Тopic 12. Employment and unemployment.

1. Employment and unemployment.

2. Social and economic consequences of unemployment

1. Employment and unemployment

All the population of a country can be divided into the following groups.
1. Economically inactive population and people who are not included in the labor
force. These are: children under the age of 16 years; retirees; people who are
institutionalized, for example, in mental hospitals or correctional institutions; disabled
people; people who stopped job searching.
2. The labor force (Economically active population) consists of people who are able
and willing to work. Both those who are employed and those who are unemployed but
actively seeking work are counted as being in the labor force.

labor force= employed people + unemployed people

Законодавчо встановлений працездатний вік в Україні – від 15 до 70
роківЗайняте населення — це працездатне населення від 16 до 55 років (жінки) і 60
років (чоловіки).

According to the Law of Ukraine “On Employment of people” employed people are
those who are Employed as hired labor, who are self-employed; who are elected or
appointed to a paid position at Government bodies or public organizations; military
personnel; students, pupils, people at training.
According to the Law of Ukraine unemployed people are able-bodied population at
the age able to work, who due to lack of job do not have earnings or other income and
registered at employment service as those who are looking for work, willing and able to
perform relevant work.
People who are not recognized as unemployed:
 citizens under the age of 16, except those who have been dismissed and have
already worked;
 those who are looking for a job for the first time and do not have a profession;
 those who have refused of two offers of suitable work since they were
registered in State employment service;
 who are entitled to pensions.
 Unemployment is a social and economic phenomenon on a labor market, when
economically active population is not involved in the production process.
Causes of unemployment (see the diagram)

The major Indicators of labor usage are employment rate and unemployment rate.
Re = (E / L )*100%
де Re – рівень зайнятості; E - чисельність зайнятих; L – чисельність
робочої сили;
The unemployment rate (Ru) is the percentage of the labor force unemployed:

There are several types of unemployment, marked out by scientists.

Frictional unemployment—consists of search unemployment and wait
unemployment— for workers who are either searching for jobs or waiting to take jobs in
the near future. Frictional unemployment is inevitable and, at least in part, desirable.
Frictional unemployment is short-term.
Structural unemployment is connected with changes in “structure” of the total
demand for labor, both occupationally and geographically, that occur over time because
of changes in consumer demand and in technology. Structural unemployment is more
likely to be long-term and consequently more serious.
Unemployment that is caused by a decline in total spending is called cyclical
unemployment and typically begins in the recession phase of the business cycle. Cyclical
unemployment results from insufficient demand for goods and services.

(Voluntary unemployment arises because employees do not agree to work under the terms of given
wages, and agree to work only for higher salary.
Involuntary unemployment is generated by inflexible salaries. If wage is too high from a position
of market equilibrium and it does not reduce, there is excess supply of labor and only the part of workers
gets a place, others will be unemployed.
Hidden unemployment occurs if the number of employees exceeds the objective need. (like it was in
USSR) )
 Because frictional and structural unemployment is largely unavoidable in a dynamic
economy, full employment is something less than 100 percent employment of the labor
force. Economists say that the economy is “fully employed” when it is experiencing only
frictional and structural unemployment, that amount to natural unemployment. That is,
full employment occurs when there is no cyclical unemployment.

NRU = frictional unemployment + structural unemployment

At the natural rate of unemployment (NRU), the economy is said to be producing its
potential output.
Potential output is the real GDP that occurs when the economy is “fully employed.”

2. Social and economic consequences of unemployment.

Unemployment that is excessive involves great economic and social costs.
The basic economic cost of unemployment is forgone output.
When the economy fails to create enough jobs for all who are able and willing to
work, potential production of goods and services is lost. In terms of Chapter 1’s analysis,
unemployment above the natural rate means that society is operating at some point inside
its production possibilities curve.
Economists call this sacrifice of output a GDP gap—the difference between actual
and potential GDP. That is:

Okun's Law argues that if actual unemployment rate is above the natural rate of
unemployment by 1%, the actual output is below potential output for β%:

(Y-Y*)/Y* = - β(uфакт - u*)

Noneconomic, social Costs of unemployment consist of the following:

 poverty,
 loss of skills,
 loss of selfrespect,
 plummeting morale,
 family disintegration,
 sociopolitical unrest,
 racial and ethnic tensions.