Economics is the study of how
individuals, businesses, governments
and other organisations within society
choose to use scarce resources to
satisfy their unlimited needs and wants
in a manner that is efficient, equitable
SO….What is Unemployment?
In economics, unemployment refers to the condition of unwanted
job losses, or willing workers without jobs. The willingness of the
unemployed worker to be employed is the key to the idea.
A person who is :Physically
Willing to work at prevailing wage rate
BUT DOES NOT GET JOB , THIS SITUATION IS
CALLED UNEMPLOYMENT !!
Key Concepts To Understanding
Labour Force Participation Rate
Quick Facts about unemployment
Unemployment is lack of full utilization of resources, and eats up the
production of the economy.
management is one of the toughest jobs of every
government in the world.
with price level, unemployment is probably the most
observable economic indicator that the general public complains about
Unemployment rate can be anywhere between 1% ~ 30% (beyond is
very much unlikely), and a healthy economy is believed to have an
unemployment rate around 5%.
Unemployment rate is highest among young workers aged between
15 and 24.
Classification Of Unemployment
Unemployment can be broadly classified under two broad categories –
VOLUNTARY UNEMPLOYMENT - Unemployment that results when people who
are willing and able to engage in production choose not to produce output. These are
people that decide to leave one job, often in search of another.
INVOLUNTARY UNEMPLOYMENT - The contrast to voluntary unemployment is
involuntary unemployment, in which people are forced out of work. Involuntary
unemployment is also known as Forced Unemployment. Now that’s HECTIC!!
Measurement Of Unemployment
Labour Force - The total number of people employed or seeking employment
in a country or region. Also called work force.
Measurement Of Unemployment
The rate of unemployment in a country is measured by the following
Unemployment rate = Labour force – Employed labour X
Unemployment rate = Number of unemployed
Seasonal unemployment refers to a situation where a number of persons are
not able to find jobs during some months of the year.
Example: Agriculture is a seasonal activity. There is an increased demand
for labour at the time of sowing, harvesting, weeding and threshing. In
between there is little or no demand for labour. Agricultural labour finds
himself unemployed during this period. This is called seasonal
Because of business cycles, many firms reduce the demand for
inputs, including labor in recessional periods when production
Cyclical unemployment is used to refer to the fluctuation in
unemployment i.e. the unemployment caused by economic
Cyclical unemployment can be zero in full expansions during a
Unemployment caused by technological changes or new
methods of production 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. The assembly line itself was a great
technological innovation. Today, robots are employed for
much of the hand-work humans used to do.
This is a type of voluntary unemployment that arises because of
the time needed to match job seekers with job openings. Just as
friction always takes place before the slider comes to its final
position on the surface, people need time to find the best job, thus
voluntarily rubbing back and forth between choices and staying
Example: When you make up your mind and set off looking for a
better job and abandoning the current one, you are in the frictional
unemployment labor force.
This unemployment arises due to structural change in dynamic
economy. Unemployment caused by massive mismatch of skills or
geographic location is noted as structural unemployment.
Example: Heavy Manufacture (mining) - Manufacture now involves
machines so humans are no longer needed for the harder work.
Structural unemployment poses more of a problem because
workers must seek jobs elsewhere or must develop the skills
demanded. The process is full of pain and frustration, and may lead
to negative impacts on society.
When more people are engaged in some activity than the number of
person required for that, this is called disguised unemployment.
Disguised unemployment exists where part of the labor force is
either left without work or is working in a redundant manner where
worker productivity is essentially zero.
Example: An agricultural field require 4 laborers but people
engaged in this activity is 6 then this unemployment for 2 labors is
called disguised unemployment
Cost Of Unemployment
Loss of paycheck - Loss of earnings to the unemployed
Loss of self esteem - Those who are unemployed will find it more
difficult to get work in future(this is known as hysteresis effect)
Increase in social problems - Areas of high unemployment (especially
youth unemployment) tends to have more crime and vandalism.
Cost Of Unemployment
Loss in output – Labour has productivity, high or low, depending on its
skill and availability of capital per labour. Therefore, unemployment
means loss of output expected from the employment of unemployed
Increased Govt borrowings. Tax revenue will fall because there are less
people paying Income Tax and VAT. Also the Govt will have to spend
more on 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.
Inflation and the rate of
As per A. W. Philips, a British economist, he found an
inverse relationship between the rate of change in the
money wage rate and the rate of unemployment
According to his findings, if rate of inflation is high, rate of
unemployment is low. On the other hand, if the rate of
inflation is low, unemployment rate is high.
For example, when a government intends to lower down the
rate of unemployment it had to bear the increase rate of
inflation in the national economy.
The Philips Curve
According to the Phillips curve, the lower an
economy's rate of unemployment, the more rapidly
wages paid to labor increase in that economy.
Philips curve reveals that there exists a trade-off
between the rate of unemployment and the rate of
change in money wage rates, that is, a lower rate of
unemployment can be achieved only by allowing
money wage rate to increase up to a certain level. This
implies that inflation reduces unemployment
Why Philips Curve Relationship?
Why is there an inverse relationship between the rate of
inflation and the rate of unemployment?
How does inflation reduce the rate of unemployment or
how does it promote employment?
The inverse relationship between the inflation rate and the
unemployment rate can be explained by both
Philips postulated that during demand-pull inflation, demand for
labour increases as increase in prices.
Thus with the increase in the money wage rates following the rise in
inflation rate, the rate of unemployment decreases.
Two conclusions can be drawn from this description:
Unemployment rate and wage rate are inversely related, and
Upward movement in wage rates is rapid and quick during
inflation, and downward adjustment in wages is gradual, rather
sticky, during the period of deflation.
Wage-Push Inflation is caused by the autonomous demand by the
labour unions for increase in wages in excess of increase in labour
The lower the rate of unemployment, the greater the union’s power to
push the 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 pay higher wages. There is fast upward movement in
wages and decrease in unemployment.
Benefits of Unemployment
can keep wages low and
maintain lower costs.
Inflation can be kept low.
The will be reduced consumption of nonrenewable raw materials.
Ways to reduce or combat
The government can try to
stimulate demand in the
economy by increasing taxation
and government spending and
create more jobs as a result of
2. Supply-side policies
This includes programmes that
reduce occupational immobility
like the Sectorial Education and
Training Authorities which train
people so that mobility between
different jobs may be easier.
DOE CAPS Document- Economics FET