Employment & unemployment cause and effect

1. Employment &
unemployment
Dr. Arifa Saeed

2. introduction
Unemployed:
Those who are willing and able but have no job are known as unemployed.
Rate of unemployment:
The unemployment rate is the percentage of the labor force without a job. It is a lagging indicator, meaning that it generally rises or falls
in the wake of changing economic conditions, rather than anticipating them.
When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the economy grows at
a healthy rate and jobs are relatively plentiful, it can be expected to fall.
Rate of unemployment = (Unemployed/ labour force) ​×100​
Labour force = employed + unemployed

3. Types of unemployment
Frictional unemployment
Structural unemployment
Cyclical unemployment

4. Causes of unemployment
1. Frictional unemployment
2. Structural unemployment
3. classical unemployment
4. Too high unemployment benefits
5. Keynesian unemployment

5. 1-Frictional unemployment
It is a type of unemployment that arises when workers are searching for new jobs or are
transitioning from one job to another. It is part of natural unemployment and hence is present
even when the economy is considered at full employment.
Unlike other kinds of unemployment, frictional unemployment does not increase during
an economic recession. On the contrary, during a recession, it tends to decline because
workers become more concerned about job security since fewer job opportunities are available
in the market.

6. Search unemployment: do not accept first job or jobs on offer n spent time
looking for a better paid job
Casual unemployment: people are out of work between the periods of
employment
Seasonal unemployment: Demand for workers fluctuate according to time of
the years e.g tourism.

7. Causes of Frictional
Unemployment
1. A mismatch between the workers and available jobs
If there is a mismatch between job-seekers and available jobs in the market, that is
considered frictional unemployment. The issue can especially affect the new entrants
or re-entrants to the job market. This is generally due to the natural career
progression for an employee, and their natural transition to a new job, industry, or
role.
2. Workers’ dissatisfaction with work conditions
Workers’ anxiety towards salaries, benefits, work location, job responsibilities, etc.
may force them to quit their current job, and look for something that better meets
their updated expectations.

8. Effects of Frictional Unemployment
frictional unemployment → positive event for the economy.
It provides businesses within the economy with a larger selection of human capital →
companies may gain access to more qualified employees
negative side effects → if job-seekers take a long time to find a new job. In this case,
there will be an increasing frustration among job-seekers that can lead to a decrease
in productivity. Moreover, longer frictional unemployment → production decline in the
economy.

9. How to Overcome Frictional
Unemployment
1. Increase the information transmission between job-seekers and employers
The low transfer of information is a primary reason for rising frictional unemployment. The
application of mediums (such as social networks, online job boards) that allow faster information
exchange will reduce the matching time between the job seekers and employers, and subsequently
lower unemployment.
2. Resist prejudice against workers, jobs, or locations
Regulators should resist existing prejudice by increasing the attractiveness of certain workers, jobs,
or locations.
3. Enhance job flexibility
Regulators may encourage employers to provide more flexibility to prospective employees to make
available jobs more compelling to job seekers

10. 2-Structural unemployment
Arises due to change in the structure in the economy
Over time, pattern on demand and supply change, so some industries contract while other
expand
If workers can’t move from one industry to other industry due to lack of occupational or
geographical immobility they may become structural unemployed

11. Structural unemployment different
forms:
• A change in the pattern of demand: D decline → due to change in taste → goods go out of
fashion → or may be due to competition may be D decreases
• Technological unemployment: people are out of wok → introduction of labor saving
techniques
• Regional unemployment: declining industries → in particular area → so unemployment
prevail
• International unemployment: workers lose their jobs → demand switches from domestic to
competitive foreign industries

12. 3-Real wage unemployment / classical
unemployment
• Classical unemployment occurs when real wages
are kept above the market-clearing wage rate,
leading to a surplus of labour supplied
• Classical unemployment is sometimes known
as real wage unemployment because it refers to
real wages being too high
In the diagram classical Unemployment = Q3-Q2.
In a free market, the quantity of labour would be Q1.
But, with wages kept at W2, the supply (Q3) is
greater than the demand (Q2)

13. Causes of classical unemployment
• Powerful trade unions which bargain for wages above the equilibrium.
• minimum wage rate that create a legal minimum for wages.
• Deflation and ‘sticky wages’. Deflation is a period of falling prices. If there are falling prices,
to maintain full employment, it may be necessary to cut wages. However, workers and firms
often avoid nominal wage cuts – for the psychological cost. Therefore, during a period of
deflation, classical unemployment is more likely to occur
• Classical economists stress the importance of this type of unemployment. They argue that if
wages were more flexible, then most unemployment could be solved

14. Keynesian view on classical
unemployment
However, Keynesian economists argue it is not as straightforward. They argue the problem
may be a lack of aggregate demand (AD) in the economy. For example, if wages are cut, it
could lead to a further fall in AD, as workers have lower wages. In this case, cutting wages may
be ineffective in solving classical unemployment.
Also, if there is monopsony, then minimum wages and trade unions may not be causing
unemployment because monopsony employs less than market equilibrium.

15. 4-Too high unemployment benefit
Unemployed people refuse to take job → unemployment benefits are high → unemployment
benefits are too near the level of pay being offered

16. 5- Demand deficit / mass / cyclical /
Keynesian unemployment
It occurs when there is insufficient demand in the economy to maintain full employment.
In a recession (a period of negative economic growth) consumers will be buying fewer goods
and services.
Selling fewer goods, firms sell less and so reduce production.
If firms are producing less, this leads to lower demand for workers – either workers are fired, or
a firm cuts back on employing new workers. In the worst case scenario, the fall in demand may
be so great a firm goes bankrupt, and everyone is made redundant.

17. Demand deficient unemployment is
associated with the theory of J.M.Keynes
who developed his General Theory of Money
(1936) against a backdrop of the Great
Depression. During the Great Depression,
unemployment soared in the US due to the
collapse of demand and fall in the money
supply.

18. Problems of Demand Deficient
Unemployment

19. Cyclical unemployment is related to demand deficient unemployment and often used interchangeably. It refers to how unemployment
changes with the economic cycle. When the economy is booming, jobs are created, and unemployment falls. When the economy slows
down and goes into recession, firms will lay off workers creating the demand deficient unemployment.
Classical economic theory suggests any cyclical unemployment will be temporary. Classical economists argue that if there is a fall in
demand for labour, wages will fall to overcome the surplus of workers.
However, Keynes argued that demand deficient unemployment could persist in the long term.
• Workers may resist nominal wage cuts. Wages are ‘sticky downwards’.
• If firms did manage to cut wages, this would lead to a further fall in consumer spending and aggregate demand, causing more
unemployment
• –ve miltipier effect: A rise in unemployment will cause a fall in consumer spending and therefore further cause a rise in
unemployment.
• Furthermore, a rise in unemployment can adversely affect consumer confidence and consumer spending. The fear of
unemployment can cause a rise in savings which further reduce economic growth. Keynes referred to this as a paradox of thrift

20. Voluntary & involuntary unemployment
Involuntary unemployment voluntary unemployment
Occur when people are willing and able to work at
the given real wage rate but no job is available
Only cyclical unemployment is involuntary
unemployment. It is involuntary because
unemployed workers cannot choose to go back to
work, because there are no jobs available.
Occur when all those willing and able to work at the
given real wage rate are working. This occur when
workers refuse opportunities of work at existing
wage rate
Search unemployment
Seasonal unemployment
Structural unemployment
Classical unemployment

21. Full employment / natural rate of
unemployment
• The employment is said to be at full employment when there is no involuntary unemployment in the economy.
• The level of employment corresponding to where all who wish to work have found jobs, excluding involuntary
unemployment.
Because structural and frictional unemployment are largely unavoidable in dynamic economy, full employment is
something less than 100 percent employment of the labour force. Economists say that the economy is fully employed
when it is experiencing only involuntary employment. That is full employment occurs when there is no cyclical
unemployment.
Note: The natural unemployment rate is the minimum unemployment rate resulting from real or voluntary economic
forces. Natural unemployment reflects workers moving from job to job, the number of unemployed replaced by
technology, or those lacking the skills to gain employment.

22. Natural rate of unemployment/ non
accelerating inflation rate of
unemployment
The natural rate of unemployment is the %age of workers who are voluntary unemployed
NRU =
𝑛𝑜 𝑜𝑓 𝑛𝑎𝑡𝑢𝑟𝑎𝑙𝑙𝑦 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 𝑣𝑜𝑢𝑛𝑡𝑎𝑟𝑦
𝑙𝑎𝑏𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒
∗ 100
It is also known as non accelerating inflation rate of unemployment.
NAIRU is the rate of unemployment when inflation is correctly anticipated and economy is at full
employment level

23. Consequences of unemployment on
government
The consequences of unemployment on the government are also uncertainty and instability.
In an unstable economy with high unemployment rates, governments should consider their
investment in public goods once more and probably prioritize their work to create more jobs to
reduce unemployment.
Unemployment and instability have also consequences for politicians. In hard times,
voters would be more likely to be dissatisfied and more likely to vote for a radical change that
they would not agree with in better times.

24. Consequences of unemployment on
individuals
As we discussed above, unemployment in the long term leads to instability in the economy
which decreases consumption on average. Since this leads to further unemployment, the
unemployed people would face even harder times finding a job. This vicious circle affects
individuals in a negative way significantly.
Another consequence of unemployment on individuals is the high crime rates, increased
substance abuse, or increased poverty in the nation. Since these factors also affect the
welfare level, unemployment has an effect on each of us

25. How is unemployment measured?
Unemployment rate measures are:
1. the Claimant Count measure
2. the Labour Force Survey measure.

26. 1-The Claimant Count
Claimants means number of people claiming for unemployment benefits
𝑟𝑎𝑡𝑒 𝑜𝑓 𝑢𝑛𝑚𝑝𝑜𝑙𝑦𝑚𝑒𝑛𝑡 =
𝑐𝑙𝑎𝑖𝑛𝑚𝑒𝑛𝑡𝑠
𝑐𝑙𝑎𝑖𝑛𝑚𝑒𝑛𝑡𝑠+𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
* 100
Advantages:
1. Relatively cheap measure
2. Quick to calculate
3. Inactive people will be excluded
Problems:
1. Govt manipulation: → coz of political gains
2. Rules for eligibility:
3. False claims:
4. Lack of information

27. 2- labour survey measure
The official measure of unemployment in most of the countries is the Labour Force Survey which is used to discover the unemployment
rate in a country or region.
𝑟𝑎𝑡𝑒 𝑜𝑓 𝑢𝑛𝑚𝑝𝑜𝑙𝑦𝑚𝑒𝑛𝑡 =
𝑛𝑜 𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑟𝑒𝑝𝑜𝑡𝑖𝑛𝑔 𝑡ℎ𝑒𝑚𝑠𝑒𝑙𝑣𝑒𝑠 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
𝑡𝑜𝑡𝑎𝑙 𝑛𝑜.𝑜𝑓 𝑝𝑒𝑜𝑝𝑙𝑒 𝑖𝑛 𝑠𝑢𝑟𝑣𝑒𝑦
* 100
Advantages of the Labour Force Survey
1. It is more accurate because it is a survey sent around the country. Real people collect the data instead of machines.
2. It is an internationally accepted measure, and thus international comparisons are more valid (as the definition is standardised).
Disadvantages of the Labour Force Survey
1. It is expensive and time-consuming to run, and thus it’s only updated annually.
2. Like other surveys, there is the likelihood that the sample doesn’t represent the entire population appropriately.
3. The monthly estimates are not as accurate as the full, quarterly result, which means they must be revised when the quarterly
figures are known.
4. Additional administrative resources are required, aside from those related to measuring and administering welfare claims.

28. Policies to correct unemployment
Type of unemployment Policies
Classical or real-wage unemployment By trade union reforms
By abolishing minimum wage rate laws
Structural unemployment Subsidizing declining industry
Enhancing infrastructure
Tax free zones
Increase in geological mobility
Tax cuts
Frictional unemployment ↑ in job information by advertisement
Job center development
Increase in geological mobility
Increase in occupational mobility
Reduce unemployment allowances
Reduce tax rate
Cyclical unemployment / demand deficit Expantionary fiscal policy
Expansionary monetary policy
Exchange rate devalueation & protectionism