What is Unemployment?In economics, unemployment refers to the condition of unwanted job losses,or willing workers without jobs. The willingness of the unemployedworker to be employed is the key to the idea.A person who is :-Physically FitMentally soundWell qualifiedWilling to work at prevailing wage rateBUT DOES NOT GET JOB, THIS SITUATION IS CALLED UNEMPLOYMENT
Key Concepts To Understand Unemployment Adult Population Labour Force Labour Force Participation Rate Unemployment Rate Discouraged Worker
Quick Facts Unemployment is lack of full utilization of resources, and eats up theproduction of the economy.Unemployment is highly and negatively correlated with the productivity ofthe economy Labour Force Participation Rate Unemployment management is one of the toughest jobs of everygovernment in the world. Along with price level, unemployment is probably the most observableeconomic indicator that the general public complains about their government. Unemployment rate can be anywhere between 1% ~ 30% (beyond is verymuch unlikely), and a healthy economy is believed to have an unemploymentrate around 5%. Unemployment rate is highest among young workers aged between 15 and24.
Classification Of UnemploymentUnemployment can be broadly classified under two broad categories – VOLUNTARY UNEMPLOYMENT - Unemployment that results whenresources which are willing and able to engage in production choose not toproduce output. These are resources (especially labor) that decide to leaveone job, often in search of another. INVOLUNTARY UNEMPLOYMENT - The contrast to voluntaryunemployment is involuntary unemployment, in which resources are forcedout of work. Involuntary unemployment is also known as ForcedUnemployment.
Measurement Of UnemploymentLabour Force - The total number of people employed or seekingemployment in a country or region. Also called work force.47, 83, 00,000 - Labour Force available in India in the year 2010 (source –World Bank Indicator)
Measurement Of UnemploymentThe rate of unemployment in a country is measured by the followingformula:-Unemployment rate = Labour force – Employed labour X 100 Labour ForceOrUnemployment rate = Number of unemployed X 100 Labour Force
Seasonal UnemploymentSeasonal unemployment refers to a situation where a number of persons arenot able to find jobs during some months of the year.Example: Agriculture is a seasonal activity. There is an increased demand forlabour at the time of sowing, harvesting, weeding and threshing. In betweenthere is little or no demand for labour. Agricultural labour finds himselfunemployed during this period. This is called seasonal unemployment.
Cyclical UnemploymentBecause of business cycles, many firms reduce the demand for inputs,including labor in recessional periods when production declines.Cyclical unemployment is used to refer to the fluctuation in unemploymenti.e. the unemployment caused by economic recessions.Cyclical unemployment can be zero in full expansions during a businesscycle.
Technical UnemploymentUnemployment caused by technological changes or new methods ofproduction in an industry or business.Example: The evolution of the automobile assembly plant. In the beginning,everything on the line was done by humans in order to build a car. Theassembly line itself was a great technological innovation. Today, robots areemployed for much of the hand-work humans used to do.
Frictional UnemploymentThis is a type of voluntary unemployment that arises because of the timeneeded to match job seekers with job openings. Just as friction always takesplace before the slider comes to its final position on the surface, people needtime to find the best job, thus voluntarily rubbing back and forth betweenchoices and staying unemployedExample: When you make up your mind and set off looking for a better joband abandoning the current one, you are in the frictional unemployment laborforce.
Structural UnemploymentThis unemployment arises due to structural change in dynamic economy.Unemployment caused by massive mismatch of skills or geographic locationis noted as structural unemployment.Example: Heavy Manufacture (mining) - Manufacture now involvesmachines so humans are no longer needed for the harder work.Structural unemployment poses more of a problem because workers mustseek jobs elsewhere or must develop the skills demanded. The process is fullof pain and frustration, and may lead to negative impacts on society.
Disguised UnemploymentWhen more people are engaged in some activity than the number of personrequired for that, this is called disguised unemployment.Disguised unemployment exists where part of the labor force is either leftwithout work or is working in a redundant manner where worker productivityis essentially zero.Example: An agricultural field require 4 laborers but people engaged in thisactivity is 6 then this unemployment for 2 labors is called disguisedunemployment
UnderemploymentThe term "underemployment" has three distinct related meanings. a situation in which someone with excellent job qualifications is workingin a position which requires lesser qualifications working part time when one would prefer to be working full time. it is a form of overstaffing in which employees are not being fully utilized.Example: An engineering working as a pizza delivery man. He is consideredto be underemployed and underutilized by the economy as he in theory canprovide a greater benefit to the overall economy if he were working as anengineer.
Inflation and the rate of UnemploymentAs per A. W. Philips, a British economist, he found an inverse relationshipbetween the rate of change in the money wage rate and the rate ofunemploymentAccording to his findings, if rate of inflation is high, rate of unemployment islow. On the other hand, if the rate of inflation is low, unemployment rate ishigh.For example, when a government intends to lower down the rate ofunemployment it had to bear the increase rate of inflation in the nationaleconomy.
The Philips CurveAccording to the Phillips curve, the lower an economys rate ofunemployment, the more rapidly wages paid to labor increase in thateconomy.Philips curve reveals that there exists a trade-off between the rate ofunemployment and the rate of change in money wage rates, that is, a lowerrate of unemployment can be achieved only by allowing money wage rate toincrease up to a certain level. This implies that inflation reducesunemployment
Why Philips Curve Relationship?Why is there an inverse relationship between the rate of inflation and the rateof unemployment? Or,How does inflation reduce the rate of unemployment or how does it promoteemployment?The inverse relationship between the inflation rate and the unemploymentrate can be explained by boththe Demand-pull andthe Wage-push factors.
Demand-Pull FactorPhilips postulated that during demand-pull inflation, demand for labourincreases as increase in prices.Thus with the increase in the money wage rates following the rise in inflationrate, the rate of unemployment decreases.Two conclusions can be drawn from this description:Unemployment rate and wage rate are inversely related, andUpward movement in wage rates is rapid and quick during inflation, anddownward adjustment in wages is gradual, rather sticky, during the period ofdeflation.
Wage-Push FactorWage-Push Inflation is caused by the autonomous demand by the labourunions for increase in wages in excess of increase in labour productivity.The lower the rate of unemployment, the greater the union’s power to pushthe wages up and vice versa.Also, the period of low unemployment is generally the sign of ‘buoyant’product market and high profits. Therefore employers are willing to payhigher wages. There is fast upward movement in wages and decrease inunemployment.
Cost Of UnemploymentPersonal Cost -Loss of paycheck - Loss of earnings to the unemployedLoss of self esteem - Those who are unemployed will find it moredifficult to get work in future(this is known as hysteresis effect)Increase in social problems - Areas of high unemployment (especiallyyouth unemployment) tends to have more crime and vandalism.
Cost Of UnemploymentEconomic Cost -Loss in output – Labour has productivity, high or low, depending on its skilland availability of capital per labour. Therefore, unemployment means loss ofoutput expected from the employment of unemployed labour force.Increased Govt borrowings. Tax revenue will fall because there are lesspeople paying Income Tax and VAT. Also the Govt will have to spend moreon unemployment benefits.Lower GDP for the economy - The economy will be below full capacity.This is inefficient and will lead to lower output and incomes.