Unemployment

In order to define and

measure
unemployment, we
Definition need to know…
of Key • Which groups of people
Terms constitute the labour force?
• Which groups of people are
excluded from the labour
force?
• Who do we classify as
‘unemployed’?
 Total Population
(Age 15 and above)

Not in the Labour Force In the Labour Force

(Economically Inactive) (Economically Active)

❑ Housewives/
Unemployed
Employed (i.e. currently without
homemakers
(i.e. have jobs) a job but actively
❑ Full-time students seeking one)
❑ Retirees
❑ Persons with
disabilities
❑ Employees ❑ New entrants
❑ Institutionalized
❑ Self-employed ❑ Re-entrants
persons
workers ❑ Quit/ Laid off from
❑ Discouraged workers
last job
Which of the following persons are
considered ‘unemployed’?

Unemployment refers to people who are

part of the labour force, but currently
without a job and actively looking for one.
 Underemployment
• Underemployment refers to people of
working age with part-time jobs when they
would rather work full time, or with jobs
that do not make full use of their skills and
education.
– People who work fewer hours per week
than they would like
– Trained individuals (e.g. engineers or
computer analysts) who work as waiters
or waitresses, or anything else
unrelated to their profession, when
they would rather have a job in their
profession.
Measurement
How is unemployment rate calculated?
 Total Population
(Age 15 and above)

Not in the Labour Force In the Labour Force

(Economically Inactive) (Economically Active)

❑ Housewives/
Unemployed
Employed (i.e. currently without
homemakers
(i.e. have jobs) a job but actively
❑ Full-time students seeking one)
❑ Retirees
❑ Persons with
disabilities
❑ Institutionalized
• ❑ Employees ❑ New entrants
❑ Self-employed ❑ Re-entrants
persons
workers ❑ Quit/ Laid off from
❑ Discouraged workers
last job
 Difficulties in Measuring
Unemployment
Official statistics often underestimate true
unemployment because of hidden unemployment:
• Unemployment figures include unemployed
persons who are actively looking for work BUT
exclude ‘discouraged workers’.
• Discouraged workers are unemployed workers
who gave up looking for a job because, after
trying unsuccessfully to find work for some
time, they became discouraged & stopped
searching.
• These people in effect dropped out of the
labour force.
 Difficulties in Measuring
Unemployment
Official statistics often underestimate
true unemployment because of hidden
unemployment:
• Unemployment figures do not make a distinction
between full-time and part-time employment.
• Count people with part-time jobs as having full-
time jobs when in fact they are underemployed.
• Unemployment figures make no distinction on
the type of work done.
• If a highly trained person works as a waiter, this
counts as full employment.
 Difficulties in Measuring
Unemployment

Official statistics often

underestimate true
unemployment because of
hidden unemployment:
• Unemployment figures do not include
people on retraining programmes who
previously lost their jobs & people who
retire early but would rather be
working.
 Difficulties in Measuring Unemployment

Official statistics may

overestimate true
unemployment:
Unemployment figures do not include people
working in the underground economy.
• Some people may be officially registered as unemployed but
they may be working in an unreported (underground) activity.
 Difficulties in Measuring Unemployment

Official statistics does not account for differences in

unemployment that often arise among different
population groups in a society.

Within a national population, unemployment may differ

by:

• region – regions with declining industries may have higher

unemployment rates
• gender – women sometimes face higher unemployment rates than men
• ethnic groups – some ethnic groups may be disadvantaged due to
discrimination, lower levels of education/training
 Official statistics does not account
for differences in unemployment
that often arise among different
population groups in a society.

Difficulties in
Measuring Within a national population,
unemployment may differ by:
Unemployment

• age – youth (under the age of 25) often

face higher unemployment rates than
older population groups due to lower skill
levels; people who are ageing may also
face higher unemployment rates as
employers are less willing to employ them
 Costs of Unemployment
Costs of unemployment to the unemployed
• Unemployed people receive less income than they
would do if they were employed. (Assuming they
receive some unemployment benefits)
- Lower standard of living for themselves & families
- Costs worsen the longer they stay unemployed 🡪 become
increasingly dejected & face personal problems associated
with stress such as anxiety & depression
- Situation is much worse if there are no unemployment
benefits.
 Costs of Unemployment
Costs of unemployment to society
• Social costs of unemployment include
poverty, homelessness, higher rates of crime
and vandalism, increased gang activities, etc.
 Costs of Unemployment
Costs of unemployment to the economy
• With unemployment, actual output produced
is less than potential output due to the
unemployment of labour (i.e. loss of real
output)
• Economy is foregoing possible output that
could have been produced if labour is fully
employed
 Costs of Unemployment
Costs of unemployment to the economy
• Loss of tax revenue for the government
– Govt earns less direct tax since unemployed people who
have lower incomes pay less direct tax.
– Govt earns less indirect taxes (e.g. GST) since the
unemployed spend less money on goods & services
• Govt has to spend more money to solve the social
problems created by unemployment
• Opportunity cost of govt spending on unemployment
benefits
 4 Types of
Unemployment

Cyclical
unemployment
Frictional
Types & Causes unemployment
of
Unemployment Structural
unemployment
Seasonal
unemployment
Cyclical Unemployment

• Cyclical unemployment occurs during

the downturns of the business cycle,
when the economy is in a deflationary
gap.
• Arises from declining/low AD (also known
as demand-deficient unemployment)
Cyclical Unemployment

As an economy moves into a period of slower growth

(or negative growth in the case of a recession), AD
tends to fall as consumers spend less on goods &
services

Lead to a fall in the DD for labour, as firms cut back on

production.
Recession
🡪C&I↓
🡪 AD↓
🡪 real o/p ↓
🡪 firms ↓ production
🡪employ fewer workers +
retrench existing ones

AD0
Impact on Labour Market
• Initially, AD for labour at ADL, so the
equilibrium wage will be We for Qe Wage
workers
• When firms ↓ production due to
recession, firms will ↓ their DD for
labour from ADL to ADL1
• Real wage shld ↓ to W1 but due to
sticky wages (e.g. labour contracts,
trade union power), firms may not be
able to ↓ wage
• Wages stuck at We and aggregate
supply for labour (ASL) will be greater
than aggregate demand for labour
(ADL1)
• Unemployment a-b will be created
 Frictional • Frictional unemployment
occurs when people are in
Unemployment between jobs.
• At any given time,
1) some people with
marketable skills are fired,
2) others voluntarily quit jobs
to accept or look for new
ones and
3) there are always young
people who leave school
and look for their first job
 Frictional unemployment tends to be
short-term and does not involve a lack
of skills that are in demand.

Frictional
Unemployment

Not generally perceived to be a negative

outcome in any dynamic economy.
If people leave one job, the As soon as such members of
assumption is that they will the labour force get a job, they
move on to a job where they will be able to contribute more
can be more productive. to the economy.
 Frictional Unemployment
• Caused by imperfect information between employers &
workers regarding job vacancies and required qualifications
• Takes time for the right applicants to get matched up with the
right jobs
We are not fully informed
about the types of jobs that
We are not fully informed are available. We need time
about the type of labour that to search for the right jobs.
is available. We need time to
search for the right labour.

Employers Employees
 Structural
unemployment occurs
as a result of the
changing structure of
Structural an economy
Unemployment
• Permanent fall in DD for
particular types of labour
• Change in the institutional
framework of the economy
(i.e. Labour market rigidities)
 Permanent fall in
demand for a particular
type of labour

• ‘Mismatch’ of the skills

of workers who are out
of work and the skills
required for existing
job opportunities 🡪
Structural
unemployment
 Permanent fall in DD for a
particular type of labour

New technologies can make certain

types of labour unnecessary
• Automation reduces the need for
labour & can be referred to as
technological unemployment.
• Example
• Automated teller machines
(ATMs) have reduced the demand
for human bank tellers.
Permanent Changes in consumer taste may lead to a fall
fall in DD in DD for a particular type of labour.
• Workers who lose their jobs may not have
for a the necessary skills to work in growing
industries & become structurally
particular unemployed.
type of Example:
– People are increasingly concerned
labour about the -ve externalities associated
with the production & consumption of
coal.
– A search for alternatives has led to a
fall in DD for coal in some countries.
– Coal miners become structurally
unemployed.
 Permanent fall in DD for a particular type
of labour

Demand for a particular type of labour might fall due to

lower-cost labour in foreign countries.
Example:
– Cost of employing manufacturing workers in
developing economies is lower than that in
developed countries.
– Fall in DD for manufacturing labour in higher-wage
countries like Canada.
– Manufacturing workers in Canada becomes
structurally unemployed.
 Diagrammatical illustration
• Fall in demand (D1 to D2 ) for
manufacturing labour in
Canada.
• Fewer manufacturing
workers employed (Q1 to
Q2) and the wage falls from
$16/hour to $12/hour.
• Unless these workers can
find other jobs, there is an
increase in unemployment
Figure 1: Labour Market for
of the amount Q1-Q2.
Manufacturing Workers in Canada
Change in the Institutional
Framework of the
Economy (i.e. Labour
market rigidities)

• Labour market rigidities

are factors preventing the
forces of SS and DD from
operating in the labour
market.
Change in the Institutional
Framework of the Economy
(i.e. Labour market
rigidities)

• minimum wage legislation,

which leads to higher than
equilibrium wages & causes
unemployment

• labour union activities and

wage bargaining with
employers, resulting in higher
than equilibrium wages also
causing unemployment

• employment protection laws,

which make it costly for firms
to fire workers (because they
must pay compensation),
thus making firms more
cautious about hiring
 Diagrammatical illustration
• Unemployment arising from
minimum wages activities
leading to higher than
equilibrium wages, can also
be shown in a labour mkt
diagram.
• Higher than equilibrium
wage, Wm, results in
unemployment of labour
equal to Qs – Qd.
Minimum wage legislation leads to higher
than equilibrium wages and lower qty of
labour demanded
 Diagrammatical illustration
(Using Product Market)
• Higher than equilibrium
wages & employment
protection lead to higher
COP for firms, causing the SS
curve to shift to the left.
• Results in a smaller quantity
of output produced (Q2
instead of Q1).
• Firms therefore hire a
Market for Electronic Goods smaller quantity of labour
(Increase in costs of production, SS shifts
to the left, causing a fall in Q produced;
employers hire fewer workers)
Note:

• If workers retrenched from these industries

lack the relevant skills to move into the
expanding industries, or if they are unable/
unwilling to relocate to take up jobs
elsewhere, they remain structurally
unemployed

• More serious than frictional unemployment as

it tends to result in long- term
unemployment.
Seasonal Unemployment
• Natural in many economies for some
workers to be employed on a seasonal
basis.
• DD for certain workers falls at certain times
of the year.
• Examples:
• In temperate climates where there is
cold winter, construction workers or
farmers may be unemployed.
• Tourism industry tends to work in
seasons – ski instructors in Austria will
be unemployed in July during summer
 Some Questions to
Ponder Over
• What does it imply when
the economy is at ‘full
employment’?
• What is meant by ‘natural
rate of unemployment’?
• Why is ‘natural rate of
unemployment’ also known
as ‘full employment rate of
unemployment’?
• Natural rate of unemployment — sum of the
frictional, structural, seasonal unemployment
• The natural rate of unemployment is also
referred to as the full employment rate of
unemployment because, at this level, the
economy is operating at its productive
potential. There’s no cyclical unemployment
due to economic downturns (insufficient AD).