Unemployment
Unemployment is defined as people who are not working, but they are actively looking for
work and are willing to accept the going or market wage rate but cannot find a job. They
should also be actively seeking a job during the last 4 weeks. For example, Glenn did not
work at all last week, though he tried to find a job, so he is considered unemployed.
Causes of unemployment
Unemployment is caused by various reasons that come from both the demand side, or
employer, and the supply side, or the worker.
1. Demand-side reductions may be caused by high interest rates, global recession, and
financial crisis.
2. From the supply side, frictional unemployment and structural employment play a
great role.
Types of unemployment
Structural Unemployment - Structural unemployment arises from a change in the structure of
demand and a change in technology. Demand for labour is a derived demand and if there is
no demand for the product, there is no demand for the labour that labour produces, and those
persons who would normally make the product will be unemployed. Technological progress
has rendered certain types of jobs obsolete. For example, the introduction of the personal
computer and word processors had made the stenographers obsolete. Technicians who used
to make black and white television or video recording machines would have to be retrained to
take up jobs in the industry that manufactures coloured televisions and DVD players.
Frictional unemployment - this is a temporary type of unemployment that occurs when
persons are between jobs, for example, a worker may have been fired. Frictional
unemployment naturally occurs, even in a growing, stable economy. Workers choosing to
leave their jobs in search of new ones and workers entering the workforce for the first time
constitute frictional unemployment. For example, college and university students may decide
to enter the labour market seeking a job for the first time or may choose to re-enter the labour
market. These persons will find a job but the timing and other frictions may cause a person to
wait. Some economist argue that frictional unemployment is good for the economy as a
whole since people move from lower paying jobs to higher paying jobs or jobs involving low
productivity to high productivity or move from jobs with poor working conditions to better
working condition
Cyclical unemployment/demand deficient – this type of unemployment varies with the
business cycle. It falls during the peak of boom and rises with the recession. During the boom
stage of the business cycle, there is an increase in total spending or aggregate demand. Firms
respond to market signals by producing more goods and services and employ more workers.
During the recession, there is insufficient total expenditure to purchase the full employment
level of output. Firms see their inventories of goods rising and respond by cutting back on
output and laying off workers.
Seasonal unemployment
Seasonal unemployment occurs when people are unemployed at certain times of the year,
because they work in industries where they are not needed all year round. Examples of
industries where demand, production and employment are seasonal include tourism and
leisure, farming, construction and retailing.
Real wage unemployment/classical unemployment – this occurs when the actual wage rate is
above the equilibrium wage rate. Trade unions may use their monopoly power on the supply
of labour to increase the wage rate above the equilibrium. The government may establish a
minimum wage or a price floor. Note a price floor will only affect the market when it is
above the equilibrium. As the graph shows at the wage rate W, the market clears in that the
quantity demand for labour is equal to the quantity supplied, there is neither a surplus nor a
shortage. Once the wage rate is above the equilibrium or the market clearing wage rate, the
quantity of labour demanded decreases but the quantity supplied increases. This creates a
surplus of labour in the form of unemployment. This type of unemployment is sometimes
called classical unemployment. This is because the classical economist claimed that the
unemployment that existed during the great depression persisted because real wage was not
allowed to fall.
Strategies to reduce unemployment
There are two main strategies for reducing unemployment –
Demand deficient unemployment is expansionary monetary
and fiscal policies – as the term implies, there is an insufficient
amount of total spending or aggregate demand. To use
monetary policy to increase aggregate demand, the authorities
will increase the money supply and decrease the interest rate.
An increase in the money supply will increase total spending
by increasing the amount of money in circulation. A decrease
in interest rate will decrease the cost of borrowing and there
will be an increase in borrowing to purchase consumer
durables and for firms to purchase capital goods.
Fiscal policy – in the case of an expansionary fiscal policy, the
authorities will increase government spending and decrease
the rate of taxation. An increase in government spending
ceteris paribus, will increase aggregate demand by the
increment in government spending. A decrease in the rate of
taxation can the different forms. A decrease in income tax will
increase disposable income and will increase consumption. A
decrease in GCT will increase real income and will increase
consumption. A decrease in corporate tax will increase the
firm’s profits and will increase investment.
To reduce frictional unemployment the authorities should
establish more employment agencies. They should provide
more information for example, by means of newspapers,
Jamaica information service (JIS) etc.
To reduce structural unemployment an agency of the
government or private sector initiative could retrain persons
who have lost their jobs in declining industries to take up new
jobs in expanding industries for example, in the 1990s, there
was a work force development consortium who trained workers
who have lost their jobs in the sugar industries with computer
skills to take up new jobs in expanding industries. The
government could also improve the infrastructure by building
highways so that persons can commute to areas where new
jobs are created.
To reduce real wage unemployment, let the market determine
the wage rate
