Unemployment

Aggregate demand for labor (ADL)

The total demand for all the labor that produce an economy’s goods & services.

Aggregate supply for labor (ASL)

The total number of an economy’s workers that are willing and able to work in the economy at every given average wage rate.

Equilibrium

Labor market is in Equilibrium where ADL equals ASL. E wage rate is determined by interaction of ADL and ASL. When labor market is in Equilibrium:

• number of job vacancies in economy = no. of people looking for work
• number of workers firms willing to hire = no. of workers willing to accept a job offer

Unemployment

People of working age who are without work, available for work (willing & able to work), and actively seeking employment.

Unemployment rate (UR)

The percentage of the total labor force in a nation that is unemployed.

Unemployment rate =(No.of people who are unemployed)/(Total labour force)×100%

Total Labor Force = the employed (full & part time) + unemployed

Full employment

The highest possible use of a factor of production.

The natural rate of unemployment

The level of unemployment which exists when the labor market is in equilibrium. In this situation, the total demand for labor equals the total supply of labor and there is no upward pressure on wages and the price level.

Types of unemployment

Frictional unemployment: exists even when there is full employment. It is short term unemployment which occurs when workers are in between jobs.

• Voluntary unemployment: happens when unemployed people choose not to take up the job vacancies on offer.

• Search unemployment: occurs when workers who have lost one job do not take the first job offered to them. Instead they search around for a better job.

• Casual unemployment: occurs when workers have periods of employment followed by periods of unemployment; for example, film actors and festival organizers.

• Seasonal unemployment: is when people work during certain periods of the year and then are unemployed during off peak time. For instance, tour guides will find work during peak holiday times but may be out of work for the rest of the year.

Structural unemployment: It occurs when there is a mismatch between the jobs available & the skills of the unemployed, and may result in a permanent fall in demand for a particular type of labor. It exists due to the occupational and geographical immobility of labor.

• International unemployment: arises when workers lose their jobs because industries decline due to competition from foreign industries.

• Regional unemployment: refers to a situation where industries and occupations decline in particular areas of the country.

• Technological unemployment: occurs when industries and occupations disappear due to advances in technology.

Cyclical(demand-deficient) unemployment: can last for years and may be on a very large scale. It occurs due to a lack of aggregate demand and so affects most industries and occupations.

• When economy slows down, AD falls, and output falls, firms will decrease the demand for labor. However, wages are “sticky downwards”, hard to fall. Wages remain “stuck” up at We, Average Supply of labor >Average Demand of Labor, Unemployment =a-b is created.

Consequences of unemployment

DIS

• Lose potential output and so living standards will be lower
• Lose potential tax revenue and will have to spend more on Unemployment benefits.
• Fall in income - unemployed
• Increased crime rates, Increased stress levels, Increased indebtedness

AD

• Reduce inflationary pressure
• Enable firms to expand
• Give the unemployed time to reflect on what they really want and to research job opportunities.

Policies to correct unemployment

Demand side

• Expansionary monetary policies

Lower interest rate Increase money supply

• Expansionary fiscal policies

Reduce taxes Increase government spending

Supply side

• trade union reform
• promote training to encourage seasonally unemployed workers to take up different jobs in their “off season” or to help people acquire necessary skills to match available jobs.
• improve education so that workers become more occupationally mobile, able to adapt to rapidly changing e. conditions.
• reduce income tax or subsidize firms that provide training for workers
• cut unemployment benefit: encourage the unemployed to take up the available jobs rather than wait for better opportunities.
• improve the flow of job information from potential employers to job-seekers through such mediums as Internet job sites, job fairs and employment counselling. (information symmetry between)

Disadvantage of demand side policies

• Government expenditure↑→ fiscal deficits: LR fiscal problems
• Government expenditure: Opportunity cost involved
• Government expenditure: crowding-out effect
• If consumer & business confidence is too low, these policies may not work: ↓tax &↓IR: no guarantee ↑C&I
• time lag: they take time to take effect. (esp. fiscal p.)
• they may cause inflation & thus reduce the country’s export competitiveness.