Economist
first began a study of unemployment during the great depression when Maynard
Keynes challenged the classicalist view that economic system left on their own
will quickly return to full employment.
UNEMPLOYMENT is
a situation in which people within the labor force and able to work are
actively seeking for a job but are unable to get a job to do. It is important to note that to be
considered unemployed a person must be an active member of the labor force and
in search of remunerative work.
The
term "LABOR FORCE" refers
to the population of an economy that is willing and able to engage in paid
employment, and whose ages fit within a range that has been statutorily
established. Labor Force Participation Ratio (Rate) or Labor Participation
Ratio for short. This is the proportion or percentage of the adult population
that is in the labor force or workforce. People who have attained the legal employment
age but are currently in school, for example, are part of the adult population
but not in the labor force, The labor participation ratio is calculated by
dividing the number of people in the labor force by the entire adult population
and multiplied by 100.
UNEMPLOYMENT RATE is the
percentage of people in the labor force who are not working.
Consequently, measuring the unemployment rate requires identifying who is in
the labor force. The labor force includes people who are either employed or
unemployed.
Also
excluded in the definition are the so – called discouraged workers thus those who look for job and give up on their
search in frustration.
This is also different from underemployment
which constitutes the section of the labour force seeking for full-time
paid employment but unfortunately, the structure of the employment permit them
to work for only part-time or are employed below capacity.
It must be noted that discouraged workers and
Underemployment understates the actual unemployment rate. i.e. makes the
unemployment rate lower.
The underground
economy overstate the actual unemployment rate i.e. makes the unemployment
rate higher. The underground economy refers to economic transactions that are
deemed illegal, either because the goods or services traded are unlawful in
nature, or because transactions fail to comply with governmental reporting
requirements. Examples include, prostitution, drugs dealing, etc.
TYPES OF UNEMPLOYMENTS
1.
Natural
unemployment - Natural unemployment is the minimum unemployment rate
resulting from real or voluntary economic forces. It represents the number
of people unemployed due to the structure of the labor force, including those
replaced by technology or those who lack the skills necessary to get hired. It
can also be refer to as the rate of unemployment at full employment output.
2.
Cyclical
unemployment - Cyclical unemployment is the impact of economic
recession or expansion on the total unemployment rate (associated with the
business cycle). Cyclical unemployment generally rises during recessions
and falls during economic expansions and is a major focus of economic policy.
An example of cyclical unemployment is when construction workers were
laid off during the Great Recession following the financial crisis of 2008.
3.
Frictional unemployment (transitional unemployment) - is a type of short-term unemployment.
Frictional unemployment happens when a person is voluntarily job searching or
searching for a new career. Frictional unemployment isn't necessarily a bad
thing. In fact, because frictional unemployment is voluntary, it can be a sign
of a healthy economy.
4.
Structural and Technological Unemployment - is long-lasting unemployment that comes
about due to shifts in an economy. This type of unemployment happens
because, though jobs are available, there's a mismatch between what companies
need and what available workers offer. For example, a given country in Agric –
based activities changing to industry – based production will result in
unemployment.
5.
Seasonal Unemployment - occurs when people are unemployed at
particular times of the year when demand for labor is lower than usual. Seasonal unemployment refers to a temporary
window of time where the number of available employment opportunities
decreases. Examples of seasonal
unemployment include: agricultural workers who are unemployed
outside the growing season.
6.
Classical Unemployment - This is unemployment precipitated by the
intervention of the government in the labor market through the establishment of
minimum wages and causing mismatch between the vacancies available in the
economy and the number of people who are willing to work at the government
established wage rate. It occurs when real wages are kept above the market-clearing
wage rate, leading to a surplus of labor supplied. Classical unemployment is sometimes known as real wage
unemployment because it refers to real wages being too high.
Causes of Unemployment
a.
Technological
change - If there is the development of labour saving technology in some
industries, then there will be a fall in demand for some types of labour which
have been replaced by machines.
b.
Occupational
immobility - This refers to the difficulties in learning new skills applicable
to a new industry, and technological change, e.g. an unemployed farmer may
struggle to find work in high tech industries.
c.
Geographical
immobility - This refers to the difficulty in moving regions to get a job, e.g.
there may be jobs in London, but it could be difficult to find suitable
accommodation or schooling for their children.
d.
Global
recession - A global recession is an extended period of economic decline around
the world where there are downturns in a business cycle in which demand for
goods and services decreases over time. Thus, employers or producers will cut
cost by laying off some employees.
e.
Financial
crisis - A financial crisis is when financial instruments and assets decrease
significantly in value. As a result, businesses have trouble meeting their
financial obligations, and financial institutions lack sufficient cash or
convertible assets to fund projects and meet immediate needs.
Some other factors that cause unemployment
includes
·
Inadequate
jobs
·
Low income
rate
·
High
interest rate, etc
Effects of Unemployment
1.
Loss of
income - This is one of the most significant consequences of unemployment that
has a direct impact not only on the individuals affected but also on the
economy and society as a whole. People who are unable to find work are unable
to bring in the money that they would have earned had they been working.
Consider the case of a cocoa farmer whose land is purchased by a mining firm
that intends to use it for gold extraction. There will be no more stable
revenue for the farmer to derive from the farm in the long future.
2.
Loss of
government revenue: Tax revenue is another area that suffers as a direct result
of high unemployment rates. The cocoa industry makes a sizeable contribution to
the overall tax revenue of the country. Consequently, if cocoa farms are wiped
out to make room for mining operations, there will be a negative effect on the
amount of money the government receives, assuming that everything else stays
the same.
3.
Social
costs of unemployment: There are certain costs to society associated with
unemployment. People who are unemployed for an extended period of time
typically experience feelings of deprivation and the impulse to violate the
rules of society and engage in some social vices such as bribery, armed
robbery, and scamming, amongst others. Long-term unemployment can make poverty
more widespread, make income distribution more unequal, and exacerbate existing
income disparities in countries. There is a correlation between rising
unemployment rates and political unrest. Because it is so difficult to find
work, it is possible that workers will be exploited as a result.
4.
Social
problem: Many social evils like dishonesty, gambling and immorality etc. arise
due to unemployment. It endangers law and order situation of the country. It
causes social disruption in the society.
5.
Loss of
human resources: Due to unemployment, human resources go waste. No constructive
use of labor force is made. If human resources are properly used, economic
growth of the country will increase.
6.
Reduction in
National output: Unemployment will make an economy to operate inside its
production possibilities curve rather than on the curve. This happens because
the unemployed does not produce any output. When people are unemployed, they
are unable to contribute to the national output.
7.
Political
Instability: There is political instability in the country due to unemployment.
Unemployed persons engage themselves in destructive activities. They consider
Government worthless. Economic development becomes difficult under conditions
of political instability.
Some other effects of unemployment includes,
- ·
loss of
self-esteem
- ·
brain drain
- ·
low
standard of living
- · loss of tax revenue
Relationship between Unemployment and GDP (Okun's law.)
The rate of unemployment and changes that occur
in GDP are observed to be related. The relation that exists between
unemployment rate and growth in GDP was first proposed by Arthur Okun based on
his study of the
Economy of United States of America. He
indicated that there is a negative relationship between quarterly changes in
unemployment rates and
Quarterly changes in GDP. That is reduction in
quarterly unemployment
Rates is associated with increments in GDP
quarterly. On the other hand.
Increment in unemployment rates is associated
with reduction in quarterly
GDP.
The
diagram below demonstrates the Okun's law.
