Lecture 21 - Unemployment

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18 February 2011 PETER PARIAG 1

MBA ECONOMICS

LECTURE 21

UNEMPLOYMENT




Lecture Outline

1. Introduction ± Discussion of Definitions

2. Types of Unemployment

3. Unemployment and poverty

4. Statistics on the Labour Force

5. Why unemployment is a serious problem?

6. Factors producing growing unemployment

7. Government policies to influence unemployment8. Solutions to unemployment

9. Unemployment and inflation




Introduction ± Discussion of Definitions

Labour Force

µOf the population 15 years old and over covered in the

survey period, all persons engaged in, or willing and able to

be engaged in the production of economic goods andservices are classified as being in the labour force¶.

µThese include employees, as well as employers and the self

employed¶.

The labour force is therefore comprised of all persons who

either had jobs (the employed), or, if they did not have jobs,

were willing and able to work ( the unemployed).




Employed and the Unemployed EMPLOYED (have jobs)

1. Employees2. Employers

3. Self- employed

Persons with jobs

All persons who worked for payfor any length of time during thesurvey week.

Persons who are temporarilyabsent from work because of

vacation, illness, industrialdispute or some similar cause.

Persons who worked without payon a family farm or business or asa learner .

UNEMPLOYED ( did not have jobs)

3 criteria must be satisfied:1.Without work

2.Currently available for work

3.Actively seeking work.

Without work ± were not in paidemployment during the surveyweek

Currently available ± were availablefor paid or self employment during the

survey week.Actively seeking work ± had

taken steps during a specified period to seek paid employmentor self employment.




LABOUR FORCE CHARACTERISTICSLabour ForceCharacteristisc

Employed

Seekers Other Unemploye

Unemployed

Labour Forcee(EconomicallyActivePopulation)

Students Housekeepers Retired Disabled Didnot

Want Work

Other

Not inLabour Force(EconomicallyInactivepopulation

Population15yearsoldandover

(WorkingAgePopulation)



The Labour Market

The participation rate is the fraction of the population of working age who are in the labour force.

The unemployment rate is the fraction of the labour forcewithout a job.

Discouraged workers, pessimistic about finding a job, leavethe labour force.

Economists used to classify unemployment by source:frictional, structural, demand-deficient or classical.

It includes people whose handicaps make them hard to

employ. More importantly, it includes people spending shortspells in unemployment as they hop between jobs in adynamic society.





Types of Unemployment

1. Normal or Transitional Unemployment ± the time taken to matchemployees with employer. Need to speed up information.

2. Frictional Unemployment ± is the irreducible minimumunemployment in a dynamic society. Friction in the labour market. Difficulty of matching shortage of a given type of labour. Persons are between jobs, shopping around ± voluntaryunemployment.

3. Structural unemployment ± arises from the mismatch of skillsand job opportunities as the pattern of supply and demand

changes. It reflects the time taken to acquire human capital. ± Geographical immobility

± Occupational immobility





4. Seasonal Unemployment

5. Technological Unemployment ± A form of structural unemployment which occurs whennew technologies are introduced:

± Old skills are no longer required

± There is likely to be a labour savingaspect, with machines doing the job that people use to do.





6. Cyclical Unemployment

Domestic and foreign trade go through cycles of

boom, decline, recession, recovery then boom

again.

1. During recovery and boom, the demand for

output and jobs is high and unemployment low.

2. During decline and recession, the demand for output and jobs falls, and unemployment rises to

a high level.





7. Demand- deficient Unemployment- This refers toKeynesian unemployment, when aggregate demand fallsand wages and prices have not yet adjusted to restore fullemployment. Aggregate demand is deficient because it is

lower than full employment aggregate demand.8. Classical Unemployment ± describes the unemployment

created when the wage is deliberately maintained abovethe level at which the labour supply and labour demand

schedules intersect. It maybe caused either by the exerciseof trade union power or by minimum wage legislationwhich enforces a wage in excess of the equilibrium wagerate.




Types of Unemployment9. Involuntary Unemployment ± people wish to work, are prepared to

accept wages currently being obtained by employed persons, arewilling to be mobile and are properly qualified but nevertheless

cannot find jobs. Keynes concerned with involuntary

unemployment. This situation exists because there is insufficient

aggregate demand or planned expenditure in the economy.

Voluntary Unemployment Short Term Long Term

Transitional Transitional Structural

Frictional Frictional Persistent general

unemployment.

Seasonal Seasonal

Structural



Equilibrium Unemployment.

Equilibrium unemployment (also called the natural

rate of unemployment) is the unemployment rate

when the labour market is in equilibrium.

A worker is voluntarily unemployed if, at a givenlevel of wages, she wishes to be in the labour force

but does not yet wish to accept a job.

An involuntarily unemployed worker would accept a job offer at the going wage rate.




Equilibrium Unemployment

Real

wages


LF AJ

LD

W

W1 A B C

E F

Number of workersN N1N2



Equilibrium Unemployment

The schedules LD, LF, and AJ show, respectively,labour demand, the size of the labour force, and thenumbers of workers willing to accept job offers at any

real wage. AJ lies to the left of LF both because somelabour force members are between jobs and becauseoptimists are hanging on for an even better job offer.When the labour market clears at E, EF is the natural

rate of unemployment, the people in the labour forcenot prepared to take job offers at the equilibrium wageW. This unemployment is entirely voluntary.




Classical Unemployment

If union power succeeds in maintaining the wage

W1, above the equilibrium wage W, in the long run,

the labour market will be at A, and the natural rate

of unemployment AC now shows the amount of unemployment chosen by the labour force

collectively by enforcing the wage W.

In this instance, classical unemployment is includedin equilibrium unemployment.





Unemployment and Poverty The belief that unemployment necessarily means poverty is false.

1. Unemployment in the sense of the lack of paid employment, notnecessarily idle, they could be productively engaged on familyfarm or business.

2. Unemployment may not mean poverty ± the majority of young

dependents. Unemployed youths are able to get along beingmembers of households.

3. Poverty affects both the employed and the unemployed.

Much of the problem of unemployment is really the

problem of the unemployed themselves ± their attitudes,unwarranted aspirations and unwillingness to acceptavailable employment. Most of the young are not interestedin manual work.




WHY UNEMPLOYMENT IS A SERIOUS PROBLEM

1. Lies in the importance of creative productive work

for human beings, as human beings. This need is

an integral part of humanity.

2. It may mean poverty for those affected by it.

3. Because of its negative psychological impact on

the individual.

4. Unemployment does not negatively affect just theindividual or his family, but can have serious costs

for the society as a whole.




WHY UNEMPLOYMENT IS A SERIOUS PROBLEM

5. Unemployment also means an economic costto society when its existence implies anopportunity cost through lost potentialoutput.

6. Unemployment can lead to a rise in crimeand other anti-social manifestations.

7. Unemployment also means misery, socialunrest and hopelessness for the unemployed.



The Private Cost of Unemployment

When individuals are voluntary unemployed they revealthat they do better by being unemployed than by takinga job offer that they face at the going wage rate.

The private cost of unemployment ( the wage foregone by not working) is less than the private benefits of being unemployed.

Private benefits include transfer payments from

government, the value of leisure, expectation of obtaining a better job. These future benefits must be setagainst the current cost, a lower disposable income by being out of work.




The Private Cost of Unemployment

When people are involuntary unemployed, the costchanges. Involuntary unemployment mans that peoplewould like to work at the going wage but cannot find a job because there is excess labour supply at the existing

wage rate. These people are worse off beingunemployed.

The distinction between voluntary and involuntaryunemployment matters because it may affect our value judgement about how much attention to pay tounemployment. When unemployment is involuntary, people are suffering more and the case for helping themis stronger.




The Social Cost of Unemployment

When unemployment is voluntary an individual receivestransfer payments during unemployment but these transfersgive no corresponding benefit to society as a whole. Since the private benefit exceeds the social benefit, too many peoplemay be voluntarily unemployed.

In a changing economy it is important to match up the right people to the right job.

Involuntary unemployment has an even higher social cost.Since the economy is producing below capacity, it is literally

throwing away output that could have been made by puttingthese people to work. Involuntary unemployment may entailmore human and psychological suffering than voluntaryunemployment







Factors producing Growing Unemployment

DEMAND SIDE:

Private sector:

4. The tax structure of firms ± government unable to obtainenough revenue, as a result raises the tax on firms, i.e.

taxation as a deterrent to enterprise and output.

5. The monetary system services the import ± export trade,finances consumer durables to the detriment to the productive sectors.

6. Lack of savings ± the inability to mobilize domesticsavings. Savings required for investment.





DEMAND SIDE:Government:

The burden of employment falls on the government

The level of employment depends on the revenue from the private sector.

There exist a divergence between the rate of growth of theeconomy and the rate of growth of employment due to the pattern of final demand.

The present type of development planning is oriented towardseconomic growth rather than towards employment creation.





SUPPLY SIDE:

The factors which affect the rapid growth of the number seeking jobs.

1. The rapid rate of growth of those of working age as aresult of the high rate of population growth 15 yearsearlier.

2. The rapid movement from rural to urban areas and awayfrom certain agricultural oriented jobs to relatively well- paid jobs in mining, tourism, government, etc. The jobaspiration is of a particular type.





SUPPLY SIDE

3. The rapid growth in the supply of labour seeking certain

jobs but not others. This is as a direct result of the skill

composition of the labour force.4. The increasing rate of female participation in the labour

force, associated largely with the expansion of secondary

educational opportunities and the ³ emancipation of

women´.




Government Policies to Influence Employment

AIMED AT:

1. Either at reducing the number of persons unemployed

down to an ³acceptable´ level ± reducing unemployment

2. Creating more jobs ± Job creation. 1 and 2 should mean the same thing, but it is possible to :

(a) Create more jobs without reducing unemployment.

(b) Reduce unemployment without creating jobs ±

OJT,YTTEP




Some Possible Solutions To Unemployment

1. Re-organize the Educational System

2. Re-organize Agriculture ± through landreforms, ownership, diversification

3. Block out unnecessary imports

4. Develop the following labour intensiveindustries:

1. Fishing 2. Construction 3. Tourism

5. Curb the rural ± urban drift - decentralize




Linking Inflation and Unemployment

A.W. Phillips discovered (1958) a statistical relationship between unemployment and the rate of inflation whichimplied that, in general, the rate of inflation fell asunemployment rose and vice-versa. A curve known as thePhillips curve can be drawn linking inflation and

unemployment. The curve crosses the horizontal axis at a positive value for the

unemployment rate. This means that zero inflation will be associatedwith some unemployment. It is not possible to achieve zero inflationand zero unemployment at the same time.

The shape of the curve (concave) means that the lower the level of unemployment, the higher the rate of increase in inflation.




THE PHILLIPS CURVE

Unemployment

rate

Inflation

rate

Phillips Curve

1. Higher inflation associated with

lower unemployment

2. Lower inflation associated with

higher unemployment

0




What the Phillips Curve Suggests to Government

The existence of a relationship between inflation and

unemployment of a type indicated by the Phillips

Curve suggests that government should be able to

choose some point on the curve, according to its preference, and use demand management policies to

take the economy to that point ± i.e. µto strike a

balance¶ between acceptable levels of inflation and

employment.




What the Phillips Curve Suggests to Government

If achieving full employment is an economic policyobjective, a government must therefore be preparedto accept a certain level of inflation as a necessary

µevil¶. The Phillips Curve relationship between inflation

and unemployment broke down at the end of the1960s when Britain began to experience risinginflation with rising unemployment



RATES OF INFLATION AND UNEMPLOYMENT IN T&T

YEAR RATE OF INFLATION RATE OT EMPLOYMENT

1990 11.0 20.0

1991 3.8 18.5

1992 6.5 19.61993 10.8 19.8

1994 8.8 18.4

1995 5.3 17.21996 3.3 16.2

1997 3.6 15.0



YEAR RATE OF INFLATION RATE OF EMPLOYMENT

1998 5.6 14.2

1999 3.4 13.1

2000 3.6 12.1

2001 5.5 10.8

2002 4.2 10.4

2003 3.8 10.5

2004 3.7 10.2

2005 6.9 8.02006 8.3 6.2

2007 7.9 5.5

2008 12.0 4.6




Refinements to the Phillips Curve

An explanation of rising inflation rates combined withrising unemployment was put forward, based on inflationaryexpectations.

This µnatural rate hypothesis¶ is supported by monetarist

economist. µInflationary expectations¶ means the rate of inflation that is

expected in the future.

The inflationary expectations of the work force will be

reflected in the level of wage rises that is demanded in theannual round of pay negotiations between employers andworkers




Inflationary Expectations of the Work Force

ExpectedInflation

Wage demand Rate of Inflation

Actionoutcome

3% 3% 3% Mission

accomplished

3% 4% 4% Increase in real

wage 1 %

3% 3% 5% Mistake made by

work force

5% 7% 7% Follow up

action.




The Natural Rate Hypothesis

The natural rate hypothesis incorporates these viewson inflationary expectations, to produce a refinementof the Phillips curve

There exist a µnatural rate of of unemployment.

If policy makers try to reduce unemployment belowthis rate, they will bring about an inflation thatexplodes into even faster rates of price increases.

In the long run there is no trade off betweeninflation and employment.




The Expectation Augmented Phillips Curve

Unemployment Rate (%)

Prices

And

Inflation

Wages (%)

N

N

PC1PC2

42

3

8The Natural Rate Hypothesis





The economy is characterized by the Phillipscurve PC1. Unemployment rate = 4% and 0% price and wage inflation.

Unemployment reduced to 2% of the Labour force.

There is a movement along the Phillips curve,

and the new unemployment level nowassociated with 3% inflation.




The Natural Rate Hypothesis In the mean time the period of positive inflation has

generated inflationary expectations and 4% unemploymentis now associated with 3% inflation, because the Phillipscurve has shifted from PC1 to PC2.

In effect, the short run Phillips curve has shifted outwards

from PC1 to PC2.

As employers realize that they are paying higher wages as well as receiving higher prices, and asworkers realize that the real value of their wages hasnot risen, the unemployment rate rises to 4% again.





The workers who were initially brought out of unemployment by the higher wages, return tounemployment.

Monetarist economists state that the long run Phillips curveis vertical at the natural rate of unemployment i.e. NN .

In the long run, unemployment will revert towards itsnatural level.

The natural rate of inflation will be determined by the shortrun Phillips curve, which will shift upwards as inflationaryexpectations increase.




The Natural Rate of Unemployment

Number employed

Wage

0

X

YWe

Nx Ny

S1

S2

The natural rate

of Unemployment

= Ony - Onx

D




The Natural Rate of Unemployment

The demand for labour is labeled D The supply of workers available to take jobs at different

wages is S1.

S2 shows the supply of workers who are capable of taking

jobs. At any given wage there are more potential workers than

shown by S1.

This is because a number of them are prevented from being

available to take up employment by frictions such as lack of information and immobility.

There is µnatural unemployment¶ equal to ONy - ONx




THANK YOU

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Lecture 21 - Unemployment