Kaushalya Silva

B.B. Mgt. (Special) Degree in Accountancy (Kel’ya), CMA Passed Finalist, DBF (IBSL)
Lecturer (Probationary)
Department of Accountancy
E-mail: kaushalyas@kln.ac.lk
 Unemployment

BACC 12663/ BAFA 12263/ BAIS 12063

Macroeconomics
 Learning Outcomes

At the end of this lesson, you should be able to:

• Define unemployment.

• Identify the population and labor force.

• Explain how to measure unemployment.

• Discuss about unemployment in Sri Lanka.

• Describe the types of unemployment.

• Discuss the consequences of unemployment and remedies for unemployment.

3
 What is Unemployment?

Unemployment covers people who are: out of work, want a job, have actively sought work
in the previous four weeks and are available to start work within the next fortnight; or out
of work and have accepted a job that they are waiting to start in the next fortnight.
The International Labor Organization

4
 Population

Consists of people who are in the labor force as well as who are not in the labor force.

People
Labor who are
Force out of the Population
LF

5
 Labor Force

The total number of workers, including both the employed and unemployed.

People People who

who are are Labor
Employed Unemployed Force

6
 Who are out from the Labor Force?

Retired workers

Full-time students

Disabled persons Spouses

working at home

Who are not looking for a

job

7
Population and Labor Force

Population

Labor Out of the

Force Labor Force

Employed

Unemployed

8
 Flows in the Labor Market
New hires
Recalls

Employed Unemployed
Job-losers
Lay-offs
Quits

Joining to a Retiring, Discouraged Re-entrants

job Disabling worker New entrants

Out of the
Labor Force

9
 How to Measure Unemployment?

• Unemployment can be measured through the Unemployment Rate.

Unemployment Rate = (Number of Unemployed Individuals /Labor Force) *100

10
 Natural Rate of
Unemployment
• The average rate of unemployment around which the economy fluctuates is called
the natural rate of unemployment.

• In a recession, the actual unemployment rate rises above the natural rate.

• In a boom, the actual unemployment rate falls below the natural rate.

• The natural rate is the rate of unemployment toward which the economy falls in the
long run.

11
Unemployment in Sri Lanka
Unemployment Rate by Level of Education – 2021

Source: Department of Census and Statistics

12
 Types of Unemployment

These are the ways through which people can become unemployed. We can
identify four types of unemployment.

 Frictional Unemployment

 Structural Unemployment

 Seasonal Unemployment

 Cyclical Unemployment

13
 Frictional Unemployment

•Occurs when workers spend time searching for the jobs that best suit
their skills and tastes.

•This is short-term for most workers.

• The time required to bring together labor suppliers and labor demanders
results in frictional unemployment.
 Employers need time to find out about talents
available. Job seekers need time to find out about job
vacancies.

14
 Structural Unemployment

•The unemployment resulting from wage rigidity (the real wage remains above the
equilibrium level) is called structural unemployment.

• Workers
are unemployed because at the going wage, the supply of labor exceeds the
demand. These workers are simply waiting for jobs to become available.

•Occurs when there are fewer jobs than workers.

15
 Unemployment from Real Wage Rigidity
Real Supply
If the real wage
wage is Unemployment
stuck above
the eq’m Rigid
level, then real
there aren’t wage
enough jobs
to go Deman
around. d
Labor
Amount of
Amount of labor
labor
willing to work
hired
slide 16
16
 Reasons for Wage Rigidity

1. Minimum wage laws

2. Labor unions

3. Efficiency wages (employers offer high wage as incentive for

worker productivity and loyalty)

17
 The Minimum Wage

• The minimum wage is well below the eq’m wage for most workers, so it cannot
explain the majority of natural rate unemployment.
• However, the minimum wage may exceed the eq’m wage of unskilled workers,
especially teenagers.
• If so, then we would expect that increases in the minimum wage would increase
unemployment among these groups.

18
 Labor Unions

• Unions exercise monopoly power to secure higher wages for their members.
• When the union wage exceeds the eq’m wage, unemployment results.
• Employed union workers are insiders whose interest is to keep wages high.
• Unemployed non-union workers are outsiders and would prefer wages to be lower
(so that labor demand would be high enough for them to get jobs).

19
 Theory of Efficiency Wages
• Efficiency wages are above equilibrium wages paid by firms to
increase worker productivity.
• High wages increase worker productivity as it,
 attract higher quality job applicants
 increase worker effort and reduce “shirking”
 reduce turnover, which is costly
 improve health of workers (in developing countries)

• The increased productivity justifies the cost of paying above-

equilibrium wages.

• The result: unemployment

20
 Seasonal Unemployment

• Unemployment caused by seasonal shifts in Labour supply

and demand during the year.
• It occurs in industries such as agriculture, tourism and fisheries.
• Those employed in seasonal occupations knows they will probably be
unemployed during particular months.

21
 Cyclical Unemployment

• Cyclical unemployment is a factor of overall unemployment that relates to the regular

ups and downs, or cyclical trends in growth and production, that occur within the
business cycle.

• When business cycles are at their peak, cyclical unemployment will tend to be low
because total economic output is being maximized.

• When economic output falls, as measured by the gross domestic product (GDP), the
business cycle is in a recession and cyclical unemployment will rise.

22
 Full Employment

• Full employment is the level of employment rate where there

is no cyclical unemployment. Thus, full employment is when
all available labor resources are being used in the most efficient
way possible.

• Full employment is seen as the ideal employment rate within

an economy at which no workers are involuntarily unemployed.

23
 Underemployment
According to the Employment Policy Convention
adopted by the International Labour Conference in 1964,
"Full Employment" ensuresthat;

(i) there is work for all persons who are available for
and seeking work;

(ii such work is as productive as possible;

)
and
(iii it is freely chosen by workers, who should have
Accordingly, the situations which do not fulfill
)
the fullest possibility to qualify and use their
the objective (i) relate to unemployment, and
skills and endowments in a job for which they
those that do not satisfy objectives (ii) or (iii)
are well suited.
refer mainly to “Underemployment".

24
 Consequences of Unemployment

Personal Consequences
• Loss of income
• Fall in real living standards
• Increased health risks
 Stress
 Reduction in quality of diet
 Social exclusion because of loss of work and income
• Loss of marketable skills (human capital) and motivation

25
 Consequences of Unemployment

Consequences for Businesses

Negative consequences
• Fall in demand for goods and services

Positive consequences
• Bigger pool of surplus labour is available

• Less pressure to pay higher wages

• Less pressure from trade unions

26
 Consequences of Unemployment

Consequences for the Government

• Increased spending on unemployment benefits and other income (welfare
payments)
• Fall in revenue from income tax and taxes on consumer spending

• May lead to rise government borrowing (i.e. a budget deficit)

27
 Remedies for Unemployment
Demand-side Solutions:
• Many countries aid unemployed workers through social welfare programs. Individuals receive
unemployment benefits including insurance, compensation, welfare, and subsidies to aid in re- training.
• Another demand-side solution is government fundedemployment of the able-bodied poor.

Supply-side Solutions:
• Remove the labor market inefficiencies, such as minimum wage, stringent hiring and firing policies, and
powerful trade unions. The policies are designed to make the market more flexible in an attempt to
increase long-run economic growth.
• Aligning education policies with the dynamic labor market demands  vocational training,
industrial training for graduates.
• Other supply-side solutions include cutting taxes on businesses and reducing regulations.

28
Thank You