UNIT 7

Unemployment
 LECTURE OUTLINE

Unemployment definition

The costs of unemployment

The types of unemployment

 UNEMPLOYMENT

Introduction
High and prolonged unemployment is a sign of a malfunctioning economy. Being unemployed is,
for most people, a highly distressing experience that causes damage in many ways that cannot be
quantified.
 UNEMPLOYMENT

Definition:
According to ILO, unemployment (being unemployed) refers to those of a working age, who in a
specified period, are without work and are both available for, and have taken specific steps to
find work.
 UNEMPLOYMENT

This definition is not comprehensive and has the following shortcomings since it
implies that:
• People who work part-time because they cannot find full time employment are fully
employed; and
• People functioning in the ‘shadow’ economy (e.g. informal traders) are considered to be
unemployed.
 THE COSTS OF UNEMPLOYMENT

Economic Costs
• Lost output resulting in potential GDP (the real GDP the economy would produce if its
labour and other resources were fully utilised).

• Unemployment insurance payments – payment for workers who are not working. These
funds could be utilised for other purposes.
 THE COSTS OF UNEMPLOYMENT

Non-economic Costs
• Increased crime and (labour) unrest; and
• The unemployed can become dispondent and ‘rusty’.
 THE COSTS OF UNEMPLOYMENT

Cyclical Unemployment:

Any temporary drop in aggregate demand of a country results in cyclical unemployment.

This leads to a recession – drop in real GDP – in the country.

The drop in real GDP can be caused by a drop in consumption, government spending,
investments or exports.
 TYPES OF UNEMPLOYMENT

Structural and Technical Unemployment:

Results when there is a drop in demand that is of a permanent nature.

For example, if many qualified labourers cannot be employed by an industry because the
industry has undergone structural changes (closure of gold mines and decline in gold production)

If, on the other hand, people become unemployed because of technological changes such as
automation, then this type of unemployment is referred to as technical unemployment.
 TYPES OF UNEMPLOYMENT

Structural and Technical Unemployment:

Often legislation puts people out of work (restrictive tobacco legislation
reduces work opportunities along the whole value chain), minimum
wage laws makes it particularly difficult for the entry level employee to
enter the job market.

Equal pay for equal work makes it difficult for designated groups to
compete.
 TYPES OF UNEMPLOYMENT

Seasonal Unemployment:

This type of unemployment occurs when employees only work during a certain time(s) of the
year and, therefore, during other months they are regarded as unemployed.
 TYPES OF UNEMPLOYMENT

Disguised/Hidden Unemployment:

Is said to exist if people who were previously fully employed, have had their hours (and,
therefore, salaries) reduced because of poor business performance.
 TYPES OF UNEMPLOYMENT

Frictional Unemployment:

Even under the most favourable conditions, a certain percentage of people will always be
unemployed.

This ever-present unemployment is referred to as frictional unemployment (this includes people

who are temporarily between jobs).
 POLICIES TO REDUCE UNEMPLOYMENT
Supply side policies:
1] On the supply side, rapid population growth can be a significant cause of unemployment.
Steps taken to limit population growth can thus be regarded as part of the strategy to reduce
unemployment.
2] Any decline in the growth (or even the level) of the domestic population can be negated by a
net increase in immigration. This is a particularly serious problem in South Africa, since many
unemployed workers from other sub-Saharan countries and others seeking their fortunes in
South Africa enter the country legally or illegally in pursuit of employment and income. Stricter
immigration control can therefore also be regarded as an element of a policy strategy to reduce
unemployment.
 POLICIES TO REDUCE UNEMPLOYMENT

Supply side policies:

3] Other relevant features of the supply of labour in South Africa are the shortage of skills and
the oversupply of unskilled and semi-skilled labour. Even when the aggregate demand for goods
and services (and therefore also for labour) is low, there are always vacancies for people with
certain technical or professional skills or qualifications. On the other hand, people with no
training or skills have difficulty finding employment, even when there is an excess demand for
skilled workers. Any strategy to reduce unemployment in South Africa must therefore include
policies to improve the quality of labour, for example through education and training
 POLICIES TO REDUCE UNEMPLOYMENT

Demand side policies:

1] Raising the aggregate demand for goods
• Government can, of course, always raise the aggregate demand for goods and services by
spending more. But increased government spending has to be financed either by raising taxes or
borrowing.
• Another possible option is to stimulate consumption and investment spending by lowering taxes or
interest rates.
• A more promising strategy would be to raise the demand for domestically produced goods and
services by increasing the demand for exports
 POLICIES TO REDUCE UNEMPLOYMENT

Demand side policies:

2] Increasing the labour intensity of production
The idea here is to promote types of economic activity which are relatively labour intensive:
• It is often argued, for example, that government spending on housing will create more jobs
than most other forms of government spending, both directly and through the linkages
between the construction sector and the rest of the economy
• The government can also embark on special employment programmes that are aimed at
employing as many people as possible to build and maintain roads, build dams, clean the
environment, develop new agricultural land and so on.
 POLICIES TO REDUCE UNEMPLOYMENT

Demand side policies:

2] Increasing the labour intensity of production
The idea here is to promote types of economic activity which are relatively labour intensive:
• Another possible avenue is to promote small businesses and the informal sector. It is often
claimed that small businesses are much more labour intensive than larger enterprises and that
the promotion of such businesses will thus raise employment (and reduce unemployment).
• Yet another possibility is tax incentives or subsidies to stimulate employment. The idea is that
employers will receive tax benefits or subsidies if they employ more people