3.3 - unemployment

unemployment

people of working age who are able and willing to work and are actively looking for a job but who are not employed

underemployment

• people of working age with part time jobs when they could work full time

• overqualified people in low skilled occupations

labor force

the number of people who are employed plus the number of people of working age who are not working but seeking work

unemployment rate formula

unemployment rate = (number of unemployed / labor force) x 100

difficulties in measuring unemployment

• hidden unemployment

  • unemployment excludes discouraged workers

  • unemployment excludes underemployment

  • unemployment excludes people on retraining or early retirement

• unemployment excludes people working in underground economy

• doesn’t distinguish between population groups in society as its an average

  • region

  • gender

  • ethnic group

  • age

  • occupation

discouraged workers

people who are not actively seeking employment as they were unable to find work and have given up looking.

economic costs of unemployment

• loss of real GDP

  • increased government spending on social services fewer people work than available, decreasing actual output produced

• loss of income for unemployed

• loss of income tax revenue for government

• costs to government of providing unemployment benefits

• costs to government of dealing with social problems arising from unemployment

• larger budget deficit

  • tax revenues<government expenditures

personal and social costs of unemployment

• personal problems

  • loss of income

  • increased indebtedness as people borrow to survive

  • loss of self esteem

  • psychological stress

  • lower health

  • family tensions and breakdowns

  • suicide

• greater social problems

  • crime

  • violence

  • drug use

  • homelessness

  • growing poverty

types of unemployment

• structural

• frictional

• seasonal

• cyclical (not part of natural rate of unemployment)

structural unemployment

resulting from changes in the economy that create a mismatch between:

• supply of labor (the skills of workers)

and

• the demand for labor (skills needed for available jobs.)

*serious as it tends to be long term

determinants of structural unemployment

• change in demand for particular labor skills

  • technological advancements

  • changes in structure of the economy

• change in geographical location of industries/ closing down of industries

  • inability to move from one region with fall in demand for labor to region with increased demand where the business relocates to

• labor market rigidities

structural unemployment graph

equilibrium → S, D₁, W₁, Q₁

• fall in demand due to one of the determinants of structural unemployment (D₁ → D₂)

• in theory:

  • at S, D₂, W₂, Q₂ , workers would want to work even at lower wages, there

• in practice:

  • wages do not fall easily over short-time → wages remain at W₁

  • this gives rise to excess supply of labor at Q₃

labor market rigidities

features of labor market that increase production costs preventing it from reaching equilibrium

• minimum wage

• labor unions

• employment protection laws

  • costly due to compensation for firms to fire workers → more cautious hiring process

• generous unemployment benefits

  • increase ‘attractiveness’ of remaining unemployed and reduce incentives to work

unemployment arising from labor rigidities shown indirectly through product supply and demand diagram

policies to reduce structural unemployment

• encouraging workers ro retain and obtain new skills

• relocate to areas with greater employment opportunities

• providing incentives to firms to hire structurally unemployed workers

frictional unemployment

temporary unemployment that occurs when people are:

• in between jobs

• entering the workforce for the first time.

*tends to be short-term

*due to incomplete information about job opportunities and required qualifications

*inevitable in any growing, changing economy

policies to reduce frictional unemployment

• aim at reducing time a worker spends in between jobs

• improving information flow between workers and employers

seasonal unemployment

periodic unemployment due to seasonal fluctuations in demand for certain jobs

cyclical (demand-deficient) unemployment

unemployment that occurs during downturns of a business cycle, when there is insufficient demand for goods and services.

• deficiency of AD

  • AD↓ = rGDP ↓ = unemployment ↑ due to layoffs

*no cyclical unemployment when economy produces rGDP at the level or above the potential output

cyclical unemployment graph (monetarist + Keynesian)

• at Yp there is no cyclical unemployment

• fall in AD

  • deflationary gap (Yp → Yrec)

• new unemployment created