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Subject ECONOMICS

Paper No and Title 8: Economic Planning in India: Overview & Challanges

Module No and Title 20: Unemployment

Module Tag ECO_P8_M20

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
____________________________________________________________________________________________________

TABLE OF CONTENTS
1. Learning Outcomes
2. Introduction
3. Theories of Unemployment
4. Types of Unemployment
5. Causes of Unemployment
6. Consequences of Unemployment
7. Unemployment in India at a glance
8. Looking Ahead

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
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1. Learning Outcomes
After studying this module, you shall be able to know about

 The basic categorization of unemployment

 The reasons and consequences of unemployment
 Reasons for soaring unemployment in India
 Policy actions needed to cure this issue

2. Introduction

Unemployment is a glaring problem in mostly every nation today. Developed, developing

or underdeveloped countries all face the problem with the difference lying in the extent of
unemployment. According to a report by the International Labour Organisation over 201
million people were unemployed in 2014 around the world, which were over 31 million
more than before the start of the global crisis of 2008. The global unemployment is
expected to increase by 3 million in 2015 and by a further 8 million in the following four
years. Youth, especially young women, continue to be disproportionately affected by
unemployment. Approximately 74 million young people (aged 15–24) were looking for
work in 2014. The youth unemployment rate is practically 3 times higher than the
unemployment rate of their adult counterparts. The heightened youth unemployment
situation is common to all regions and is occurring despite the trend improvement in
educational attainment. This is creating social discontent.
This paper takes us through the basic concepts of Unemployment and the possible
measures how to create more jobs and bring down the unemployment rate.
Unemployment can be defined as a state where people who are willing to work are
unable to find work and earn a living. It occurs when the supply of labour is more than
the demand for labor. To know the extent of unemployment we calculate what is known
as the unemployment rate. It is calculated as a percentage by dividing the number of
unemployed individuals by all individuals currently in the labour force. There are many
debates regarding the causes, consequences and solutions for unemployment.

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
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3. Theories of Unemployment

Time and again there have been various economic literature on unemployment to explain
the root cause of unemployment. These have addressed the problem
1. Classical Theory: According to this theory market is characterized with a smooth
labour demand and supply curve. The wage rate adjusts itself to ensure there is
equilibrium between demand for labour and supply for labour. Since the market is
free to adjust, everyone seeking a job finds a job. The figure represents a labor
market where demand curve and supply curve of labour are given. The
equilibrium is marked as “E” which is point of intersection of both the curves. At
E labour demand is equal to labour supply. At In such a scenario there is no
involuntary unemployment. At any point above E there will be unemployment.
Classical economics argue 40
that unemployment in this
35
case can only occurs due
obstruction in the functioning 30
of the labour market. These 25
E
obstructions can be
20
interventions such as wage rate Supply of
unionization, bureaucratic 15 labour
work rules, minimum wage 10
Demand for
laws, taxes, and other 5 labour
regulations that according to
0
them discourage the hiring of 10 20 30 40 50 60 70
workers. This theory units of labour
proposes getting rid of all
regulations and social
programs that hinder the functioning of a free market. The recommendation is
based on the principle of laissez faire i.e. leave it alone.
2. Keynesian Theory: This theory on unemployment on the other hand sheds light
upon the cyclical nature of unemployment and recommends government
interventions in the economy will reduce unemployment during recessions. It
emphasizes on recurrent shocks that suddenly reduce aggregate demand for goods
and services and thus reduce demand for workers. A reduction in demand calls for
organisations to cut down on production and costs, which means they lay-off
workers. Thus according to this theory unemployment is a result of fall in
aggregate demand. Keynesian models recommend government interventions
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
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designed to increase demand for workers; these can include financial stimuli,
publicly funded job creation, and expansionist monetary policies. Keynes
believed that the root cause of unemployment is the desire of investors to receive
more money rather than produce more products, which is not possible without
public bodies producing new money.

4. Types of Unemployment

In addition to the above mentioned theories of unemployment, there are a few

categorizations of unemployment that are used to more precisely show the effects of
unemployment within the economic system

1. Voluntary Employment: At a very basic level, unemployment can be broken

down into voluntary unemployment- unemployment due to people willingly
leaving previous jobs and now looking for new ones
2. Involuntary unemployment- It is the unemployment that occurs due to people
getting laid off or fired from their previous jobs and needing to find work
elsewhere. Involuntary unemployment as a larger problem than voluntary
unemployment since voluntary unemployment likely reflects utility-maximizing
household choices.
3. Frictional Unemployment: Frictional unemployment is unemployment that
occurs when people are moving from one job to another for a better opportunity.
The transitional period when a person is looking for a job and when he finds one
he is considered unemployed. However such employment usually lasts for shorter
periods and is not a cause of concern from the economy’s point of view. Students
looking for jobs for first time, an individual looking for a new job because of
location change or a women re-entering the work force after having children are
all examples of frictionally employed people.
4. Cyclical Unemployment: Cyclical or demand deficient unemployment is the
unemployment that occurs due to business cycles. In periods of high economic
growth or economic boom there is high demand for goods and services and
companies hire more people to produce more to meet the increasing demand.
However during recessions or depressions when there is low demand companies
tend to lay-off workers to cut down production and costs. This leads to a situation
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
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where supply of labor is more than the demand for labour, thus unemployment.
Since this kind of unemployment is associate with business cycles its called
cyclical unemployment. As the economy recovers the unemployment tends to
naturally disappear. Thus the cause of concern for economists is not cyclical
unemployment but the root cause of recession, which causes it.
5. Structural Unemployment: There are two ways to look at structural
unemployment. One way is that such kind of unemployment occurs because some
labor markets have more workers than there are jobs available, and for some
reason wages don't decrease to bring the markets into equilibrium. Another way is
that structural unemployment results when workers possess skills that aren't in
high demand in the marketplace and lack skills that are in high demand. In other
words, structural unemployment results due to a mismatch between workers' skills
and employers' needs. Structural unemployment is considered as a significant
problem, because structural unemployment tends to be largely of the long-term
nature and retraining workers is not a cheap or easy task.
6. Disguised Unemployment: This kind unemployment mostly occurs in
developing and underdeveloped economies where the agriculture sector is the key
source of employment. Since agriculture is a family occupation and income is on
sharing basis there are usually more people working on a piece of land than
required. The marginal productivity of an additional workers is zero or negligible.
Works who contribute nothing towards the output are said to be disguisedly
unemployed.
7. Seasonal unemployment: It is unemployment that occurs because the demand
for some workers varies widely over the course of the year. For example, Pool
lifeguards. Seasonal unemployment can be thought of as a form of structural
unemployment, mainly because the skills of the seasonal employees are not
needed in certain labor markets for at least some part of the year. Seasonal
unemployment is considered less chronic as it forms a regular pattern and
resurfaces from time to time.
8. Technological Unemployment: This kind of unemployment occurs when due to
adoption of a new technology workers are displaced. This one of the most
prevalent today. The use of new technology is not only bringing down costs but
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
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also producing better products. Thus there is greater incentive to move towards
better technology. However the adoption in technology is at much faster rate than
the creation of new opportunities of the workers displaced. The economies are not
able to absorb the millions losing jobs.

5. Causes of Unemployment
The theories on unemployment and the categorizations gives us basic understanding of
the kind of unemployment that exists in different countries. The major concern of any
country is structural unemployment as this long-term unemployment and various policy
actions are required to bring down this kind of unemployment. We will now discuss
various reasons for structural unemployment.

1. Slow growth of GDP: In developed economies, there is a strong link relation

between GDP growth and employment creation. A sluggish growth of GDP can
dampen job creation.

2. Rapid changes in technology: The use of modern technology is the one of the
biggest reasons for increase in unemployment. It’s a cause that is common
worldwide. As technology is progressing there is lesser need for manual labour
and more demand for skilled labour. The developed nations are faster in adjusting
in adjusting to the new technology have lesser people unemployed as they gave
better educational and training facilities. However the countries where major
labour force is unskilled the issue is even bigger. The new technology is
displacing hundreds of people, as they don’t have the necessary skills or the
institutions to develop these skills.

3. Lack of capital: Most countries, which face high unemployment, are those who
have shortage of capital. When new projects start they create million jobs for both
skilled and unskilled labour. However countries facing shortage of capital cannot
invest in such projects to create such jobs. Moreover the lack of capital inhibits a
country’s capacity to build institutions to train labour and meet the growing
market demand. Thus such countries have large pool of unskilled labour force.

4. Over Population: Another reason for high unemployment is high rate of

population growth. Large population puts a pressure on the economy’s resources
and further aggravates the unemployment issue.

5. Low Level of Education: As the technology is advancing there is a demand for

skilled labour force. However if the educational level in a country is low then it
cannot have a skilled set of labour force. Thus unemployment increases due to
low level of education.
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
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6. Poverty: Another major reason for high unemployment in a country is mass level
poverty. Poverty means people cannot afford good educational facilities. This
means that level of education is low and thus these people cannot get a job as they
do not meet the desired level of skill set. Thus either it increases structural
unemployment or disguised unemployment.

7. Poor performance of Agriculture sector: This issue is relevant for all countries
that have agriculture as a primary sector. This sector creates disguised
employment at large scale. Eg. In India agriculture provides employment to
approximately 60% of the population where its contribution to GDP is just 15.1.
This means the marginal productivity of an additional labour is negligible. Just
like India most of the developing and underdeveloped countries are agrarian in
nature and stuck in between the transition from agriculture to service sector
oriented economy

6. Consequences of Unemployment

1. Increase in Poverty: unemployment as defined earlier is the state where people

willing to work are unable to find work. Thus if people cant find work it means
they don’t have money which increases the extent of poverty.

2. Increase in Inequality: Unemployment has led to increase in the income gap

among people. Since the rich are able to afford better education hence better skills
they get easily absorbed in the labour market. However the poor or the less
privileged that have lesser access are unable to find jobs matching their skills.
Thus this further increased the inequality gap.

3. Low level of living Standard: No income means people cannot afford basic
amenities such as a clean drinking water and sanitation also. Thus countries that
have high unemployment rate have a low standard of living.

4. Less Access to healthcare: Poverty due to lack of unemployment opportunity

further inhibits the unemployed from accessing healthcare services. Poor health
itself constraints physical strength of workers lowering further employment
opportunities.

5. Social Cost: As we all know an empty mind is a devil’s workshop the increase in
unemployment is directly related to the growth of crime rate. People unable to
find jobs find themselves stealing murdering and getting all sorts of crimes to

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
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make money. Social cost is also in terms of loss in self-esteem of a person looking
for a job. He/she may have the skills but due to lack of demand for his skills
he/she is unable to find the job for his/her potential. Incase the person in question
doesn’t want to settle for anything lower he/she might remain unemployed which
also lowers the self-esteem.

6. Loss of national output: Unemployment also involves a loss of potential national

output. This is because when an economy is operating below full employment
level it implies GDP is below potential. It is a waste of scarce resources.
Moreover lack of opportunities may cause some people to permanently move out
of labour market because they have lost the motivation of looking for a job. This
can have a negative effect on long run aggregate supply and thereby damage the
economy’s growth potential. Some economists call this the “hysteresis effect”.
When unemployment is high there will be an increase in spare capacity - in other
words the output gap will become negative and this can have deflationary forces
on prices, profits and output.

7. Fiscal costs: Government loss comes in form of loss of potential tax revenue and
higher spending on welfare benefits and unemployment benefits. This results in
increase in pressure on the budget deficit. This increases the risk of government
raising taxes to meet the deficit or cutting down various expenditures.

7. Unemployment in India at a glance

The unemployment situation in India currently is quite grim. It has averaged around 9%
from the period from 1983-2014. Most of the unemployment is structural in nature,
which means the economy is not able to absorb the growing labour force. Since India is
an agrarian economy major source of occupation is this sector. However the growth in
this sector has been very slow. The agriculture sector employs approximately 60% of the
labour force but only contributes around 15.1% to the GDP. 1/3 of the labour force in this
sector is disguisedly unemployed. The wages are extremely low due to large labour
supply. Agricultural labourers and self-cultivating farmers constitute approximately 42
and 47 percent of the rural poor. Most of these people are stuck in the vicious circle of
poverty. Low wages in this sector have further increased poverty and inequality. The low
wages have forced people to seek work outside which has led to the growth in the
informal sector. This sector consists of all the people who have shifted out of agriculture
and yet not found work in the secondary or tertiary sectors. It consists of cobblers,
hawkers, barbers, plumbers etc.
Low productivity of the agriculture, over population, High income Inequality, low
educational level and acute poverty are factors that have contributed to unemployment.
Government has tried to implement many employment generation schemes of which
MGNREGA being the biggest. This scheme ensured 100 days of unemployment to
workers enrolled under this scheme.

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
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Food for work is another such program providing wage employment in drought-affected
areas where wages are paid partly in cash and partly in food grains. Prime Minister
Employment Generation Program is another initiative by the GOI to promote self-
employment ventures/projects in both rural and urban India.

Government has also initiated training programs to enhance the skills of the people. But
poor implementation of these programs have not only failed the policies but increased the
fiscal burden also.

8. Looking Ahead

Now the big question that arises is how can an ailing job market be cured and what can
be done to create more jobs and promote decent work. There are few policy actions that
can be taken by the government to reduce unemployment.

1. Increase aggregate demand: Increase in aggregate demand means increase in

output to meet the demand. This means organizations need to hire more workers
to increase production. This can be done through an expansionary monetary
policy or an expansionary fiscal policy.

2. Government Expenditure of Infrastructure and Public Works Projects: Most

developing countries do not have adequate infrastructure. So one of the best ways
to create jobs is public expenditure on infrastructure such as roads, buildings,
hospitals schools etc. This not only creates demand for skilled workers like
engineers and managers who design such structures but also unskilled workers
like masons and plumbers.

3. Developing institutes and better training programs: Another step towards

combatting unemployment is to develop institutes, which gives training to
workers. There is mass level unemployment due to a mismatch between the
demand for skill and supply. To bridge the gap a government needs to build
institutions which give professional training so that can get a better opportunities
in the market. Building such institutes it self gives employment opportunities to
people who have the ability to give the training like teachers for example.

4. Support to small and medium scale enterprises: Large organizations have

easier access to capital and economies of scale in operation. However banks
reluctance to fund the small-scale operations that have little or no cash and
uncertain prospects and a relatively small number of customers. The central
government should shoulder some of the risk of small business loans and provide
new incentives for banks to lend to smaller businesses.

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment
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Government should support the struggling business enterprises as they have the
potential to create many job opportunities.

5. Providing Unemployment Benefits: Unemployment benefits should be provided

to those who register them as unemployed with an undertaking that they will
actively look for work. This is a form a social security for the unemployed. It
prevents them from falling into acute poverty. Increase in unemployment also
means fall in the purchasing power of these people. By government ensuring
social security to these people government can prevent fall in aggregate demand
and ensure the unemployed do not resort to crime and other means of income.

Unemployment is a disease affecting millions of people world wide and it is time joint
effort be made to cure this problem.

ECONOMICS PAPER No. 8: Economic Planning in India: Overview &

Challenges
MODULE No. 20: Unemployment