Economics Grade 10- Contemporary Economic issues

Unemployment

By Sphiwe Dladla 201221896

What is Economics? In a nutshell…

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

and sustainable.

UNEMPLOYMENT

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 Fit

Mentally sound

Well qualified

Willing to work at prevailing wage rate

BUT DOES NOT GET JOB , THIS SITUATION IS CALLED UNEMPLOYMENT !!

Key Concepts To Understanding Unemployment

Adult Population

Labour Force

Labour Force Participation Rate

Unemployment Rate

Discouraged Worker

Quick Facts about unemployment

Unemployment is lack of full utilization of resources, and eats up the

production of the economy.

Unemployment management is one of the toughest jobs of every

government in the world.

Along with price level, unemployment is probably the most

observable economic indicator that the general public complains about

their government.

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

formula:-

Unemployment rate = Labour force – Employed labour X

100

Labour Force

Or

Unemployment rate = Number of unemployed X 100

Labour Force

Types Of Unemployment

Seasonal Unemployment

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

unemployment.

Cyclical Unemployment

Because 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

unemployment i.e. the unemployment caused by economic

recessions.

Cyclical unemployment can be zero in full expansions during a

business cycle.

Technical Unemployment

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.

Frictional Unemployment

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 unemployed

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.

Structural Unemployment

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.

Disguised Unemployment

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

Personal Cost -

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

Economic Cost -

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

labour force.

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 Unemployment

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?

OR

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

the Demand-pull and

the Wage-push factors.

Demand-Pull Factor

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 Factor

Wage-Push Inflation is caused by the autonomous demand by the

labour unions for increase in wages in excess of increase in labour

productivity.

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

Businesses can keep wages low and

maintain lower costs.

Inflation can be kept low.

The will be reduced consumption of non-

renewable raw materials.

Ways to reduce or combat unemployment

1. Demand-side policies The government can try to stimulate demand in the economy by increasing taxation and government spending and create more jobs as a result of increased demand.

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.

References o http://www.slideshare.net/UdayBansode/

unemployment-15749757

o DOE CAPS Document- Economics FET Grade 10-12

o http://www.slideshare.net/zatrutakrew/unemployment-and-inflation-presentation-5860685

o http://www.slideshare.net/kinnar32/inflation-unemployment

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