Unemployment (1).pdf

3/26/2024 SYLLABUS OVERVIEW UNIT 4 4.1 Full Employment, U...

3/26/2024 SYLLABUS OVERVIEW UNIT 4 4.1 Full Employment, Unemployment, & Underemployment 4.2 Measurements of Unemployment Rate & Unemployment Difficulties in Measuring Unemployment 4.3 Costs of Unemployment 4.4 Types of Unemployment 4.5 Measures to Deal with Unemployment** 4.1 FULL EMPLOYMENT, UNEMPLOYMENT, & UNDEREMPLOYMENT Lesson Objectives At the end of this part, you should be able to: FULL EMPLOYMENT, 4.1 Define these terms: UNEMPLOYMENT, & UNDEREMPLOYMENT ❖ Working Population, Labour Force, Unemployment ❖ The Employed & Unemployed ❖ Economically Active & Inactive ❖ Underemployment ❖ Full Employment Calculate the Unemployment Rate 3 Defining Key Terms Low levels of unemployment rates are desirable – it is one of every government’s main macroeconomic objective. In order to define & measure unemployment, we need to first know… WHY? Which groups of people constitute the labour force? Falling/low unemployment rate is usually interpreted Which groups of people are excluded from the as a sign of economic recovery/ economic growth. labour force? Who do we classify as ‘unemployed’? Q: What exactly is unemployment? 1  3/26/2024 Working Population *Note: Working age varies from (Age 15 & above)* country to country Not in the Labour Force In the Labour Force Q: So who is considered ‘unemployed’? (Economically Inactive) (Economically Active) Unemployed Housewives/ Employed (i.e. currently without a homemakers (i.e. have jobs) Children job, BUT willing & able Full-time students to work, & actively Retirees seeking one) Persons with disabilities Institutionalized Employees New entrants persons Self-employed Re-entrants Discouraged workers workers Quit/ Laid off from last job UNDEREMPLOYMENT Q: So who is considered ‘unemployed’? Refers to people of working age who: have part-time jobs, are on temporary contracts, or are in jobs where they are over-qualified. Unemployment refers to people who are currently BUT without a job, BUT willing & able to work, and is actively looking for one. They are part of the actually desires to work full-time, be on a labour force. permanent contract, or be employed in a role that better utilizes their skills & education. Eg1: people working fewer hours per week than they UNEMPLOYMENT RATE would like. Eg2: trained individuals like engineers or computer Q: How is unemployment rate calculated? analysts working as waiters/ waitresses (anything unrelated to their profession) when they would rather *RECAP: Unemployment – refers to people who are have a job that’s relevant to their background. currently without a job, BUT willing & able to work, The underemployed are working, so are considered as and is actively looking for one. They are part of the employed (in the labour force). labour force. 2  3/26/2024 Working Population (Age 15 and above) Unemployment rate – refers to the number of people who are unemployed, expressed as a percentage (%) of the number of people in the labour force Not in the Labour Force In the Labour Force (Economically Inactive) (Economically Active) *Note: not the whole population. Unemployed Q: An economy has a labour force of 50 million people, Employed (i.e. currently without a (i.e. have jobs) of which 4.3 million are unemployed. Calculate the job, but actively seeking one) unemployment rate. Unemployment Rate = Unemployment Rate = 4.3 million/ 50 million * 100% = 8.6%. 𝐍𝐨.𝐨𝐟 𝐮𝐧𝐞𝐦𝐩𝐥𝐨𝐲𝐞𝐝 * 100% 𝐍𝐨.𝐨𝐟 𝐩𝐞𝐨𝐩𝐥𝐞 𝐢𝐧 𝐭𝐡𝐞 𝐋𝐚𝐛𝐨𝐮𝐫 𝐅𝐨𝐫𝐜𝐞 Full Employment Full employment refers to the highest level of employment possible i.e. unemployment at its lowest possible rate. Q1: What does it mean when the economy is at ‘full employment’? Realistically, economists regard full employment as unemployment rate of 2-4% - FE achieved when only 2- 4% of the working population are not in jobs. Is it possible for everyone in an economy to be employed at a time? It does not refer to 0% unemployment, which is ideal but realistically unattainable. Not everyone of working age will be employed – there will always be some who are unemployed at any given point in time, even if they are willing & able to work. 4.2 DIFFICULTIES IN MEASURING UNEMPLOYENT Lesson Objectives DIFFICULTIES IN At the end of this part, you should be able to: 4.2 MEASURING UNEMPLOYMENT Explain the difficulties involved in measuring unemployment. 17 3  3/26/2024 Q: How do governments measure unemployment rates? Reasons why it’s DIFFICULT to measure unemployment rates: Generally, information is gathered from national censuses & surveys of the population. This information is 1. Data inaccuracies – true unemployment rate may be: then used in the computation of the national a) UNDERESTIMATED – due to hidden unemployment. unemployment rate. b) OVERESTIMATED – due to “unemployed” people working in the shadow/ underground economy. Q: How reliable are the unemployment figures? 2. Unemployment rate is just an average figure – inequalities among different groups within an economy are not accounted for. 1. Data Inaccuracies Who are the hidden unemployed people? Official statistics often UNDERESTIMATE and/ or OVERESTIMATE the true unemployment rate in a country. a) UNDERESTIMATED due to hidden unemployment. Hidden unemployment - refers to those hidden from official unemployment figures. They are not considered as unemployed, & so not part of the labour force. Who are they? – 3 groups: i. Discouraged workers - people who have been unemployed for a long period of time, & have given Issue? - Unemployment figures include the up on looking for a job after several unsuccessful ‘unemployed’ (those without work, but are actively attempts. They become discouraged & stopped looking for work) BUT excludes the ‘discouraged searching for job. workers’. These people in effect have dropped out of the labour ∴ Official statistics UNDERESTIMATE the true force – they’re not considered to be “unemployed”, unemployment rate – ‘discouraged workers’ are not although technically, they are without a job. counted as unemployed. 4  3/26/2024 Issue? - Unemployment figures do not make a distinction ii. The Underemployed between: *RECAP: ❖ Full-time & part-time employment – it counts those with They are those who have part-time job, temporary part-time jobs as having full-time jobs (as employed), contracts, or are in jobs where they are over-qualified, BUT though in actual fact, they are UNDERemployed. actually desires to work full time, be on a permanent contract, or be employed in a role that better utilizes their ❖ Type of work done – it counts those in jobs where they skills. are overqualified, as employed (eg: engineer as waiter), though in actual fact, they are UNDERemployed. They are working, so are considered employed. ∴ Official statistics UNDERESTIMATE the true unemployment rate – the UNDEREMPLOYED are counted as EMPLOYED. Q: Why is the underemployed considered hidden Q: Why is the underemployed considered hidden unemployment? unemployment? There are some who are highly qualified, but due to circumstances, are unable to find jobs in their fields. They settle for lower-paying jobs in the meantime. They’re named as underemployed, because their employment is not appropriate to their background & qualifications. Let’s say there’s a graduate with an engineering degree, but he is unable to find a job as an engineer. He decides to just work in MCD part-time for now - how is this hidden unemployment? Technically he is NOT unemployed; he's working at MCD iii. Those on retraining programmes, who previously lost part-time – he has a job, so the gov doesn't count him as an their jobs, & those who have retired but would actually "unemployed" person. rather be working. But in reality, he's actually still job hunting looking for an engineering job, as if he was jobless. The MCD job is just a temporary role for survival or to past time, but he actually considers himself as unemployed as he hasn’t found a job in his field. So practically, he’s an unemployed engineer, but because RETRAINEES RETIREES he has a part-time job with MCDs, the govt doesn't count him as unemployed – he is the “hidden unemployed”. Q: Why are unemployment figures underestimated in these cases? 5  3/26/2024 Retraining – people who Retirees – they’re no longer lost their jobs & are now working but actually want enrolled in a retraining to work (technically they’re programme to up skill considered unemployed) themselves are considered a BUT in the eyes of the gov, ‘student’ in the eyes of the they have hit the retirement gov, & so the gov doesn’t age (no chance to work count them as unemployed. anymore – unable to) so the gov doesn’t count them as RETRAINEES BUT they are actually RETIREES unemployed persons who unemployed. has lost their jobs/ who are unable to find a job. b) OVERESTIMATED due to “unemployed” people b) Unemployment rate is just an working in the shadow/ underground economy. average figure Some people may be officially registered as Official statistics does not account for differences in unemployed, BUT they may be working in an unemployment that arise among various population unreported (underground) activity. groups in society. “Average figure” – it is not representative of the various Unemployment figures do not include those who are groups in the country. working in the shadow/ underground economy. Hence, it will be overestimated. The national unemployment rate may be high or low, BUT it doesn’t mean it’s the same for all regions, age groups, socioeconomic classes, or genders within the economy. Q: So what are some examples of differences/ disparities ❖ Age differences – in UE figures among different groups within a national - Eg1: Unemployment rates tend to be higher in the population? under-25 age group than older population groups as they’re less skilled and experienced. Within a national population, unemployment may differ - Eg2: The ageing population may face higher due to: unemployment rates as employers are less wiling to employ them. ❖ Geographical differences – unemployment varying across different regions in a country. ❖ Ethnic differences – Eg: Ethnic minorities tend to have - Eg1: regions with more declining industries may have higher unemployment rates, usually due to lower levels of higher unemployment rates. education & training. - Eg2: unemployment rates in the city may be higher than suburban/ rural unemployment as people are ❖ Gender differences – Eg: Unemployment rates are concentrated in the city. sometimes higher among women in some economies due to discrimination. 6  3/26/2024 4.3 COSTS OF UNEMPLOYMENT Lesson Objectives At the end of this part, you should be able to: 4.3 COSTS OF UNEMPLOYMENT Discuss the costs of unemployment to different economic agents. 37 COSTS OF UNEMPLOYMENT 1. Individuals (The unemployed themselves) – eg: Suffer fall in income or complete loss of earnings → lose Q: Higher unemployment tend to be an issue in the purchasing power → fall in consumption → lower economy. Why is that so? What are some of the standard of living for themselves & families. costs associated with long-term unemployment? – to: *Note1: fall in income – unemployed receive less income than one would do if they were employed, assuming that they receive some unemployment benefits. Individuals (the unemployed themselves) Society *Note2: situation is much worse if there are no unemployment benefits. Economy/ Government Loss of income → the unemployed may not be able to afford education for their children → affects their employment chances. Costs worsens the longer they remain unemployed. 2. Society – eg: - more difficult to get another job the longer they’ve Increase poverty rates – leading to more homeless, higher crime rates, vandalism, gang activities etc. been out of work - skills become out-dated, miss out on The unemployed may resort to these activities out training in new methods & technology, out of touch with of frustrations and/ or desperation. technological advancement, lose the habit of working, lack of confidence & motivation. 3. Economy/ Government – eg: Firms cut down on production as DD falls (the - The unemployed may become increasingly dejected the unemployed has lower purchasing power) → fall in longer they remain unemployed - may contribute to economic growth & increase in unemployment stress & problem associated with stress i.e. decline in rates. physical & mental health (eg: result in weight loss/ gain, low self-esteem, loss of sense of worth, anxiety & Loss of real output - actual output produced is less than potential output due to unemployment of depression, suicide) & may also lead to relationships/ labour. More G&S could’ve been produced if labour family break-up & divorce. is fully employed. There’s wastage of resources. 7  3/26/2024 Raise budget deficit & gov debt – due to lower taxes collected & higher gov spending. b) Puts pressure on gov expenditure – gov has to spend more: a) Loss of tax revenue for the govt – gov collects lesser taxes. ❖on welfare benefits for the unemployed. ❖in tackling social problems that arise as a result ❖Less direct tax – eg: income tax (people are of unemployment. unemployed) & corporate tax (firms make less ❖In providing training programmes for the profits with lower DD). unemployed. ❖Less indirect tax – eg: GST (the unemployed Higher G involves an opportunity cost – money spend less). could’ve been spent elsewhere. 4.4 TYPES OF UNEMPLOYMENT Lesson Objectives At the end of this part, you should be able to: 4.4 TYPES OF UNEMPLOYMENT Distinguish between the different causes of unemployment. Explain the natural rate of unemployment. 45 CAUSES/ TYPES OF UNEMPLOYMENT 1. Frictional Unemployment WHAT/ WHEN? - Occurs when people are in 4 main causes/ types of unemployment: between jobs. At any given time, there are: 1. Frictional Unemployment ❖People with marketable skills who are fired. ❖People who voluntarily quit their jobs in 2. Structural Unemployment search for better opportunities. 3. Cyclical Unemployment ❖People have graduated from school & are 4. Seasonal Unemployment looking for their first job. ❖People being between periods of employment – actors, models. 8  3/26/2024 CAUSE? - Incomplete information between Tends to be temporary (short-term) - a temporary employers & workers regarding job vacancies and transition. required qualifications. Takes time for the right applicants to get matched up with the right jobs. Always present, but generally perceive to have very “mild” effects on the economy – does not really have We are not fully We are not fully a negative outcome; less serious of an issue. Why? informed about the informed about the ❖ Eg1: An individual may be more productive leaving type of labour that is types of jobs that are available. We need available. We need his current job and moving on to another. time to search for the time to search for the ❖ Eg2: As soon as these people get a job, they will be right labour. right jobs. able to contribute to the economy. Friction refers to the time, effort & expense (monetary cost) it takes the workers to find a new job. Employers Employees 2. Structural Unemployment CAUSE? - 2 reasons for structural unemployment: WHAT/ WHEN? - Refers to unemployment arising from changes in the structure of an economy - In the long- a) Permanent fall in demand for a particular run, patterns of DD & SS will change, causing the type of labour. economy to undergo structural changes, with some sectors expanding & some contracting/ declining. b) Change in institutional framework of the economy (i.e. labour market rigidities). This leads to a mismatch between the skills of workers who are out of work, & the skills required for existing job opportunities. a) Permanent fall in DD for a particular type of i. Technological Advancement labour Q: How does technological advancement lead to a fall in As the economy grows, new jobs will be created & DD for workers (cause technological unemployment)? others may slowly disappear, making people unemployed. In two ways – new technologies may: ✓ Make certain types of workers unnecessary – Q: What causes a fall in DD for certain types of automation reduces the need for labour, causing some labour? to be made redundant. i. Technological Advancement ❖ Eg1: Airlines have reduced the number of backroom ii. Change in Consumer Taste staff employed as flight bookings are now done online. iii. Low Cost Foreign Labour - Globalization ❖ Eg2: Automated teller machines (ATMs) have reduced the demand for human bank tellers. 9  3/26/2024 ii. Change in Consumer Taste ✓ Lead to a mismatch between skills of unemployed workers, & skills required for jobs - ✓ Change in consumer taste may cause certain Existing workers do not have the skills to operate industries to decline & fall, & others to grow & new technology. flourish. Workers who lose their jobs in declining/ falling industries may not have the necessary skills to be employed in growing industries. ✓ Eg: Some people are increasingly concerned about the negative externalities associated with production & consumption of coal → search for alternatives → fall in demand for coal → coal miners become structurally unemployed. Globalization enables: iii. Low Cost Foreign Labour - Globalization ❖ Firms to set up operations in countries with lower labour costs, or where regulations are less strict → fall ✓ Globalization – refers to increased in DD for labour in more developed economies where interdependence of countries around the globe labour cost is higher. due to free trade. ❖ Increased trade - firms in countries with lower COP have cheaper goods & hence, better access to global ✓ It leads to fall in DD for labour in more markets → fall in DD for labour in countries with developed countries. higher COP. Q: Why/ how so? Eg: high structural unemployment in many manufacturing industries in developed countries due to lower-cost labour in China & hence cheaper imports from China. Diagrammatical Given the cost of employing Illustration (Labour Market) labour in developing countries Q: How can structural unemployment be illustrated is lower than in developed on a diagram? countries. Fall in demand (D1 to D2) for manufacturing labour in By showing a fall in demand for labour in a particular Canada. market or geographical area. Fewer manufacturing workers employed (Q1 to Q2) & wage falls from $16/ hour to $12/ hour. There’s an increase in unemployment of Q1-Q2, Figure 1: Labour Market for unless these workers can Manufacturing Workers in Canada find other jobs. 10  3/26/2024 b) Change in the Institutional Framework of the i. Minimum Wage Legislation economy (i.e. Labour Market rigidities) ✓ Gov may impose a minimum wage (above Labour Market Rigidities - refers to factors that prevent equilibrium wage) to protect workers. forces of SS & DD from operating freely in the labour market. ✓ This may however lead to unemployment. Why? Higher W: 3 factors: ❖ Raises SSL - more people are willing & able to work i. Minimum Wage Legislation BUT ii. Labour Union Activities & Wage Bargaining with ❖ Reduces DDL - firms are less keen on taking on Employers workers as cost is higher iii. Employment Protection Laws Greater SSL & lower DDL → results in unemployment. Diagrammatical Illustration (Labour Market) In a freely functioning labour market, Qe workers are employed at a wage of We i.e. where DD for labour = SS of labour. Q: Why would Given that the gov imposes a minimum wage of Wm the gov (higher than equilibrium wage, We). This leads to: impose a ❖ A fall in Qdd for labour from Qe to Qd – due to higher minimum cost for firms → reduce SS of G&S → hire less labour. wage above ❖ A rise in Qss of labour from Qe to Qs – due to greater equilibrium? income for workers → greater incentive to work. Figure 2: Minimum wage legislation leads to higher than Resulting effect: Labour unemployment of Q1-Q2. equilibrium wages ii. Labour Union Activities & Wage Bargaining with Employers Note: Structural unemployment is harmful & more ✓ Workers may ask for higher wages by negotiating serious than frictional unemployment. peacefully, or by going on strikes (protest/ demonstrate). Why? How so? ✓ Firms giving in to workers’ demand results in higher than equilibrium wages, & hence unemployment – It tends to result in long-term unemployment/ more similar effect to minimum wage legislation. permanent. People can remain structurally unemployed if retrenched workers are: iii. Employment Protection Laws 1. Occupationally immobile - lack the necessary ✓ Costly for firms to fire workers as compensation must skills or education to move into new/ expanding be made. industries. ✓ Result? – firms are more cautious about hiring 2. Geographically immobile - unable/ unwilling to workers i.e. reduce DD for labour, causing relocate to take up jobs where available. unemployment. 11  3/26/2024 3. Cyclical Unemployment Average Price Average (real) (Demand-deficient Unemployment) Level LRAS Wage rate SRAS CAUSE - Refers to unemployment caused by a lack ASL of AD. Production levels are low & so firms are not able to provide enough jobs for everyone who PL1 We wants to work. WHAT/ WHEN? - Occurs during a downturn or AD ADL recession in an economy. When the economy contracts/ when there’s slower growth or negative Yf Real GDP Qe Number of growth → C&I falls → AD falls → firms cut back on workers production → fall in demand for labour. The economy initially operates at Yf, & labour market is in equilibrium where 𝐀𝐃𝐋 = 𝐀𝐒𝐋 at 𝑾𝒆 for 𝑸𝒆 workers. Workers become redundant – unemployment is not voluntary. Cont… With a recession/ as the economy slows down Firms cut back on production → reduce DD for labour from → C&I falls → AD falls from AD to AD1 → firms cut back on 𝐀𝐃𝐋 to 𝐀𝐃𝐋𝟏 → real wage should fall from 𝑾𝒆 to 𝑾𝟏. production → lower output (Yf to Y1). Average (real) Wage rate Average Price Level LRAS ASL SRAS a b PL1 We c PL2 W1 AD ADL AD1 ADL1 Y1 Yf Real GDP Q1 Qe Number of workers But wages are unlikely to fall – i.e. wages are “sticky Demand-deficient unemployment is temporary/ short- downwards”. Why? term – It results from a slowdown in economic growth/ a recession, causing a temporary fall in demand for all ❖ Lower real wages will reduce workers’ motivation & labour in the economy. It is expected that once AD picks hence productivity. up, ADL should also increase. ❖ Labour contracts & trade union power prevent firms from reducing wages. However, cyclical unemployment arising from lengthy period of down times could eventually result in Hence, wages are likely to remain “stuck” up at 𝑾𝒆. structural unemployment. Why? - as the economy picks up later on, the economic climate may have changed. Quite possible that new forms of labour may be needed, At We, 𝐀𝐃𝐋 < 𝐀𝐒𝐋 → creates unemployment of a-b. & workers who are made redundant during the recession may not have the necessary skills. 12  3/26/2024 4. Seasonal Unemployment Natural Rate of Unemployment Refers to unemployment arising from seasonal changes. Workers are employed on a seasonal basis i.e. DD for Some Questions to Ponder Over certain workers fall during certain times of the year as their expertise isn’t applicable at the time of year. Q1: What does it mean when the economy is at ‘full employment’? Example: ❖ Eg1: Winter - constructions workers or farmers may be unemployed, whereas during summer, ski Q2: What is meant by ‘natural rate of unemployment’? instructors may be out of job. ❖ Eg2: In the agriculture industry, more workers may be needed during the planting or harvesting cycle. Q3: Why is ‘natural rate of unemployment’ also known as ‘full employment rate of unemployment’? Temporary form of unemployment. 13