Unemployment

Unemployment refers to a situation where people are willing and able to work but cannot find jobs.

The unemployed are therefore those people of ……………….. who are……………. jobs but are not able to
find paid………………...

The Labour Force:

The labour force refers to the number of people of working age who are available for work. It includes all
those who can contribute to the production of goods and services. There are the male and female workers of
working age who are employed and unemployed and seeking jobs.

Thus, labour Force = number employed + number unemployed

In fact, among people of working age, there are those who are…………………………., that is, those who are
not working and not trying to find jobs. These groups include the …………….., students enrolled in
universities, …………….. and the…………………….. These groups are not part of the labour force.

The unemployed, in contrast, belong to the labour force. It is because they represent an economic resource that
is not being currently used. Those in the labour force are the…………………………………….. groups.

Influences on the size of the labour Force:

• The school leaving age:

• The number of people who remain in full time education above the school leaving age

• The retirement age

• The proportion of women who join the labour force:

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Labour Force Participation Rate: the proportion of people of working age who belong to the labour force.

In fact, not all people of working age belong to the labour force. Some voluntarily do not seek jobs, for
example, housewives and students in full time education.

Thus, the labour force participation rate measures the % of the working population who are employed and
seeking jobs.

Labour Force Participation Rate: (Num employed + num unemployed) * 100

Population of working age

Influences on the Participation Rate:

• Wages offered – High wages will encourage people to seek work.

• Attitudes to working women – where it is acceptable for women to work, there will be fewer housewives
and therefore greater participation rate.
• Provision for care of children and elderly – If more nurseries and retirement homes are available at good
rates, the greater will be the participation rate.
• Proportion of school leavers who go for higher education – if there are more people in full time higher
education, the lower will be the participation rate. The proportion of school leavers that goes for higher
education will be influenced by the prevailing wage rates in the market and the cost of further education.
• Provision for disabled to work – the greater the number of employers who accept disabled people as
employees, the higher is the participation rate.

Level of Unemployment and Rate of Unemployment

• Level of unemployment : refers to the number of people who are unemployed, that is, willing to work
but are jobless.
• Rate of unemployment: It is the number unemployed as a percentage of the labour force.

Number of people unemployed * 100

Number in the Labour force

The level and the rate of unemployment may move in the same direction, meaning that if there are……….
numbers unemployed, the rate of unemployment also………………...

But it is not always the case. If the labour force increases…………………………… the number unemployed,
then the unemployment rate falls.

NOTE: Government also calculates the employment rate. But the employment rate measures the
numbers employed as a proportion of the working age population.

Employment Rate = Numbers employed *100

Numbers in working age population

Thus, the employment rate and unemployment rate do not add up to 100%.
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The Stock and Flow of Unemployment

A stock is measured at a particular time period whereas a flow is measured over time. The level of
unemployment and the rate of unemployment provide unemployment statistics at a point in time and are
therefore stock concepts.

They do not show the situation as people move in and out of unemployment, meaning it is not a flow concept.
For instance, the numbers unemployed might remain the same over time, but it need not be the same workers.

Some workers would have left the labour force while new ones have joined it.

- Left school or - Entered higher

university education
- Made redundant - Found
- Voluntarily stop Employment
working Unemployment - Became ill
- Improved health - Become a
- Stopped being homemaker
homemaker - Emigrated
- Migrated into the - Became a
country discouraged
worker

Measurement of Employment:

The two major ways of measuring unemployment are:

• Claimant Count Method: It involves counting those in receipt of unemployment related benefits.
The advantage of this method is that it is cheap and quick and information on people receiving
unemployment benefits is readily available to the government. In fact, it is based on information that
government collects as it pays out benefits.
On the other hand, the problem is that it is often inaccurate. It may understate or overstate the true
figure. Some may be employed but illegally claim benefits and some receiving unemployment benefits
may not be actively seeking jobs – ………………... Likewise, there can be many who are seeking jobs
but do not appear in the official figures and do not claim benefits – …………………….

• Labour Force Survey: This measure is more widely used than the claimant count method. According
to this measure, a survey must be conducted to measure unemployment and such survey is based on the
ILO (International Labour Organisation) definition of unemployment.
A person of ………………….. is unemployed if, in a specified period of time, they are ……………..
and they are available for work in the next two weeks and are seeking …………………………...
The advantage is that it is easier, more accurate as it picks up some of the groups not included in the
claimant count. Another advantage is that it is based on internationally agreed concepts and definitions
and can be used for international comparisons.
However, it is costly and time consuming to gather the information required. Also data collection is
based on surveys and can be subject to sampling error and to problems of data collection.
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 Causes of Unemployment

Cyclical Unemployment
• Cyclical unemployment is caused by lack of …………………………. Such unemployment occurs when
there is a fall in the total demand/ spending or aggregate demand for goods and services in the economy.
It is also known as Keynesian Unemployment or ……………………………. Unemployment.
It affects the whole economy and results in job losses across a range of industries.
If there is insufficient demand, firms will have to slow down or reduce production and output and
workers are made redundant, thereby leading to unemployment.
The economy achieves its equilibrium below its …………………………. level of output and it will
operate at a point inside the……………...

Structural Unemployment
• Structural unemployment is the result of changes to the …………….. of the economy.
Often there can be long-term structural changes in demand and supply that cause an industry to decline
and workers are made redundant while others expand.
Possible reasons for structural unemployment:
➢ Demand can fall if substitute products are found, hence the industry declines.
➢ Some industries lose their comparative advantage (…………………………) if other foreign
industries produce at lower cost.
➢ There can also be depletion of resources that automatically lead to the decline of an industry and
causes unemployment.
➢ Methods of production change, often driven by advances in ………………...

With such structural changes, there may be a mismatch between job vacancies and the skills,
qualifications, experience and geographical location of those who lose jobs. These prevent workers
from easily moving towards other industries, causing them to stay structurally unemployed for some
time.

The above changes lead to the decline of output from sunset industries while there can be some
industries that are growing in the economy (……………….. industries) but the unemployed workers in
the sunset industries might not find new jobs if they are occupationally immobile (if they do not have
new training).

Structural Unemployment can take a number of forms:

➢ Regional Unemployment: It occurs when declining industries are concentrated in particular
area/ areas of the country.
➢ Technological Unemployment: People are out of work due to the introduction of
…………………. techniques. Development of robots and their use in restaurants can reduce the
demand for waiters.
➢ International Unemployment: It occurs when demand shifts from domestic industries to more
competitive …………………… industries. The growth of cheaper steel industry in China has
led to loss of jobs in the US steel industry.

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 Frictional Unemployment
• Frictional Unemployment is unemployment that arises when workers are between jobs.
Frictional Unemployment may take different forms:
- Voluntary Unemployment: It occurs when workers are not willing to accept jobs at the current
wage rate and working conditions. This could be influenced by the extent to which the
unemployment benefit differs from low wage offered by employers. If what workers earn from the
low paid job is lower than benefits, the person may remain voluntarily unemployed.
- Search Unemployment: It is often observed that workers who are in the process of changing jobs
remain unemployed for some time before finding another job. They do not accept the first job or
jobs on offer. This is due to lack of information about jobs.
- Casual Unemployment occurs when people are out of work between periods of employment. This
is often the case for actors, or other types of labour who work on contracts or projects.
- Seasonal Unemployment refers to unemployment related to seasonal changes when demand for
labour is low. It will affect workers in the tourist industry during off peak seasons and workers in
agriculture/ farming during the non-harvest season.

Consequences of Unemployment
• To the Unemployed
The first impact of unemployment will be on those who are unemployed and their dependents. The
situation of unemployment represents a loss of income and in some countries unemployed workers do
not receive any financial assistance from the government.
Moreover, the loss of a job represents a loss of dignity in the society, and it is interpreted as a sign of
failure. The low income and the stress associated with unemployment often results in mental breakdown
and marital break ups. Some unemployed become easy preys for social evils like alcoholism and crime.
If a person is unemployed for a longer period, the chances of finding a new job fall because he loses the
existing skills as well as the training in new methods.

• To the firm
Firms can lose from rising unemployment. In fact, as more people are unemployed, their ability to
spend falls. Firms can have lower demand for their goods and services as people cut back on spending.
Thus. firms’ profits can fall and survival of certain enterprises can be at stake. Firms that are likely to be
hardest hit are those producing non-essential goods whose consumption can be postponed.

However, firms can also benefit from falling costs of labour. In times of high unemployment, there is
……………… pressure on wages. Workers have less bargaining power as labour can be easily
replaced. Trade Unions are also less likely to bargain for increased wages. Thus, firms gain from
reduced pressure on wages that can ………………. profits.

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• To the government
If people are unemployed, the level of consumer spending on goods and services will …………. and
thus government revenue from direct and indirect taxes will also……………...
On the other hand, expenditure on unemployment benefits will automatically ………….. Thus,
government spending …………………...
If the unemployed suffer from bad health and there is a rise in crime levels, the government may have to
spend more to deal with these issues. For instance, expenditure on health and law and order will
increase.
Falling revenues and increasing expenditure in the economy can cause…………………………….
Such expenditure involves an ………………………because expenditure is reduced elsewhere. Money
paid on unemployment benefits could have been spent to improve infrastructure.

• To the taxpayer
Unemployment could also impose some costs on those who work and earn incomes. They might have to
bear ……………….. taxes to finance the rising government expenditure. This can give rise to
………………………. effects and tax …………………. on the part of those who work.

The extent and seriousness of these costs are influenced by the numbers unemployed and the length of
time for which they are unemployed. In fact, longer periods of unemployment are more severe than
short-term unemployment.

• To the economy
Unemployment imposes a cost on the economy in the form of opportunity cost. There is a loss of output
that the economy could have produced if the unemployed workers were employed. The economy is not
using all its available resources and in terms of the PPC, it implies an economy operating ………………
the PPC (……………………)

If unemployment persists for a long time, it can push the economy in a recession with a fall in the
economy’s output.
Alongside the above, unemployment can increase crime and violence in the community. This gives rise
to a cost to the society (Rising externalities)

Significance of unemployment
The overall effects of unemployment depend on its rate, duration and type of unemployment.
A higher rate of unemployment means that the economy is producing well inside its PPC, thus forgoing
a large quantity of output.
The longer the duration of unemployment, the more significant becomes unemployment. Those in long
term unemployment will suffer from low incomes and they may suffer from poor mental health due to
stress.
The significance of unemployment also depends on the cause of unemployment. Frictional
unemployment is considered the least serious form of unemployment. Some unemployment is
unavoidable in a changing economy. On the other hand, cyclical unemployment can cause serious
problems – it affects many industries.
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Governments usually aim to keep unemployment as low as possible. Low unemployment is deemed to
be more beneficial than high unemployment.

However Low unemployment is not always a sign of a strong economy.

Low unemployment may not be beneficial if works are employed in low paid and insecure jobs, they
may experience under employment, they may in jobs that do not match their skills, or some may give up
on trying to find work.

If low unemployment results from previously unemployed workers getting good quality jobs, then it is
beneficial.

NOTE: The unemployment rate will vary between genders, age groups, ethnic backgrounds, regions
and skills.