Employment & unemployment cause and effect.pptx

Employment & unemployment cause and effect

1. Employment & unemployment Dr. Arifa Saeed

2. introduction Unemployed: Those who are willing and able but have no job are known as unemployed. Rate of unemployment: The unemployment rate is the percentage of the labor force without a job. It is a lagging indicator, meaning that it generally rises or falls in the wake of changing economic conditions, rather than anticipating them. When the economy is in poor shape and jobs are scarce, the unemployment rate can be expected to rise. When the economy grows at a healthy rate and jobs are relatively plentiful, it can be expected to fall. Rate of unemployment = (Unemployed/ labour force) ​×100​ Labour force = employed + unemployed

3. Types of unemployment

4. Causes of unemployment Frictional unemployment Structural unemployment classical unemployment Too high unemployment benefits Keynesian unemployment

5. 1-Frictional unemployment It is a type of unemployment that arises when workers are searching for new jobs or are transitioning from one job to another. It is part of natural unemployment and hence is present even when the economy is considered at full employment. Unlike other kinds of unemployment, frictional unemployment does not increase during an economic recession. On the contrary, during a recession, it tends to decline because workers become more concerned about job security since fewer job opportunities are available in the market.

6. Causes of Frictional Unemployment 1. A mismatch between the workers and available jobs If there is a mismatch between job-seekers and available jobs in the market, that is considered frictional unemployment. The issue can especially affect the new entrants or re-entrants to the job market. This is generally due to the natural career progression for an employee, and their natural transition to a new job, industry, or role. 2. Workers’ dissatisfaction with work conditions  Workers’ anxiety towards salaries, benefits, work location, job responsibilities, etc. may force them to quit their current job, and look for something that better meets their updated expectations.

7. Effects of Frictional Unemployment frictional unemployment → positive event for the economy. It provides businesses within the economy with a larger selection of human capital → companies may gain access to more qualified employees negative side effects → if job-seekers take a long time to find a new job. In this case, there will be an increasing frustration among job-seekers that can lead to a decrease in productivity. Moreover, longer frictional unemployment → production decline in the economy.

8. How to Overcome Frictional Unemployment 1. Increase the information transmission between job-seekers and employers The low transfer of information is a primary reason for rising frictional unemployment. The application of mediums (such as social networks, online job boards) that allow faster information exchange will reduce the matching time between the job seekers and employers, and subsequently lower unemployment. 2. Resist prejudice against workers, jobs, or locations Regulators should resist existing prejudice by increasing the attractiveness of certain workers, jobs, or locations. 3. Enhance job flexibility Regulators may encourage employers to provide more flexibility to prospective employees to make available jobs more compelling to job seekers

9. 2-Structural unemployment Arises due to change in the structure in the economy Over time, pattern on demand and supply change, so some industries contract while other expand If workers can’t move from one industry to other industry due to lack of occupational or geographical immobility they may become structural unemployed

10. Structural unemployment different forms: A change in the pattern of demand: D decline → due to change in taste → goods go out of fashion → or may be due to competition may be D decreases Technological unemployment: people are out of wok → introduction of labor saving techniques Regional unemployment: declining industries → in particular area → so unemployment prevail International unemployment: workers lose their jobs → demand switches from domestic to competitive foreign industries

11. 3-Real wage unemployment / classical unemployment Classical unemployment occurs when real wages are kept above the market-clearing wage rate, leading to a surplus of labour supplied Classical unemployment is sometimes known as real wage unemployment because it refers to real wages being too high In the diagram c lassical Unemployment = Q3-Q2. In a free market, the quantity of labour would be Q1. But, with wages kept at W2, the supply (Q3) is greater than the demand (Q2)

12. Causes of classical unemployment Powerful trade unions which bargain for wages above the equilibrium. minimum wage rate that create a legal minimum for wages. Deflation and ‘sticky wages’. Deflation is a period of falling prices. If there are falling prices, to maintain full employment, it may be necessary to cut wages. However, workers and firms often avoid nominal wage cuts – for the psychological cost. Therefore, during a period of deflation, classical unemployment is more likely to occur Classical economists stress the importance of this type of unemployment. They argue that if wages were more flexible, then most unemployment could be solved

13. Keynesian view on classical unemployment However , Keynesian economists argue it is not as straightforward. They argue the problem may be a lack of aggregate demand (AD) in the economy. For example, if wages are cut, it could lead to a further fall in AD, as workers have lower wages. In this case, cutting wages may be ineffective in solving classical unemployment. Also , if there is monopsony, then minimum wages and trade unions may not be causing unemployment because monopsony employs less than market equilibrium.

14. 4-Too high unemployment benefit Unemployed people refuse to take job → unemployment benefits are high → unemployment benefits are too near the level of pay being offered

15. 5- Demand deficit / mass / cyclical / Keynesian unemployment It occurs when there is insufficient demand in the economy to maintain full employment. In a recession (a period of negative economic growth) consumers will be buying fewer goods and services. Selling fewer goods, firms sell less and so reduce production. If firms are producing less, this leads to lower demand for workers – either workers are fired, or a firm cuts back on employing new workers. In the worst case scenario, the fall in demand may be so great a firm goes bankrupt, and everyone is made redundant.

16. Demand deficient unemployment is associated with the theory of J.M.Keynes who developed his General Theory of Money (1936) against a backdrop of the Great Depression. During the Great Depression, unemployment soared in the US due to the collapse of demand and fall in the money supply .

17. Problems of Demand Deficient Unemployment

18. Cyclical unemployment is related to demand deficient unemployment and often used interchangeably. It refers to how unemployment changes with the economic cycle. When the economy is booming, jobs are created, and unemployment falls. When the economy slows down and goes into recession, firms will lay off workers creating the demand deficient unemployment . Classical economic theory suggests any cyclical unemployment will be temporary. Classical economists argue that if there is a fall in demand for labour , wages will fall to overcome the surplus of workers. However, Keynes argued that demand deficient unemployment could persist in the long term. Workers may resist nominal wage cuts. Wages are ‘sticky downwards’. If firms did manage to cut wages, this would lead to a further fall in consumer spending and aggregate demand, causing more unemployment – ve miltipier effect: A rise in unemployment will cause a fall in consumer spending and therefore further cause a rise in unemployment. Furthermore, a rise in unemployment can adversely affect consumer confidence and consumer spending. The fear of unemployment can cause a rise in savings which further reduce economic growth. Keynes referred to this as a paradox of thrift

19. Voluntary & involuntary unemployment Involuntary unemployment voluntary unemployment Occur when people are willing and able to work at the given real wage rate but no job is available Only cyclical unemployment is involuntary unemployment. It is involuntary because unemployed workers cannot choose to go back to work, because there are no jobs available. Occur when all those willing and able to work at the given real wage rate are working. This occur when workers refuse opportunities of work at existing wage rate Search unemployment Seasonal unemployment Structural unemployment Classical unemployment

20. Full employment / natural rate of unemployment The employment is said to be at full employment when there is no involuntary unemployment in the economy. The level of employment corresponding to where all who wish to work have found jobs, excluding involuntary unemployment. Because structural and frictional unemployment are largely unavoidable in dynamic economy, full employment is something less than 100 percent employment of the labour force. Economists say that the economy is fully employed when it is experiencing only involuntary employment. That is full employment occurs when there is no cyclical unemployment. Note: The natural unemployment rate is the minimum unemployment  rate resulting from real or voluntary economic forces. Natural unemployment reflects workers moving from job to job, the number of unemployed replaced by technology, or those lacking the skills to gain employment.

21. Natural rate of unemployment/ non accelerating inflation rate of unemployment The natural rate of unemployment is the %age of workers who are voluntary unemployed NRU It is also known as non accelerating inflation rate of unemployment. NAIRU is the rate of unemployment when inflation is correctly anticipated and economy is at full employment level  

22. Consequences of unemployment on government The consequences of unemployment on the government are also uncertainty and instability . In an unstable economy with high unemployment rates, governments should consider their investment in public goods once more and probably prioritize their work to create more jobs to reduce unemployment. Unemployment and instability have also consequences for politicians . In hard times, voters would be more likely to be dissatisfied and more likely to vote for a radical change that they would not agree with in better times.

23. Consequences of unemployment on individuals As we discussed above, unemployment in the long term leads to instability in the economy which decreases consumption on average . Since this leads to further unemployment, the unemployed people would face even harder times finding a job. This vicious circle affects individuals in a negative way significantly. Another consequence of unemployment on individuals is the high crime rates, increased substance abuse, or increased poverty in the nation . Since these factors also affect the welfare level, unemployment has an effect on each of us

24. How is unemployment measured? Unemployment rate measures are: the Claimant Count measure the Labour Force Survey measure .

25. 1-The Claimant Count Claimants means number of people claiming for unemployment benefits * 100 Advantages: Relatively cheap measure Quick to calculate Inactive people will be excluded Problems: Govt manipulation: → coz of political gains Rules for eligibility: False claims: Lack of information  

26. 2- labour survey measure The official measure of unemployment in most of the countries is the Labour Force Survey which is used to discover the unemployment rate in a country or region . * 100 Advantages of the Labour Force Survey It is more accurate because it is a survey sent around the country. Real people collect the data instead of machines. It is an internationally accepted measure, and thus international comparisons are more valid (as the definition is standardised ). Disadvantages of the Labour Force Survey It is expensive and time-consuming to run, and thus it’s only updated annually. Like other surveys, there is the likelihood that the sample doesn’t represent the entire population appropriately. The monthly estimates are not as accurate as the full, quarterly result, which means they must be revised when the quarterly figures are known. Additional administrative resources are required, aside from those related to measuring and administering welfare claims.  

27. Policies to correct unemployment Type of unemployment Policies Classical or real-wage unemployment By trade union reforms By abolishing minimum wage rate laws Structural unemployment Subsidizing declining industry Enhancing infrastructure Tax free zones Increase in geological mobility Tax cuts Frictional unemployment ↑ in job information by advertisement Job center development Increase in geological mobility Increase in occupational mobility Reduce unemployment allowances Reduce tax rate Cyclical unemployment / demand deficit Expantionary fiscal policy Expansionary monetary policy Exchange rate devalueation & protectionism