Unemployment
Topic Twenty-Nine

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Unemployment

Unemployment is defined as an economic condition whereby individuals actively seeking jobs remain out of work or cannot obtain jobs.  The unemployment rate is defined as the percentage of unemployed persons who are actively seeking work out of the total number of employable people or the labour force.  It must be stressed that persons who are not working and not looking for work are not considered to be unemployed and are not counted as part of the unemployment rate. 

For example: let us assume that 200,000 people are employed with 40,000 people being unemployed and seeking employment.  There is another 10,000 persons unemployed but not seeking employment – these persons will not be considered and counted as part of the labour force.  Then the labour force would be the sum of the employed plus the unemployed seeking work or 200,000 + 40,000 = 240,000.    The unemployment rate is the ratio of the unemployed to the total labor force or (40,000 /240,000) times by 100 = 17.0 %. This will be considered to be relatively high and should be brought below 6 percent.

Types of Unemployment or Causes of Unemployment

Unemployment happens for different reasons and therefore there are different types of unemployment. 

Cyclical unemployment - When the economy experiences a disturbance, growth in the economy will come to a halt and there will be a reduction in economic activities and hence income and output.  At this stage, companies will begin to lay off workers and unemployment will be on the rise. 

Frictional unemployment - this is the type of unemployment that stems from people moving between jobs, careers, and locations.   This unemployment involves people in the midst of transiting between jobs and searching for new ones.  New entrants such as graduating students and re-entrants such as former homemakers can be included in the frictional unemployment figures.

Structural unemployment - this type of unemployment is caused by a mismatch between workers' skills and the skills needed for available jobs. Employers seek workers who have one type of skill and the workers seeking employment have a different type of skill.

Real wage or classical unemployment – this arises when the real wages of workers in an economy are too high which results in firms being unwilling to employ every person looking for a job. When real wages are too high, it means that the cost of employing an extra worker (the real wage) is higher than the benefit from employing an extra worker (the value of output the worker produces). 

Solution to Unemployment

Solution to Structural Unemployment

Education and training - expansionary fiscal and monetary policies have little if any long term effect on structural unemployment. While stimulating the economy can reduce structural unemployment temporarily, so long as technological progress continues, structural unemployment eventually returns to its normal level.  While it may not be possible to totally eliminate structural unemployment, it can be reduced through education and training programs.

Solution to Cyclical Unemployment

As stated earlier, real wage or classical unemployment arises when the real wage is so high that companies cannot employ all of the existing persons in the labour force.  Some of the possible solutions to this type of unemployment are as follows:

Education and training – in cases where employees cannot obtain jobs in particular industries due to the high real wages in those industries, the government can afford training in particular industries where real wages are not relatively so high so that companies in such industries will be able to absorb some of the displaced employees. 

Employment subsidies – companies can be given tax breaks or subsidies for taking on long term unemployed in these industries where the real wage is high and where labourers cannot easily obtain jobs.  This helps give them new confidence and on the job training. However, it will be quite expensive and it may encourage firms to simply replace current workers with the long term unemployment in order to benefit from the tax breaks.

Improve labour market mobility – the government can make it easier for members of the labour force to switch between jobs thereby increasing occupational mobility and also make it easier for members of the labour force to move to other locations where they can get jobs easier thereby allowing for geographical mobility.

Solution to Frictional Unemployment

Making information about jobs easily accessible - Like other types of unemployment, frictional unemployment cannot be reduced through expansionary monetary policy or fiscal policy. Frictional unemployment can be reduced by bringing better information about jobs to the worker. This can be accomplished by job matching services on the Internet, job fairs, networking with advertising agencies, publications in the print media and also networking through professional organizations.

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