Unemployment:‌‌  

  ‌
 ‌
I. Low‌‌unemployment:‌‌    ‌
A. Unemployment‌‌define:‌‌    ‌
1. Everyone‌‌of‌‌working‌‌age‌‌who‌‌is‌‌looking‌‌for‌‌work‌‌but‌‌who‌‌cannot‌‌find‌‌  
employment.‌  ‌
B. Unemployment‌‌measurement:‌‌    ‌
1. Labor‌‌force:‌‌    ‌
a) All‌‌persons‌‌of‌‌working‌‌age‌‌who‌‌are‌‌either‌‌employed‌‌or‌‌  
unemployed‌‌and‌‌seeking‌‌work.‌  ‌
2. The‌‌unemployment‌‌rate:‌‌    ‌
a) Percentage‌‌of‌‌the‌‌labor‌‌force‌‌who‌‌are‌‌actively‌‌looking‌‌for‌‌work‌‌but‌‌  
are‌‌without‌‌a‌‌job‌‌    ‌
3. Unemployment‌‌rate‌‌formula:‌‌    ‌
a) (‌‌Number‌‌of‌‌unemployed‌‌/‌‌labor‌‌force‌‌)‌‌x‌‌100‌  ‌
II. Difficulties‌‌in‌‌measuring‌‌unemployment:‌‌    ‌
A. Hidden‌‌unemployment:‌‌    ‌
1. Part-time‌‌workers‌‌are‌‌considered‌‌employed‌‌although‌‌their‌‌skills‌‌are‌‌not‌‌  
fully‌‌utilized.‌‌    ‌
a) Example:‌‌An‌‌engineer‌‌might‌‌work‌‌as‌‌a‌‌taxi‌‌driver,‌‌which‌‌again‌‌  
means‌‌that‌‌the‌‌person's‌‌skills‌‌are‌‌not‌‌fully‌‌utilized.‌‌    ‌
B. Discouraged‌‌workers:‌‌    ‌
1. Many‌‌people‌‌may‌‌be‌‌put‌‌off‌‌looking‌‌for‌‌work‌‌if‌‌they‌‌have‌‌spent‌‌a‌‌long‌‌  
period‌‌of‌‌time‌‌unemployed.‌‌    ‌
a) People‌‌have‌‌to‌‌be‌a ‌ ctively‌‌‌seeking‌‌work‌‌to‌‌be‌‌considered‌‌
 
unemployed.‌  ‌
C. Regional,‌‌ethnic,‌‌age,‌‌and‌‌gender‌‌disparities:‌‌    ‌
1. Because‌‌the‌‌unemployment‌‌rate‌‌is‌‌usually‌‌published‌‌as‌‌a‌‌national‌‌  
unemployment‌‌rate‌‌and‌‌is‌‌essentially‌‌an‌‌average,‌‌the‌‌data‌‌ignores‌‌  
regional,‌‌ethnic,‌‌age,‌‌and‌‌gender‌‌disparities.‌‌    ‌
D. Informal‌‌economy:‌‌    ‌
1. people‌‌employed‌‌in‌‌the‌‌underground‌‌or‌‌informal‌‌economy‌‌might‌‌be‌‌  
registered‌‌as‌‌unemployed‌‌and‌‌claiming‌‌unemployment‌‌benefits.‌  ‌
III. Types‌‌of‌‌Unemployment:‌‌    ‌
A. Disequilibrium‌‌unemployment‌‌    ‌
1. Cyclical‌‌(demand-deficient)‌  ‌
a) Most‌‌concerning‌‌cause‌‌of‌‌unemployment‌‌is‌‌a‌‌recession‌  ‌
(1) Has‌‌the‌‌potential‌‌to‌‌reduce‌‌income‌‌for‌‌unemployed‌‌and‌‌  
rest‌‌of‌‌the‌‌earning‌‌population.‌‌    ‌
b) In‌‌this‌‌case,‌‌a‌‌reduction‌‌in‌‌aggregate‌‌demand‌‌would‌‌cause‌‌a‌‌fall‌‌  
in‌‌national‌‌output,‌‌a‌‌fall‌‌in‌‌earnings‌‌for‌‌businesses‌‌and‌‌individuals,‌‌  
an‌‌increase‌‌in‌‌unemployment‌‌and,‌‌potentially,‌‌a‌‌fall‌‌in‌‌the‌‌general‌‌  
price‌‌level‌‌too.‌  ‌
 c) Recessions‌‌can‌‌also‌‌cause‌‌a‌‌supply‌‌shock‌‌when‌‌aggregate‌‌  
supply‌‌falls,‌‌causing‌‌costs‌‌of‌‌production‌‌to‌‌rise‌‌and‌‌resulting‌‌in‌‌
 
what‌‌is‌‌termed‌‌as‌‌stagflation.‌  ‌

d)  ‌
e) In‌‌Figure‌‌2,‌‌total‌‌demand‌‌for‌‌labour‌‌falls‌‌from‌‌ADL‌‌to‌‌ADL1.‌‌   ‌
(1) At‌‌the‌‌market‌‌wage‌‌rate‌‌WE,‌‌firms‌‌are‌‌not‌‌willing‌‌to‌‌
 
employ‌‌the‌‌entire‌‌supply‌‌of‌‌labour,‌‌so‌‌there‌‌is‌‌
 
disequilibrium.‌‌   ‌
(2) The‌‌number‌‌of‌‌unemployed‌‌workers‌‌is‌‌represented‌‌by‌‌the‌‌  
gap‌‌between‌‌A‌‌and‌‌B,‌‌or‌‌QE‌‌and‌‌Q1.‌  ‌
2. Real-wage‌‌unemployment‌  ‌

a)  ‌
b) Government-imposed‌‌minimum‌‌wage‌‌can‌‌also‌‌increase‌‌  
unemployment.‌‌    ‌
c) There‌‌is‌‌a‌‌gap‌‌between‌‌the‌‌number‌‌of‌‌jobs‌‌available‌‌and‌‌the‌‌  
number‌‌of‌‌people‌‌willing‌‌and‌‌able‌‌to‌‌work‌‌at‌‌the‌‌prevailing‌‌wage‌‌  
rate.‌‌
   ‌
d) With‌‌a‌‌wage‌‌above‌‌the‌‌equilibrium‌‌market‌‌wage,‌‌firms‌‌will‌‌only‌‌  
demand‌‌QD‌‌labour‌‌but‌‌there‌‌will‌‌be‌‌QS‌‌supply‌‌of‌‌labour‌‌as‌‌  
individuals‌‌are‌‌more‌‌willing‌‌and‌‌able‌‌to‌‌work‌‌for‌‌the‌‌higher‌‌wage.‌  ‌
B. Equilibrium‌‌/‌‌natural‌‌rate‌‌of‌‌unemployment‌‌    ‌
1. Frictional‌‌unemployment‌  ‌
a) When‌‌people‌‌are‌‌between‌‌jobs.‌‌    ‌
 b) You‌‌may‌‌choose‌‌yourself‌‌to‌‌take‌‌some‌‌time‌‌after‌‌leaving‌‌a‌‌place‌‌  
of‌‌work‌‌to‌‌find‌‌a‌‌new‌‌job,‌‌in‌‌order‌‌to‌‌make‌‌sure‌‌you‌‌find‌‌the‌‌best‌‌  
fit.‌‌
   ‌
(1) Government‌‌will‌‌want‌‌to‌‌keep‌‌the‌‌length‌‌of‌‌time‌‌an‌‌  
individual‌‌spends‌‌unemployed‌‌as‌‌short‌‌as‌‌possible‌‌as‌‌it‌‌  
wants‌‌people‌‌to‌‌remain‌‌economically‌‌active.‌  ‌
c) Example:‌‌parents,‌‌students,‌‌university‌‌graduates‌  ‌
2. Seasonal‌‌unemployment‌  ‌
a) Occurs‌‌when‌‌people‌‌do‌‌specific‌‌job‌‌types‌‌that‌‌are‌‌only‌‌required‌‌  
during‌‌certain‌‌times‌‌of‌‌the‌‌year.‌‌    ‌
b) Example:‌‌Ski‌‌instructor‌  ‌
3. Structural‌‌unemployment‌  ‌
a) occurs‌‌when‌‌there‌‌is‌‌a‌‌mismatch‌‌between‌‌the‌‌supply‌‌and‌‌demand‌‌  
for‌‌a‌‌particular‌‌set‌‌of‌‌labour‌‌skills.‌‌   ‌
b) Causes‌‌for‌‌structural‌‌unemployment:‌‌    ‌
(1) When‌‌an‌‌industry‌‌relocates‌‌across‌‌a‌‌country‌‌or‌‌to‌‌another‌‌  
country,‌‌it‌‌is‌‌unlikely‌‌that‌‌people‌‌will‌‌move‌‌with‌‌the‌‌ 
industry.‌‌This‌‌can‌‌cause‌‌major‌‌problems‌‌for‌‌some‌‌regions‌‌  
in‌‌some‌‌countries,‌‌especially‌‌when‌‌manufacturing‌‌  
industries‌‌have‌‌reduced‌‌in‌‌size,‌‌and‌‌cities‌‌and‌‌towns‌‌in‌‌  
those‌‌areas‌‌suffer‌‌from‌‌high‌‌rates‌‌of‌‌unemployment.‌‌This‌‌  
is‌‌illustrated‌‌in‌‌Figure‌‌5a.‌‌The‌‌decrease‌‌in‌‌the‌‌demand‌‌for‌‌  
labour‌‌in‌‌an‌‌industry‌‌is‌‌illustrated‌‌as‌‌a‌‌shift‌‌from‌‌D1‌‌to‌‌D2,‌‌  
lowering‌‌the‌‌wage‌‌rate‌‌and‌‌decreasing‌‌the‌‌quantity‌‌  
demanded‌‌of‌‌labour‌‌from‌‌Q1‌‌to‌‌Q2,‌‌representing‌‌an‌‌  
increase‌‌in‌‌unemployment.‌  ‌

(a)  ‌
(2) Labor‌‌market‌‌rigidities‌‌such‌‌as‌‌how‌‌difficult‌‌it‌‌is‌‌for‌‌people‌‌
 
to‌‌change‌‌jobs‌‌and‌‌job‌‌type,‌‌and‌‌employment‌‌legislation‌‌  
that‌‌prevents‌‌the‌‌easy‌‌firing‌‌of‌‌ineffective‌‌workers,‌‌will‌‌ 
reduce‌‌the‌‌supply‌‌of‌‌labour‌‌available.‌‌If‌‌the‌‌labour‌‌market‌‌  
becomes‌‌increasingly‌‌rigid,‌‌the‌‌number‌‌of‌‌people‌‌willing‌‌to‌‌  
work‌‌will‌‌decrease.‌‌This‌‌is‌‌illustrated‌‌in‌‌Figure‌‌5b.‌‌The‌‌  
 supply‌‌of‌‌labour‌‌shifts‌‌inwards‌‌from‌‌S1‌‌to‌‌S2,‌‌increasing‌‌
 
the‌‌wage‌‌rate‌‌and‌‌decreasing‌‌the‌‌quantity‌‌of‌‌labour‌‌  
demanded‌‌from‌‌Q1‌‌to‌‌Q2,‌‌again‌‌representing‌‌an‌‌increase‌‌  
in‌‌unemployment.‌  ‌

(a)  ‌
c) Both‌‌the‌‌shift‌‌shown‌‌in‌‌Figure‌‌5a‌‌and‌‌the‌‌shift‌‌shown‌‌in‌‌Figure‌‌5b‌‌
 
will‌‌result‌‌in‌‌the‌‌equilibrium‌‌quantity‌‌of‌‌labour‌‌falling‌‌below‌‌the‌ 
total‌‌labour‌‌force,‌‌as‌‌illustrated‌‌in‌‌Figure‌‌5c.‌  ‌

(1)  ‌
IV. Economic‌‌Impact/Costs‌‌of‌‌unemployment:‌  ‌
A. Loss‌‌of‌‌GDP:‌‌    ‌
1. People‌‌who‌‌are‌‌not‌‌engaged‌‌in‌‌production‌‌will‌‌not‌‌contribute‌‌to‌‌a‌‌nation's‌‌
 
GDP‌‌and‌‌will‌‌not‌‌earn‌‌a‌‌salary‌‌or‌‌wage‌‌with‌‌which‌‌to‌‌contribute‌‌to‌‌
 
consumption.‌‌    ‌
B. Loss‌‌of‌‌tax‌‌revenue:‌‌   ‌
1. With‌‌individuals‌‌on‌‌reduced‌‌or‌‌no‌‌incomes,‌‌tax‌‌revenues‌‌for‌‌the‌‌  
government‌‌will‌‌fall.‌‌
   ‌
a) This‌‌makes‌‌it‌‌more‌‌difficult‌‌for‌‌the‌‌government‌‌to‌‌run‌‌a‌‌balanced‌‌
 
budget‌‌during‌‌times‌‌of‌‌high‌‌unemployment.‌‌    ‌
C. Increased‌‌cost‌‌of‌‌unemployment‌‌benefits:‌‌    ‌
1. There‌‌will‌‌be‌‌added‌‌pressure‌‌on‌‌government‌‌finances‌‌when‌‌larger‌‌  
numbers‌‌of‌‌people‌‌start‌‌to‌‌claim‌‌unemployment‌‌benefits.‌  ‌
D. Loss‌‌of‌‌income‌‌for‌‌individuals:‌‌   ‌
 1. The‌‌classical‌‌economic‌‌theory‌‌suggest‌‌that‌‌we‌‌can‌‌expect‌‌a‌‌fall‌‌in‌‌the‌‌  
general‌‌price‌‌level‌‌if‌‌there‌‌is‌‌unemployment‌‌of‌‌resources,‌‌as‌‌firms‌‌can‌‌  
lower‌‌wages‌‌to‌‌keep‌‌costs‌‌low‌‌and‌‌to‌‌boost‌‌output.‌‌    ‌
a) This‌‌means‌‌lower‌‌wages‌‌for‌‌those‌‌who‌‌remain‌‌employed,‌‌which‌‌is‌‌  
not‌‌a‌‌desirable‌‌outcome.‌‌    ‌
E. Greater‌‌disparities‌‌in‌‌the‌‌distribution‌‌of‌‌income:‌‌    ‌
1. In‌‌industries‌‌where‌‌work‌‌is‌‌more‌‌casual,‌‌like‌‌hospitality,‌‌and‌‌workers‌‌are‌‌  
paid‌‌a‌‌wage‌‌per‌‌hour,‌‌it‌‌is‌‌easy‌‌to‌‌reduce‌‌costs‌‌of‌‌production‌‌by‌‌reducing‌‌  
hours‌‌or‌‌employee‌‌numbers‌‌if‌‌the‌‌economy‌‌were‌‌to‌‌dip.‌‌    ‌
2. There‌‌are‌‌also‌‌people‌‌earning‌‌lower‌‌or‌‌no‌‌wages,‌‌and‌‌would‌‌not‌‌find‌‌it‌‌  
easy‌‌to‌‌cover‌‌costs‌‌of‌‌living.‌‌   ‌
V. Personal‌‌impact/costs‌‌of‌‌unemployment:‌‌    ‌
A. Increased‌‌indebtedness,‌‌homelessness‌‌and‌‌family‌‌breakdown:‌‌    ‌
1. A‌‌person's‌‌employment‌‌status‌‌is‌‌tied‌‌to‌‌many‌‌things‌‌such‌‌as‌‌loan‌‌  
agreements‌‌and‌‌the‌‌renting‌‌or‌‌ownership‌‌of‌‌their‌‌home.‌‌    ‌
a) If‌‌someone‌‌loses‌‌ther‌‌job,‌‌it‌‌will‌‌be‌‌difficult‌‌for‌‌them‌‌to‌‌make‌‌the‌‌  
expected‌‌monthly‌‌payments‌‌and‌‌can‌‌only‌‌sustain‌‌finances‌‌by‌‌  
borrowing‌‌for‌‌a‌‌relatively‌‌short‌‌period‌‌of‌‌time.‌‌    ‌
B. Increased‌‌stress‌‌levels:‌‌    ‌
1. Losing‌‌a‌‌job‌‌is‌‌an‌‌extremely‌‌stressful‌‌experience,‌‌especially‌‌if‌‌there‌‌are‌‌  
dependents‌‌to‌‌look‌‌after‌‌like‌‌children‌‌or‌‌ageing‌‌family‌‌members.‌‌    ‌
a) Stress‌‌may‌‌put‌‌extra‌‌pressure‌‌on‌‌the‌‌national‌‌health‌‌care‌‌system.‌  ‌
VI. Social‌‌costs‌‌of‌‌unemployment:‌‌    ‌
A. Increased‌‌crime‌‌rates:‌‌    ‌
1. As‌‌people‌‌lose‌‌their‌‌steady‌‌source‌‌of‌‌income,‌‌it‌‌is‌‌plausible‌‌that‌‌they‌‌may‌‌  
turn‌‌to‌‌other‌‌ways‌‌of‌‌making‌‌money.‌  ‌
B. Increased‌‌risks‌‌to‌‌health:‌  ‌
1. In‌‌some‌‌countries,‌‌employment‌‌is‌‌tied‌‌to‌‌health‌‌care‌‌and‌‌other‌‌essential‌‌  
services.‌‌    ‌
2. As‌‌people‌‌lose‌‌their‌‌jobs,‌‌they‌‌lose‌‌access‌‌to‌‌that‌‌health‌‌care‌‌for‌‌  
themselves‌‌and‌‌their‌‌families,‌‌which‌‌will‌‌have‌‌a‌‌negative‌‌effect‌‌on‌‌their‌‌  
health.‌‌   ‌
a) This‌‌is‌‌not‌‌only‌‌a‌‌problem‌‌for‌‌them‌‌personally,‌‌but‌‌also‌‌for‌‌the‌‌  
country,‌‌as‌‌the‌‌healthy‌‌labour‌‌force‌‌is‌‌reduced,‌‌which‌‌can‌‌lead‌‌to‌‌  
less‌‌economic‌‌activity.‌  ‌
VII. Solutions‌‌for‌‌Unemployment:‌‌    ‌
A.  ‌
1. During‌‌a‌‌recession,‌‌both‌‌equilibrium‌‌and‌‌disequilibrium‌‌unemployment‌‌  
will‌‌exist.‌‌This‌‌is‌‌due‌‌to‌‌the‌‌presence‌‌of‌‌equilibrium‌‌unemployment‌‌in‌‌the‌‌  
economy‌‌(natural‌‌unemployment)‌‌and‌‌the‌‌tendency‌‌of‌‌wages‌‌to‌‌remain‌‌at‌‌  
the‌‌level‌‌W2‌‌even‌‌as‌‌ADL‌‌shifts‌‌leftward.‌‌If‌‌wages‌‌were‌‌flexible‌‌and‌‌not‌‌  
'sticky',‌‌the‌‌labour‌‌market‌‌would‌‌return‌‌to‌‌a‌‌new‌‌equilibrium‌‌at‌‌point‌‌E.‌  ‌
B. Cyclical‌‌unemployment‌‌=‌‌problem:‌  ‌
1. The‌‌government‌‌will‌‌need‌‌to‌‌address‌‌the‌‌fall‌‌in‌‌aggregate‌‌demand‌‌  
directly.‌‌   ‌
2. This‌‌involves‌‌stimulating‌‌aggregate‌‌demand‌‌using‌‌tax‌‌incentives,‌‌  
increased‌‌government‌‌spending,‌‌lower‌‌interest‌‌rates‌‌and‌‌a‌‌greater‌‌supply‌‌  
of‌‌money.‌‌    ‌
3. The‌‌AD‌‌will‌‌fall‌‌during‌‌a‌‌recession‌‌as‌‌confidence‌‌in‌‌the‌‌economy‌‌takes‌ 
time‌‌to‌‌recover‌‌from‌‌whatever‌‌shock‌‌caused‌‌the‌‌problem‌‌in‌‌the‌‌first‌‌  
place.‌‌   ‌
4. Therefore,‌‌any‌‌efforts‌‌by‌‌the‌‌government‌‌to‌‌stimulate‌‌demand‌‌may‌‌take‌‌  
some‌‌time‌‌and‌‌will‌‌depend‌‌on‌‌the‌‌economic‌‌conditions‌‌of‌‌the‌‌time.‌  ‌
C. Structural‌‌unemployment‌‌=‌‌problem:‌‌    ‌
1. Use‌‌policies‌‌that‌‌improve‌‌the‌‌flexibility‌‌of‌‌the‌‌labour‌‌force.‌‌
   ‌
2. The‌‌education‌‌system‌‌should‌‌be‌‌designed‌‌so‌‌that‌‌students‌‌graduate‌‌from‌‌  
school‌‌and‌‌university‌‌with‌‌skills‌‌that‌‌will‌‌improve‌‌their‌‌employability.‌‌    ‌
3. In‌‌addition,‌‌there‌‌should‌‌be‌‌provision‌‌for‌‌adult‌‌education‌‌and‌‌training,‌‌  
allowing‌‌older‌‌members‌‌of‌‌society‌‌to‌‌re-qualify‌‌and‌‌gain‌‌new‌‌skills.‌  ‌
4. However,‌‌it‌‌will‌‌take‌‌time‌‌to‌‌develop‌‌a‌‌truly‌‌flexible‌‌labour‌‌force‌‌and‌‌this‌‌  
can‌‌potentially‌‌result‌‌in‌‌an‌‌opportunity‌‌cost‌‌for‌‌government‌‌spending.‌  ‌
a) significant‌‌changes‌‌for‌‌employees’‌‌safety,‌‌pay,‌‌and‌‌security.‌  ‌
D.   ‌