1. Advance Diploma Economics Assignment
"It's a recession when your neighbor loses his job, it's a depression when you lose your own" - Harry S. Truma
By: Maha H
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2. S.no Topic Pg.no
1. What is un-employment and reasons for its existence 3
1. Various types of unemployment 4
2. Various ways to overcome unemployment 7
3. Costs associated with unemployment 8
4. References 11
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3. Unemployment is a state where a person is available and is willing to work but remains un-hired. It is
expressed as percentage of the total available labour force and the level of unemployment can vary with
the economic conditions and other circumstances.
Unemployment can be caused due to various reasons like:
Inflation
Recession
Undulating business cycles
Due to technological, trends or taste changes
Disability
Willingness to work
Perception of employees
Employee values
Discriminating factors (e.g. discrimination on the basis of age, class, ethnicity, color and race)
Ability to look for jobs
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4. Different types of unemployment:
Frictional unemployment - It occurs when a person is out of one job temporarily and is searching for
a new one. The time in between that it takes for searching a new job a person is said to be frictionally
unemployed. It is a type of voluntary unemployment and it always exists in an economy so that the
level of:
Involuntary unemployment = unemployment rate - the rate of frictional unemployment
Therefore, the increases or decreases in unemployment are normally under-represented in the
simple statistics.
E.g. People changing jobs, fresh graduates looking for jobs etc
Residual or Hard core unemployment- It is the remaining unemployment that exists during the
times of full employment, made up of people who are unable or unwilling to work owing to a mental
or physical disability.
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5. Structural unemployment - It exists when there are insufficient people available in the labour
market with specific qualifications to do a particular job. It happens there is a change in the structure
of an industry. As an economy develops over time the structure of an industry might change. Some of
the reasons of the existence of structural unemployment are:
 Change in the economy-due to change in people's tastes, trends, demand and supply.
 Occupational immobility- This refers to facing difficulties in learning new skills, and adapting to
the technological changes.
 Geographical Immobility-.This refers to the difficulty in moving from places to places to get or
find a job.
 Technological Changes-when technology replaces labour in some industries, the demand for
labour force decreases.
 Structural changes in the economy- when there are industries dying concentrated on a particular
area like for e.g. decline of mining and shipbuilding industries due to a lack of competitiveness
and the unemployed workforce might find it very difficult to get jobs in new industries such as
computers.
Seasonal unemployment-It exists during a certain time of the year due to un- favourable weather
conditions, spread of disease etc varying from country to country. Industries that might suffer from
this type of unemployment are:
 Hotel and catering
 Tourism
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6. Cyclical or Demand deficient Unemployment- It occurs when the economy is in need of fewer
workforces and when there is an economic disequilibrium. It is known as cyclical unemployment as it
moves with the trade cycle. The demand for labour increases with the economy in the boom phase and
when the economy passes though recession phase, the demand for labour decreases and the surplus is
released as the unemployed labour force.
Classical or Real Wage Unemployment-It occurs when the wages in a competitive labour market
are raised above the equilibrium. It is also sometimes known as "disequilibrium" unemployment.
Here, the wages are not flexible downwards which implies that unemployment would persist for long.
Such wages are usually set because of the manipulations in the trade union.
Technological unemployment- It occurs when there is a reduction in the need for labour because of
the changes in technology. For e.g. the introduction of UPC scanners at retail checkout counters
allows fewer employees to perform the same amount of work compared to when prices had to be
input into a register. Similarly, utilization of robots in manufacturing plants has reduced the number
of employees required to produce most products.
Hidden unemployment- It is the unemployment of potential workers and it is not reflected in the
official unemployment statistics. Usually only those who have no work but are actively looking for
work are counted as unemployed. Those who are not looking for work or those who are on
Government "retraining" programmes are not officially counted as unemployed, even though they are
not employed. Similarly, the statistics do not count the 'underemployed' i.e. those having seasonal or
part time jobs. Hidden unemployment's official statistics often underestimates unemployment rates.
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7. Various ways to overcome unemployment:
Frictional unemployment- It occurs when a person is out of one job temporarily and is searching
for a new one. It can be reduced if government provides an efficient system of job notification and
replacement and thus providing retraining so cope up with the technological advancements and
knowledge. It reduces with the development of efficient labor markets and an improving
economy.
Structural unemployment- It exists when there are insufficient people available in the labour
market with specific qualifications to do a particular job.It can be reduced if the workers whose
skills are no longer in demand are retrained. It can also be reduced if workers are paid fairly
according to the wage limit set by law. If the mobility of labor across different jobs increases, the
level of structural unemployment can fall. Also, it can be reduced if the economy and the structure
of an industry improve.
Seasonal unemployment- It exists during a certain time of the year due to un- favourable weather
conditions spread of disease etc. Little can be done to reduce such type of unemployment but the
government can provide part time job to people suffering from this type of unemployment.
Cyclical or Demand deficient Unemployment- It occurs when the economy is in need of fewer
workforces and when there is an economic disequilibrium. It can be reduced by reflating
aggregate demand i.e. the government can increase the level of aggregate demand by using
policies like lowering interest rates or the direct taxes. It will also encourage foreign multinational
companies to make investments into the economy. As a result, cyclical unemployment will
decrease.
Residual/Hard core Unemployment- - It is the remaining unemployment that exists when people
are unable or unwilling to work owing to a mental or physical disability. In order to reduce it
government can set up centres especially aimed for disabled people where they can do some jobs
related to the handicraft and the art work .Also they can offer tax reductions or employment
subsidies to companies to encourage them to employ disabled people.
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8. Classical or Real Wage Unemployment-It occurs when the wages in a competitive labour
market are raised above the equilibrium. This type of unemployment can be reduced normally if it
focuses on the strategy of making each labour market more elastic so that pay conditions become
more adaptable to the varying demand and supply conditions. Real wages should rise when the
demand, the output and the employment is rising, but they should fall if an industry experiences
recession which puts jobs at risk.
Technological unemployment- It occurs when there is a reduction in the need for labour because
of the changes in technology. It can be reduced if retraining programmes are set for the existing
workforce to increase their present skills and knowledge.
Hidden Unemployment- It is the unemployment of potential workers and it is not reflected in the
official unemployment statistics. It can be reduced by keeping a track of it, and therefore should
be reflected in the official unemployment statistics also.
Costs associated with unemployment
Economic costs of unemployment
If high levels of unemployment exist it not only proves costly for the individuals and families directly
affected by it, but also the local and regional economies and the economy as a whole.
Economic costs are usually associated with the:
Unemployment Rate.
It is the percentage of people in the labour force who are available and are willing to work but cannot
find a job.
Labour Force
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9. The people who are willing and are able to work, that are already having a job.
Participation Rate
It is the percentage of the population with a legal working age declaring themselves as a part of a labour
force. It excludes groups such as:
o long term disabled
o Women bringing up children
Economic costs also cause a lost in the output of goods and services i.e as unemployment causes a
waste of scarce economic resources; it therefore also reduces the long run growth potential of the
economy. An economy with high unemployment rate usually produces within its production possibility
frontier. The hours cannot be recovered in which the unemployed workers do not work.
Fiscal costs to the government
High unemployment rate also has a great effect on government expenditure, taxation and the level of
government borrowing each year. An increase in unemployment results in higher benefit payments and
lower tax revenues. When individuals are unemployed, not only do they receive benefits but also do not
pay income tax. Their spending power also decreases as their disposal income decreases; they therefore
contribute less with the government indirect taxes. This rise in government spending along with the fall in
tax revenues may result in a higher government borrowing requirement which is known as a public sector
net cash requirement.
Fiscal costs also cause deadweight loss of investment in human capital i.e. unemployment wastes
some of the scarce resources used in training workers. The workers who are unemployed for long
periods become de-skilled as their skills become increasingly out-dated in a rapidly changing job market.
This reduces their chances of gaining employment in the future, which in turn increases the economic
burden on government and society.
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10. Social Costs of Unemployment
The rise in unemployment rate is linked to social and economic deprivation, as it increases there is also
an increase in the crime rate and it is worsening social dislocation (i.e. there is an increase in divorce rate,
health problems and lower life expectancy).
High unemployment areas usually also see a decline in the real income and spending power together with
rising relative poverty and income inequality. There is also a risk involved with the above average
unemployment which suffers from an ageing potential workforce, as older employees are not
geographically mobile than the younger workers. Thus, it makes them seem less attractive as investment
locations for new businesses.
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11. References:
AS and A Level Economics by Colin Bamford, Keith Brunskill, Gordon Cain, Sue Grant ,
Stephen Munday , Stephen Walton
IGCSE Business Studies by Karen Borrington and Peter Stimpson
Business Studies by Dave Hall, Rob Jones, Carlo Raffo
http://ingrimayne.com/econ/Labor/TypesUnempl.html
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