Unemployment

Definition of Unemployment

An unemployed person is Not working, willing and able to work Actively seeking a job and willing to accept a job at

the prevailing market wage

Not counted as unemployed Unable or unwilling to work, underage, college

students, homemakers, retired, in the military

Meaning of Unemployment

Unemployment describes the state of a worker who is able and willing to take work but cannot find it. As indicated by the unemployment rate and other yardsticks, unemployment is an important measure of the economy's strength. A high unemployment rate generally indicates an economy in recession with few job opportunities, while a low unemployment rate points to an economy running at or near full throttle.

Quick Facts

Unemployment is lack of full utilization of resources, and eats up the production of the economy.

Unemployment is highly and negatively correlated with the productivity of the economy.

Unemployment management is one of the toughest jobs of every government in the world.

Quick Facts

Along with price level, unemployment is probably the most observable economic indicator that the general public complains about their government.

Unemployment rate can be anywhere between 1% ~ 30% (beyond is very much unlikely), and a healthy economy is believed to have a unemployment rate around 5%.

Unemployment rate is highest among young workers aged between 15 and 24.

CALCULATION OF UNEMPLOYMENT RATE

• Unemployment Rate = No. of unemployed X 100 Labour Force

• Example: In India in year 2007 ,

• Total Population = 1112.86 Million

• Labour force = 507.94 Million

• No. of Unemployed = 39.62 Million

• Unemployment Rate = 39.62 X 100 507.94

• Unemployment Rate = 7.8 %

Unemployment Rate in IndiaU

nem

ploy

men

t ra

te in

%

YEARS

Year Unemployment rate Rank

2003 8.80 % 110

2004 9.50 % 105

2005 9.20 % 83

2006 8.90 % 91

2007 7.80 % 92

2008 7.20 % 89

2009 6.80 % 85

2010 10.70 % 117

Source: CIA WORLD FACTBOOK as of February 19, 2010

TYPES OF UNEMPLOYMENT

VOLUNTARY UNEMPLOYMENTFRICTIONAL UNEMPLOYMENTCASUAL UNEMPLOYMENTSEASONAL UNEMPLOYMENTSTRUCTURL UNEMPLOYMENTTECHNOLOGICAL UNEMPLOYMENTCYCLICAL UNEMPLOYMENTCHRONIC UNEMPLOYMENTHIDDEN UNEMPLOYMENT

VOLUNTARY UNEMPLOYMENT

People are unwilling to work at the prevailing wage rate & people who get a continuous flow of income from their property or other sources & need not work, such people are Voluntarily unemployed.

Voluntary unemployment is a National waste of Human Energy but it is not a serious economic problem.

FRICTIONAL UNEMPLOYMENT

A temporary phenomenon which results from workers which are temporarily out of work while changing jobs or are suspended due to strikes or lockouts.

Frictional Unemployment is due to difficulties in getting workers and vacancies together.

Eg:- Big Industries Units & Polluting Industries have been moved out of the large towns and cities like Delhi

CASUAL UNEMPLOYMENT

In Industries such as Construction , Catering or Agriculture , where workers are employed on a day to day basis , there are chances of Casual Unemployment occurring due to Short term Contracts, which are terminable any time

SEASONAL UNEMPLOYMENT

Industries and Occupation such as Agriculture , the catering trade in holiday resorts, where Production Activities are seasonal in nature offer employment only for a certain period of Time in a year. People engaged in such type of Work or Activities may remain unemployed during the off season which is termed as seasonal unemployment.

STRUCTURAL UNEMPLOYMENT

Unemployment which arises due to change in the Pattern of Demand leading to changes in the structure of production in the economy is termed as structural unemployment

Example : Use of Synthetic Rubber is bound to reduce Demand for Natural Rubber and lead to unemployment in Rubber Plantation.

The only way to remove such unemployment is to retrain the unemployed in vocations so that they learn new Technologies & are thus absorbed in expanding Economic Sectors.

TECHNOLOGICAL UNEMPLOYMENT

Due to introduction of New Machinery improvement in methods of Production, Labour-Saving devices , etc some workers tend to be replaced by Machines. Their unemployment is termed as Technological unemployment.

It may also refer to the way in which steady increase in labour productivity means fewer workers are required to produce same level of output every year.

CYCLICAL UNEMPLOYMENT

It is associated with the Cyclical Fluctuations in Economic Activity, especially in the Recessionary, Depressionary Phases of Trade cycle.

Cyclical unemployment rises during economic downturns and falls when the economy improves.

With Cyclical unemployment the number of employed workers exceeds number of job vacancies i.e. even if all the jobs are filled some workers would still remain unemployed.

Mostly found in capitalist countries like USA and Western European nations etc.

CHRONIC UNEMPLOYMENT

When Employment tends to be a Long term feature of a country it is called as Chronic Unemployment.

Underdeveloped countries suffer from Chronic unemployment on account of Poverty, Lack of Developed Resources, and their under utilization , High Population growth , Low Capital Formation etc.

HIDDEN UNEMPLOYMENT

Hidden or covered unemployment is the unemployment of the potential workers that is not reflected in official unemployment statistics.

In many countries those who have no work but are actively looking for work are counted as unemployed, those who have given up looking for work are not officially counted as unemployed. The same applies to those who have taken early retirement to avoid being laid off but would prefer to be working.

The statistics also does not count the underemployed those with part time or seasonally job who would rather have full time jobs.

Consequences of Unemployment

DIRECT EFFECTS1)Fall in National Output:Labour is a factor of production. Hence a fall in the

overall supply of labour caused by higher levels of unemployment will result in a fall in national output. However if the unemployment is caused by factor substitution ie labour is substituted by new machinery, then a fall in National Output may not necessarily result.

2) Loss of Personal Income:- Those not working will encounter a fall in their living

standard, as their income falls. The unemployed will have less purchasing power and less disposable income.

Consequences of Unemployment

INDIRECT EFFECTS1) Negative Multiplier Effect: Unemployed individuals as mentioned above,

are not able to spend as much money on goods and services, so a negative multiplier effect may result. Eg, Local business may suffer as a result of recent job losses in an area, meaning that purchases from supplier will fall and so on.

2) Loss of Tax Revenue : A fall in income results in a fall of both direct

and indirect taxes. Direct taxes come from wages while indirect taxes come from the products those wages would have been spent on.

Consequences of Unemployment

As a result government must either raise the level of tax on existing wage earners or reduce government spending.

3) SOCIETY:A) Inequalities of Wealth and IncomeB) Increase in Crime RatesC) Less healthy lifestylesD) Poor EducationE) Average Skills

Consequences of falling unemployment

The circular flow and the multiplier: Incomes flowing into households will grow Falling unemployment adds to demand and

creates a positive multiplier effect on incomes, demand and output.

The balance of payments: When incomes and spending are growing,

there is an increase in the demand for imports. Unless this is matched by a rise in export sales, the trade balance in goods and services will worsen

Consequences of falling unemployment

Government finances: With more people in work paying income

tax, national insurance and value added tax, the government can expect a large rise in tax revenues.

Inflationary effects Falling unemployment can also create a rise

in inflationary pressure – particularly when the economy moves close to operating at full capacity

DEMAND AND SUPPLY SIDE APPROACHES

Policies to reduce unemployment

Demand side Policies to Reduce Unemployment

These are mainly measures to boost total labour demand (reduce cyclical unemployment) Lower interest rates (a monetary policy

stimulus) A lower exchange rate (helps exporters) Lower direct taxes (fiscal stimulus to spending

power) Government spending on major capital projects

(e.g. improving the transport infrastructure) Employment subsidies (including the New Deal

programme) – designed to reduce the cost to a business of employing additional workers

Incentives to encourage flows of foreign investment in the UK – particularly in areas of above average unemployment

Supply-side policies to reduce Unemployment

Supply-side policies These are measures to improve labour supply

(reduce frictional and structural unemployment) Increased spending on education & training

including an emphasis on “lifetime-learning”)

Improved flows of information on job vacancies

Changes to tax and benefits to improve incentives

Measures designed to make the labour market more flexible so that workers have the skills and education that gives them improved employment options