Lecture 21 - Unemployment

MBA ECONOMICS
LECTURE 21
UNEMPLOYMENT
December 8, 2021 PETER PARIAG 1

Lecture Outline
1. Introduction – Discussion of Definitions
2. Types of Unemployment
3. Unemployment and poverty
4. Statistics on the Labour Force
5. Why unemployment is a serious problem?
6. Factors producing growing unemployment
7. Government policies to influence unemployment
8. Solutions to unemployment
9. Unemployment and inflation
Introduction – Discussion of Definitions
Labour Force
‘Of the population 15 years old and over covered in the
survey period, all persons engaged in, or willing and able to
be engaged in the production of economic goods and
services are classified as being in the labour force’.
‘These include employees, as well as employers and the self
employed’.
The labour force is therefore comprised of all persons who
either had jobs (the employed), or, if they did not have jobs,
were willing and able to work ( the unemployed).
Employed and the Unemployed
• EMPLOYED (have jobs) UNEMPLOYED ( did not have jobs)
1. Employees 3 criteria must be satisfied:
2. Employers 1.Without work
3. Self- employed 2.Currently available for work
Persons with jobs 3.Actively seeking work.
• All persons who worked for pay Without work – were not in paid
for any length of time during the employment during the survey
survey week. week
• Persons who are temporarily Currently available – were available
absent from work because of for paid or self employment during the
survey week.
vacation, illness, industrial
dispute or some similar cause. Actively seeking work – had taken
• Persons who worked without pay steps during a specified period to
seek paid employment or self
on a family farm or business or as
employment.
a learner.
L a b o u r F o rc e C h a ra c te ri s ti s c
LABOUR FORCE CHARACTERISTICS
P o p u l a ti o n 1 5 ye a rs o l d a n d o ve r
(W o rk i n g A g e P o p u l a ti o n )
L a b o u r F o rc e e N o t i n L a b o u r F o rc e
(E c o n o m i c a l y A c ti v e P o p u l a ti o n ) (E c o n o m i c a l y In a c ti v e p o p u l a ti o n
E m p lo y e d U n e m p l o ye d S tu d e n ts H o u s e k e e p e rs R e ti r e d D is a b le d D id n o t O th e r
W a n t W o rk
S e e k e rs O th e r U n e m p l o ye d

The Labour Market
• The participation rate is the fraction of the population of
working age who are in the labour force.
• The unemployment rate is the fraction of the labour force
without a job.
• Discouraged workers, pessimistic about finding a job, leave
the labour force.
• Economists used to classify unemployment by source:
frictional, structural, demand-deficient or classical.
• It includes people whose handicaps make them hard to
employ. More importantly, it includes people spending short
spells in unemployment as they hop between jobs in a
dynamic society.

Types of Unemployment
1. Normal or Transitional Unemployment – the time taken to
match employees with employer. Need to speed up information.
2. Frictional Unemployment – is the irreducible minimum
unemployment in a dynamic society. Friction in the labour
market. Difficulty of matching shortage of a given type of
labour. Persons are between jobs, shopping around – voluntary
unemployment.
3. Structural unemployment – arises from the mismatch of skills
and job opportunities as the pattern of supply and demand
changes. It reflects the time taken to acquire human capital.
– Geographical immobility
– Occupational immobility

4. Seasonal Unemployment
5. Technological Unemployment – A form of
structural unemployment which occurs when
new technologies are introduced:
– Old skills are no longer required
– There is likely to be a labour saving
aspect, with machines doing the job that
people use to do.
6. Cyclical Unemployment
Domestic and foreign trade go through cycles of
boom, decline, recession, recovery then boom
again.
1. During recovery and boom, the demand for
output and jobs is high and unemployment low.
2. During decline and recession, the demand for
output and jobs falls, and unemployment rises to
a high level.
7. Demand- deficient Unemployment- This refers to
Keynesian unemployment, when aggregate demand falls
and wages and prices have not yet adjusted to restore full
employment. Aggregate demand is deficient because it is
lower than full employment aggregate demand.
8. Classical Unemployment – describes the unemployment
created when the wage is deliberately maintained above
the level at which the labour supply and labour demand
schedules intersect. It maybe caused either by the exercise
of trade union power or by minimum wage legislation
which enforces a wage in excess of the equilibrium wage
rate.
9. Involuntary Unemployment – people wish to work, are prepared to
accept wages currently being obtained by employed persons, are
willing to be mobile and are properly qualified but nevertheless
cannot find jobs. Keynes concerned with involuntary
unemployment. This situation exists because there is insufficient
aggregate demand or planned expenditure in the economy.
Voluntary Unemployment Short Term Long Term
• Transitional Transitional Structural
• Frictional Frictional Persistent general
unemployment.
• Seasonal Seasonal
• Structural
Equilibrium Unemployment.
• Equilibrium unemployment (also called the natural
rate of unemployment) is the unemployment rate
when the labour market is in equilibrium.
• A worker is voluntarily unemployed if, at a given
level of wages, she wishes to be in the labour force
but does not yet wish to accept a job.
• An involuntarily unemployed worker would accept
a job offer at the going wage rate.

Equilibrium Unemployment
Real
AJ
LF
wages
A B
W1 C
W F
E
LD
N2 N N1 Number of workers

Equilibrium Unemployment
• The schedules LD, LF, and AJ show, respectively,
labour demand, the size of the labour force, and the
numbers of workers willing to accept job offers at any
real wage. AJ lies to the left of LF both because some
labour force members are between jobs and because
optimists are hanging on for an even better job offer.
When the labour market clears at E, EF is the natural
rate of unemployment, the people in the labour force not
prepared to take job offers at the equilibrium wage W.
This unemployment is entirely voluntary.

Classical Unemployment
• If union power succeeds in maintaining the wage
W1, above the equilibrium wage W, in the long run,
the labour market will be at A, and the natural rate
of unemployment AC now shows the amount of
unemployment chosen by the labour force
collectively by enforcing the wage W.
• In this instance, classical unemployment is included
in equilibrium unemployment.

Unemployment and Poverty
• The belief that unemployment necessarily means poverty is false.
1. Unemployment in the sense of the lack of paid employment, not
necessarily idle, they could be productively engaged on family
farm or business.
2. Unemployment may not mean poverty – the majority of young
dependents. Unemployed youths are able to get along being
members of households.
3. Poverty affects both the employed and the unemployed.
• Much of the problem of unemployment is really the
problem of the unemployed themselves – their attitudes,
unwarranted aspirations and unwillingness to accept
available employment. Most of the young are not interested
in manual work.
WHY UNEMPLOYMENT IS A SERIOUS PROBLEM
1. Lies in the importance of creative productive work

for human beings, as human beings. This need is
an integral part of humanity.
2. It may mean poverty for those affected by it.
3. Because of its negative psychological impact on
the individual.
4. Unemployment does not negatively affect just the
individual or his family, but can have serious costs
for the society as a whole.
WHY UNEMPLOYMENT IS A SERIOUS PROBLEM
5. Unemployment also means an economic cost

to society when its existence implies an
opportunity cost through lost potential
output.
6. Unemployment can lead to a rise in crime
and other anti-social manifestations.
7. Unemployment also means misery, social
unrest and hopelessness for the unemployed.

The Private Cost of Unemployment
• When individuals are voluntary unemployed they reveal
that they do better by being unemployed than by taking
a job offer that they face at the going wage rate.
• The private cost of unemployment ( the wage foregone
by not working) is less than the private benefits of
being unemployed.
• Private benefits include transfer payments from
government, the value of leisure, expectation of
obtaining a better job. These future benefits must be set
against the current cost, a lower disposable income by
being out of work.
The Private Cost of Unemployment
• When people are involuntary unemployed, the cost
changes. Involuntary unemployment mans that people
would like to work at the going wage but cannot find a
job because there is excess labour supply at the existing
wage rate. These people are worse off being
unemployed.
• The distinction between voluntary and involuntary
unemployment matters because it may affect our value
judgement about how much attention to pay to
unemployment. When unemployment is involuntary,
people are suffering more and the case for helping them
is stronger.
The Social Cost of Unemployment
• When unemployment is voluntary an individual receives
transfer payments during unemployment but these transfers
give no corresponding benefit to society as a whole. Since the
private benefit exceeds the social benefit, too many people
may be voluntarily unemployed.
• In a changing economy it is important to match up the right
people to the right job.
• Involuntary unemployment has an even higher social cost.
Since the economy is producing below capacity, it is literally
throwing away output that could have been made by putting
these people to work. Involuntary unemployment may entail
more human and psychological suffering than voluntary
unemployment
Factors producing Growing Unemployment
DEMAND SIDE:
Private sector:
1. Principal reason : Technology – the introduction of
advanced capital intensive technologies from
abroad which are most inappropriate to the factor
endowment of the country.
2. The bias of taste towards imports
3. The structural fragmentation among firms

DEMAND SIDE:
Private sector:
4. The tax structure of firms – government unable to obtain
enough revenue, as a result raises the tax on firms, i.e.
taxation as a deterrent to enterprise and output.
5. The monetary system services the import – export trade,
finances consumer durables to the detriment to the
productive sectors.
6. Lack of savings – the inability to mobilize domestic
savings. Savings required for investment.

DEMAND SIDE:
Government:
• The burden of employment falls on the government
• The level of employment depends on the revenue from the
private sector.
There exist a divergence between the rate of growth of the
economy and the rate of growth of employment due to the
pattern of final demand.
The present type of development planning is oriented towards
economic growth rather than towards employment creation.

SUPPLY SIDE:
The factors which affect the rapid growth of the number
seeking jobs.
1. The rapid rate of growth of those of working age as a
result of the high rate of population growth 15 years
earlier.
2. The rapid movement from rural to urban areas and away
from certain agricultural oriented jobs to relatively well-
paid jobs in mining, tourism, government, etc. The job
aspiration is of a particular type.

SUPPLY SIDE
3. The rapid growth in the supply of labour seeking certain
jobs but not others. This is as a direct result of the skill
composition of the labour force.
4. The increasing rate of female participation in the labour
force, associated largely with the expansion of secondary
educational opportunities and the “ emancipation of
women”.

Government Policies to Influence Employment
AIMED AT:
1. Either at reducing the number of persons unemployed
down to an “acceptable” level – reducing unemployment
2. Creating more jobs – Job creation.
• 1 and 2 should mean the same thing, but it is possible to :
(a) Create more jobs without reducing unemployment.
(b) Reduce unemployment without creating jobs –
OJT,YTTEP

Some Possible Solutions To Unemployment
1. Re-organize the Educational System

2. Re-organize Agriculture – through land
reforms, ownership, diversification
3. Block out unnecessary imports
4. Develop the following labour intensive
industries:
1. Fishing 2. Construction 3. Tourism
5. Curb the rural – urban drift - decentralize
Linking Inflation and Unemployment
• A.W. Phillips discovered (1958) a statistical relationship
between unemployment and the rate of inflation which
implied that, in general, the rate of inflation fell as
unemployment rose and vice-versa. A curve known as the
Phillips curve can be drawn linking inflation and
unemployment.
• The curve crosses the horizontal axis at a positive value for the
unemployment rate. This means that zero inflation will be associated
with some unemployment. It is not possible to achieve zero inflation
and zero unemployment at the same time.
• The shape of the curve (concave) means that the lower the level of
unemployment, the higher the rate of increase in inflation.

THE PHILLIPS CURVE
1. Higher inflation associated with
lower unemployment
Inflation
rate 2. Lower inflation associated with
higher unemployment
0
Unemployment
rate
Phillips Curve

What the Phillips Curve Suggests to Government
• The existence of a relationship between inflation

and unemployment of a type indicated by the
Phillips Curve suggests that government should be
able to choose some point on the curve, according to
its preference, and use demand management policies
to take the economy to that point – i.e. ‘to strike a
balance’ between acceptable levels of inflation and
employment.

What the Phillips Curve Suggests to Government
• If achieving full employment is an economic policy

objective, a government must therefore be prepared
to accept a certain level of inflation as a necessary
‘evil’.
• The Phillips Curve relationship between inflation
and unemployment broke down at the end of the
1960s when Britain began to experience rising
inflation with rising unemployment

RATES OF INFLATION AND UNEMPLOYMENT IN T&T
YEAR RATE OF INFLATION RATE OT EMPLOYMENT
1990 11.0 20.0

1991 3.8 18.5
1992 6.5 19.6
1993 10.8 19.8
1994 8.8 18.4
1995 5.3 17.2
1996 3.3 16.2
1997 3.6 15.0
YEAR RATE OF INFLATION RATE OF EMPLOYMENT
1998 5.6 14.2

1999 3.4 13.1
2000 3.6 12.1
2001 5.5 10.8
2002 4.2 10.4
2003 3.8 10.5
2004 3.7 10.2
2005 6.9 8.0
2006 8.3 6.2
2007 7.9 5.5
2008 12.0 4.6
Refinements to the Phillips Curve
• An explanation of rising inflation rates combined with
rising unemployment was put forward, based on inflationary
expectations.
• This ‘natural rate hypothesis’ is supported by monetarist
economist.
• ‘Inflationary expectations’ means the rate of inflation that is
expected in the future.
• The inflationary expectations of the work force will be
reflected in the level of wage rises that is demanded in the
annual round of pay negotiations between employers and
workers

Inflationary Expectations of the Work Force
Expected Wage demand Rate of Action
Inflation Inflation outcome
3% 3% 3% Mission
accomplished
3% 4% 4% Increase in real
wage 1 %
3% 3% 5% Mistake made by
work force
5% 7% 7% Follow up
action.
The Natural Rate Hypothesis
• The natural rate hypothesis incorporates these views
on inflationary expectations, to produce a
refinement of the Phillips curve
• There exist a ‘natural rate of of unemployment.
• If policy makers try to reduce unemployment below
this rate, they will bring about an inflation that
explodes into even faster rates of price increases.
• In the long run there is no trade off between
inflation and employment.

The Expectation Augmented Phillips Curve
Prices 8 N
And
Inflation
Wages (%)
N
2 4
PC2 Unemployment Rate (%)
PC1

• The economy is characterized by the Phillips
curve PC1. Unemployment rate = 4% and 0%
price and wage inflation.
• Unemployment reduced to 2% of the Labour
force.
• There is a movement along the Phillips curve,
and the new unemployment level now
associated with 3% inflation.

• In the mean time the period of positive inflation has
generated inflationary expectations and 4% unemployment
is now associated with 3% inflation, because the Phillips
curve has shifted from PC1 to PC2.
• In effect, the short run Phillips curve has shifted outwards
from PC1 to PC2.
• As employers realize that they are paying higher
wages as well as receiving higher prices, and as
workers realize that the real value of their wages has
not risen, the unemployment rate rises to 4% again.

• The workers who were initially brought out of
unemployment by the higher wages, return to
unemployment.
• Monetarist economists state that the long run Phillips curve
is vertical at the natural rate of unemployment i.e. NN .
• In the long run, unemployment will revert towards its
natural level.
• The natural rate of inflation will be determined by the short
run Phillips curve, which will shift upwards as inflationary
expectations increase.

The Natural Rate of Unemployment
Wage S1
S2
X
We Y The natural rate
of Unemployment
= Ony - Onx
D
0 Nx Ny
Number employed

The Natural Rate of Unemployment
• The demand for labour is labeled D
• The supply of workers available to take jobs at different
wages is S1.
• S2 shows the supply of workers who are capable of taking
jobs.
• At any given wage there are more potential workers than
shown by S1.
• This is because a number of them are prevented from being
available to take up employment by frictions such as lack of
information and immobility.
• There is ‘natural unemployment’ equal to ONy - ONx
THANK YOU
THE END

Lecture 21 - Unemployment

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MBA ECONOMICS

December 8, 2021 PETER PARIAG 1

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1. Lies in the importance of creative productive work

5. Unemployment also means an economic cost

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1. Re-organize the Educational System

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• The existence of a relationship between inflation

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• If achieving full employment is an economic policy

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YEAR RATE OF INFLATION RATE OT EMPLOYMENT

1990 11.0 20.0

1998 5.6 14.2

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