to work but can not find jobs or works
Forms/ Types of Unemployment
I. Structural Unemployment. This is a type of unemployment
which occurs due to decline of an industry caused by a
decrease in demand for the product produced by the
industry or change in the technology of producing the
product, that is, when competitors emerge with a new
technology which the industry can not cope with.
 Also when a labor saving technology is introduced in a
factory then many people will lose their job (structural
unemployment).
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 Cont..
II. Casual/erratic unemployment. This type of
unemployment occurs when workers are laid off in
some economic activities which occurs in short time
basis or temporarily. Examples of such activities are
tourism, construction, catering etc. These activities
occur temporarily, workers who work in these
activities become unemployed in some periods of
time
III. Seasonal unemployment. This is a type of casual
unemployment which is caused by a regular
fluctuation in weather conditions. For example,
peasants become unemployed after the agricultural
seasons have passed.
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 Cont..
IV. Disguised/ hidden unemployment. This occurs when
labor is under utilized. This means, a work given to a
certain worker is insufficient (not enough) to make the
worker fully employed. For example, if two workers
perform a work which could be done by only one
worker, then these two workers are said to be disguised
unemployed
V. Cyclical/ mass unemployment. This occurs when there
is a general decline in the whole economy. It means
during the period of economic depression. During this
period, almost all the workers lose their jobs.
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 Cont..
VI. Frictional unemployment. Occurs as a result from
friction in the labor market; which creates a delay or
time lag during which a worker is unemployed when
moving from one job to another.
VII. Classical/ real wage unemployment. This occurs when
there is excessive increase in real wages. As a result,
demand for labor decrease while supply of labor
increase. Hence workers become unemployed
VIII. Residual unemployment. This catches all categories
covering any other possible cause of unemployment.
This may include people with physical disabilities

PREP BY: KENANI, M 5

 Causes of Unemployment

 Technological change. For example the use of conveyor

belts to lift cargo in factories and the introduction of
computers in offices, has replaced the use of labor force
and cause unemployment
 Decline in aggregate demand. This causes a decline in
production, hence the reduction of workers.
 Climatic change. Bad weather condition may affect
various economic activities such as mining, agriculture,
construction works, etc. Therefore, people who work in
these areas lose their jobs.
 Lack of capital goods which retard investment and
production, hence unemployment.

PREP BY: KENANI, M 6

 Cont…
 Monetary factors. For example, a decrease in money
supply will retards investments and hence
unemployment
 Fiscal factors.Also a decrease in government spending in
public works like construction may cause unemployment.
 Population pressure. For example a greater number of
graduates every year may lead to unemployed because
the labor market can not accommodate all of them.
 Lack of supplementary activities in rural areas. People in
rural areas become unemployed when they have
completed farming activities and when weather
condition is unfavorable for farming

PREP BY: KENANI, M 7

 Effects of Unemployment

 Unemployment has both negative and positive effects:

Negative impact of unemployment
 Decline in the size of national income. National income is
reduced by the proportion that could be produced by the
unemployed people if they were employed.
 Increase in the dependence ratio. A large number of
unemployed people increase the number of dependants.
 Decline in saving capacity of income earners. Savings by
income earners decline due to large burden of helping
unemployed people who are close relatives.

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 Cont..
 Emergence of social evils. Lack of unemployment may
cause some people to engage in social evils such as
robbery, prostitution and theft in order to survive
 Emergence of classes. This is between people who are
employed and those who are unemployed.
 Increase in the government burden. This is very common
in countries where unemployed people are paid
unemployment benefits by the government. This burden
may be transferred to tax payers.

PREP BY: KENANI, M 9

 Positive effects of unemployment
 Increase in the supply of labor. A large number of
unemployed people may increase the supply of labor and
therefore reduce the level of wages and the cost of
production.
 Increase in work discipline. Those employed may become
disciplined for fear of losing their jobs due to existence of
large number of unemployed people who are searching
for the same job.
 A remedy for demand pull inflation. Unemployment
reduces disposable incomes of income earners and their
purchasing power. A decrease in purchasing power may
be a remedy for demand-pull inflation
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 Cont..
 Firms can pick the best employees.
Solutions of unemployment
 Application of labor intensive technique of
production
 Establishment of irrigation schemes especially in
areas where rainfall is inadequate
 Diversification of the economy. This is through the
establishment of many economic sectors such as
agriculture, mining, tourism, industries, fishing etc in
order to employ many people.
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 Cont..
 Expansionary monetary policy. This can be done by
reducing the rate of interest. This is because the low rate
of interest would always attracts investors to borrow
money from banks for investment. An increase in
investments creates more employment opportunities
 Expansionary fiscal policy. This can also help to reduce
the unemployment rate through increasing government
expenditures in public works that will help to create
more jobs, and through the reduction of tax
 Promotion of exports by reducing export tariffs and
providing export incentives.

PREP BY: KENANI, M 12

 Cont..
Establishment of supplementary activities in
the rural areas. This will help to solve the
problem of seasonal unemployment in the
rural areas
Provision of entrepreneurial education to
students and other people in the country. This
will assist people to employ themselves.
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PREP BY: KENANI, M 13