lecture 21 - unemployment
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8/7/2019 Lecture 21 - Unemployment
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18 February 2011 PETER PARIAG 1
MBA ECONOMICS
LECTURE 21
UNEMPLOYMENT
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18 February 2011 PETER PARIAG 2
Lecture Outline
1. Introduction ± Discussion of Definitions
2. Types of Unemployment
3. Unemployment and poverty
4. Statistics on the Labour Force
5. Why unemployment is a serious problem?
6. Factors producing growing unemployment
7. Government policies to influence unemployment8. Solutions to unemployment
9. Unemployment and inflation
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Introduction ± Discussion of Definitions
Labour Force
µOf the population 15 years old and over covered in the
survey period, all persons engaged in, or willing and able to
be engaged in the production of economic goods andservices are classified as being in the labour force¶.
µThese include employees, as well as employers and the self
employed¶.
The labour force is therefore comprised of all persons who
either had jobs (the employed), or, if they did not have jobs,
were willing and able to work ( the unemployed).
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Employed and the Unemployed EMPLOYED (have jobs)
1. Employees2. Employers
3. Self- employed
Persons with jobs
All persons who worked for payfor any length of time during thesurvey week.
Persons who are temporarilyabsent from work because of
vacation, illness, industrialdispute or some similar cause.
Persons who worked without payon a family farm or business or asa learner .
UNEMPLOYED ( did not have jobs)
3 criteria must be satisfied:1.Without work
2.Currently available for work
3.Actively seeking work.
Without work ± were not in paidemployment during the surveyweek
Currently available ± were availablefor paid or self employment during the
survey week.Actively seeking work ± had
taken steps during a specified period to seek paid employmentor self employment.
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18 February 2011 PETER PARIAG 5
LABOUR FORCE CHARACTERISTICSLabour ForceCharacteristisc
Employed
Seekers Other Unemploye
Unemployed
Labour Forcee(EconomicallyActivePopulation)
Students Housekeepers Retired Disabled Didnot
Want Work
Other
Not inLabour Force(EconomicallyInactivepopulation
Population15yearsoldandover
(WorkingAgePopulation)
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The Labour Market
The participation rate is the fraction of the population of working age who are in the labour force.
The unemployment rate is the fraction of the labour forcewithout a job.
Discouraged workers, pessimistic about finding a job, leavethe labour force.
Economists used to classify unemployment by source:frictional, structural, demand-deficient or classical.
It includes people whose handicaps make them hard to
employ. More importantly, it includes people spending shortspells in unemployment as they hop between jobs in adynamic society.
18 February 2011 PETER PARIAG 6
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Types of Unemployment
1. Normal or Transitional Unemployment ± the time taken to matchemployees with employer. Need to speed up information.
2. Frictional Unemployment ± is the irreducible minimumunemployment in a dynamic society. Friction in the labour market. Difficulty of matching shortage of a given type of labour. Persons are between jobs, shopping around ± voluntaryunemployment.
3. Structural unemployment ± arises from the mismatch of skillsand job opportunities as the pattern of supply and demand
changes. It reflects the time taken to acquire human capital. ± Geographical immobility
± Occupational immobility
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18 February 2011 PETER PARIAG 8
Types of Unemployment
4. Seasonal Unemployment
5. Technological Unemployment ± A form of structural unemployment which occurs whennew technologies are introduced:
± Old skills are no longer required
± There is likely to be a labour savingaspect, with machines doing the job that people use to do.
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Types of Unemployment
6. Cyclical Unemployment
Domestic and foreign trade go through cycles of
boom, decline, recession, recovery then boom
again.
1. During recovery and boom, the demand for
output and jobs is high and unemployment low.
2. During decline and recession, the demand for output and jobs falls, and unemployment rises to
a high level.
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Types of Unemployment
7. Demand- deficient Unemployment- This refers toKeynesian unemployment, when aggregate demand fallsand wages and prices have not yet adjusted to restore fullemployment. Aggregate demand is deficient because it is
lower than full employment aggregate demand.8. Classical Unemployment ± describes the unemployment
created when the wage is deliberately maintained abovethe level at which the labour supply and labour demand
schedules intersect. It maybe caused either by the exerciseof trade union power or by minimum wage legislationwhich enforces a wage in excess of the equilibrium wagerate.
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Types of Unemployment9. Involuntary Unemployment ± people wish to work, are prepared to
accept wages currently being obtained by employed persons, arewilling to be mobile and are properly qualified but nevertheless
cannot find jobs. Keynes concerned with involuntary
unemployment. This situation exists because there is insufficient
aggregate demand or planned expenditure in the economy.
Voluntary Unemployment Short Term Long Term
Transitional Transitional Structural
Frictional Frictional Persistent general
unemployment.
Seasonal Seasonal
Structural
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Equilibrium Unemployment.
Equilibrium unemployment (also called the natural
rate of unemployment) is the unemployment rate
when the labour market is in equilibrium.
A worker is voluntarily unemployed if, at a givenlevel of wages, she wishes to be in the labour force
but does not yet wish to accept a job.
An involuntarily unemployed worker would accept a job offer at the going wage rate.
18 February 2011 PETER PARIAG 12
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Equilibrium Unemployment
Real
wages
18 February 2011 PETER PARIAG 13
LF AJ
LD
W
W1 A B C
E F
Number of workersN N1N2
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Equilibrium Unemployment
The schedules LD, LF, and AJ show, respectively,labour demand, the size of the labour force, and thenumbers of workers willing to accept job offers at any
real wage. AJ lies to the left of LF both because somelabour force members are between jobs and becauseoptimists are hanging on for an even better job offer.When the labour market clears at E, EF is the natural
rate of unemployment, the people in the labour forcenot prepared to take job offers at the equilibrium wageW. This unemployment is entirely voluntary.
18 February 2011 PETER PARIAG 14
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Classical Unemployment
If union power succeeds in maintaining the wage
W1, above the equilibrium wage W, in the long run,
the labour market will be at A, and the natural rate
of unemployment AC now shows the amount of unemployment chosen by the labour force
collectively by enforcing the wage W.
In this instance, classical unemployment is includedin equilibrium unemployment.
18 February 2011 PETER PARIAG 15
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Unemployment and Poverty The belief that unemployment necessarily means poverty is false.
1. Unemployment in the sense of the lack of paid employment, notnecessarily idle, they could be productively engaged on familyfarm or business.
2. Unemployment may not mean poverty ± the majority of young
dependents. Unemployed youths are able to get along beingmembers of households.
3. Poverty affects both the employed and the unemployed.
Much of the problem of unemployment is really the
problem of the unemployed themselves ± their attitudes,unwarranted aspirations and unwillingness to acceptavailable employment. Most of the young are not interestedin manual work.
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18 February 2011 PETER PARIAG 17
WHY UNEMPLOYMENT IS A SERIOUS PROBLEM
1. Lies in the importance of creative productive work
for human beings, as human beings. This need is
an integral part of humanity.
2. It may mean poverty for those affected by it.
3. Because of its negative psychological impact on
the individual.
4. Unemployment does not negatively affect just theindividual or his family, but can have serious costs
for the society as a whole.
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WHY UNEMPLOYMENT IS A SERIOUS PROBLEM
5. Unemployment also means an economic costto society when its existence implies anopportunity cost through lost potentialoutput.
6. Unemployment can lead to a rise in crimeand other anti-social manifestations.
7. Unemployment also means misery, socialunrest and hopelessness for the unemployed.
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The Private Cost of Unemployment
When individuals are voluntary unemployed they revealthat they do better by being unemployed than by takinga job offer that they face at the going wage rate.
The private cost of unemployment ( the wage foregone by not working) is less than the private benefits of being unemployed.
Private benefits include transfer payments from
government, the value of leisure, expectation of obtaining a better job. These future benefits must be setagainst the current cost, a lower disposable income by being out of work.
18 February 2011 PETER PARIAG 19
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The Private Cost of Unemployment
When people are involuntary unemployed, the costchanges. Involuntary unemployment mans that peoplewould like to work at the going wage but cannot find a job because there is excess labour supply at the existing
wage rate. These people are worse off beingunemployed.
The distinction between voluntary and involuntaryunemployment matters because it may affect our value judgement about how much attention to pay tounemployment. When unemployment is involuntary, people are suffering more and the case for helping themis stronger.
18 February 2011 PETER PARIAG 20
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The Social Cost of Unemployment
When unemployment is voluntary an individual receivestransfer payments during unemployment but these transfersgive no corresponding benefit to society as a whole. Since the private benefit exceeds the social benefit, too many peoplemay be voluntarily unemployed.
In a changing economy it is important to match up the right people to the right job.
Involuntary unemployment has an even higher social cost.Since the economy is producing below capacity, it is literally
throwing away output that could have been made by puttingthese people to work. Involuntary unemployment may entailmore human and psychological suffering than voluntaryunemployment
18 February 2011 PETER PARIAG 21
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Factors producing Growing Unemployment
DEMAND SIDE:
Private sector:
4. The tax structure of firms ± government unable to obtainenough revenue, as a result raises the tax on firms, i.e.
taxation as a deterrent to enterprise and output.
5. The monetary system services the import ± export trade,finances consumer durables to the detriment to the productive sectors.
6. Lack of savings ± the inability to mobilize domesticsavings. Savings required for investment.
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18 February 2011 PETER PARIAG 24
Factors producing Growing Unemployment
DEMAND SIDE:Government:
The burden of employment falls on the government
The level of employment depends on the revenue from the private sector.
There exist a divergence between the rate of growth of theeconomy and the rate of growth of employment due to the pattern of final demand.
The present type of development planning is oriented towardseconomic growth rather than towards employment creation.
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18 February 2011 PETER PARIAG 25
Factors producing Growing Unemployment
SUPPLY SIDE:
The factors which affect the rapid growth of the number seeking jobs.
1. The rapid rate of growth of those of working age as aresult of the high rate of population growth 15 yearsearlier.
2. The rapid movement from rural to urban areas and awayfrom certain agricultural oriented jobs to relatively well- paid jobs in mining, tourism, government, etc. The jobaspiration is of a particular type.
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18 February 2011 PETER PARIAG 26
Factors producing Growing Unemployment
SUPPLY SIDE
3. The rapid growth in the supply of labour seeking certain
jobs but not others. This is as a direct result of the skill
composition of the labour force.4. The increasing rate of female participation in the labour
force, associated largely with the expansion of secondary
educational opportunities and the ³ emancipation of
women´.
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18 February 2011 PETER PARIAG 27
Government Policies to Influence Employment
AIMED AT:
1. Either at reducing the number of persons unemployed
down to an ³acceptable´ level ± reducing unemployment
2. Creating more jobs ± Job creation. 1 and 2 should mean the same thing, but it is possible to :
(a) Create more jobs without reducing unemployment.
(b) Reduce unemployment without creating jobs ±
OJT,YTTEP
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18 February 2011 PETER PARIAG 28
Some Possible Solutions To Unemployment
1. Re-organize the Educational System
2. Re-organize Agriculture ± through landreforms, ownership, diversification
3. Block out unnecessary imports
4. Develop the following labour intensiveindustries:
1. Fishing 2. Construction 3. Tourism
5. Curb the rural ± urban drift - decentralize
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18 February 2011 PETER PARIAG 29
Linking Inflation and Unemployment
A.W. Phillips discovered (1958) a statistical relationship between unemployment and the rate of inflation whichimplied that, in general, the rate of inflation fell asunemployment rose and vice-versa. A curve known as thePhillips curve can be drawn linking inflation and
unemployment. The curve crosses the horizontal axis at a positive value for the
unemployment rate. This means that zero inflation will be associatedwith some unemployment. It is not possible to achieve zero inflationand zero unemployment at the same time.
The shape of the curve (concave) means that the lower the level of unemployment, the higher the rate of increase in inflation.
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18 February 2011 PETER PARIAG 30
THE PHILLIPS CURVE
Unemployment
rate
Inflation
rate
Phillips Curve
1. Higher inflation associated with
lower unemployment
2. Lower inflation associated with
higher unemployment
0
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What the Phillips Curve Suggests to Government
The existence of a relationship between inflation and
unemployment of a type indicated by the Phillips
Curve suggests that government should be able to
choose some point on the curve, according to its preference, and use demand management policies to
take the economy to that point ± i.e. µto strike a
balance¶ between acceptable levels of inflation and
employment.
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18 February 2011 PETER PARIAG 32
What the Phillips Curve Suggests to Government
If achieving full employment is an economic policyobjective, a government must therefore be preparedto accept a certain level of inflation as a necessary
µevil¶. The Phillips Curve relationship between inflation
and unemployment broke down at the end of the1960s when Britain began to experience risinginflation with rising unemployment
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RATES OF INFLATION AND UNEMPLOYMENT IN T&T
YEAR RATE OF INFLATION RATE OT EMPLOYMENT
1990 11.0 20.0
1991 3.8 18.5
1992 6.5 19.61993 10.8 19.8
1994 8.8 18.4
1995 5.3 17.21996 3.3 16.2
1997 3.6 15.0
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YEAR RATE OF INFLATION RATE OF EMPLOYMENT
1998 5.6 14.2
1999 3.4 13.1
2000 3.6 12.1
2001 5.5 10.8
2002 4.2 10.4
2003 3.8 10.5
2004 3.7 10.2
2005 6.9 8.02006 8.3 6.2
2007 7.9 5.5
2008 12.0 4.6
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18 February 2011 PETER PARIAG 35
Refinements to the Phillips Curve
An explanation of rising inflation rates combined withrising unemployment was put forward, based on inflationaryexpectations.
This µnatural rate hypothesis¶ is supported by monetarist
economist. µInflationary expectations¶ means the rate of inflation that is
expected in the future.
The inflationary expectations of the work force will be
reflected in the level of wage rises that is demanded in theannual round of pay negotiations between employers andworkers
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18 February 2011 PETER PARIAG 36
Inflationary Expectations of the Work Force
ExpectedInflation
Wage demand Rate of Inflation
Actionoutcome
3% 3% 3% Mission
accomplished
3% 4% 4% Increase in real
wage 1 %
3% 3% 5% Mistake made by
work force
5% 7% 7% Follow up
action.
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18 February 2011 PETER PARIAG 37
The Natural Rate Hypothesis
The natural rate hypothesis incorporates these viewson inflationary expectations, to produce a refinementof the Phillips curve
There exist a µnatural rate of of unemployment.
If policy makers try to reduce unemployment belowthis rate, they will bring about an inflation thatexplodes into even faster rates of price increases.
In the long run there is no trade off betweeninflation and employment.
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18 February 2011 PETER PARIAG 38
The Expectation Augmented Phillips Curve
Unemployment Rate (%)
Prices
And
Inflation
Wages (%)
N
N
PC1PC2
42
3
8The Natural Rate Hypothesis
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The Natural Rate Hypothesis
The economy is characterized by the Phillipscurve PC1. Unemployment rate = 4% and 0% price and wage inflation.
Unemployment reduced to 2% of the Labour force.
There is a movement along the Phillips curve,
and the new unemployment level nowassociated with 3% inflation.
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18 February 2011 PETER PARIAG 40
The Natural Rate Hypothesis In the mean time the period of positive inflation has
generated inflationary expectations and 4% unemploymentis now associated with 3% inflation, because the Phillipscurve has shifted from PC1 to PC2.
In effect, the short run Phillips curve has shifted outwards
from PC1 to PC2.
As employers realize that they are paying higher wages as well as receiving higher prices, and asworkers realize that the real value of their wages hasnot risen, the unemployment rate rises to 4% again.
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18 February 2011 PETER PARIAG 41
The Natural Rate Hypothesis
The workers who were initially brought out of unemployment by the higher wages, return tounemployment.
Monetarist economists state that the long run Phillips curveis vertical at the natural rate of unemployment i.e. NN .
In the long run, unemployment will revert towards itsnatural level.
The natural rate of inflation will be determined by the shortrun Phillips curve, which will shift upwards as inflationaryexpectations increase.
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18 February 2011 PETER PARIAG 42
The Natural Rate of Unemployment
Number employed
Wage
0
X
YWe
Nx Ny
S1
S2
The natural rate
of Unemployment
= Ony - Onx
D
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18 February 2011 PETER PARIAG 43
The Natural Rate of Unemployment
The demand for labour is labeled D The supply of workers available to take jobs at different
wages is S1.
S2 shows the supply of workers who are capable of taking
jobs. At any given wage there are more potential workers than
shown by S1.
This is because a number of them are prevented from being
available to take up employment by frictions such as lack of information and immobility.
There is µnatural unemployment¶ equal to ONy - ONx
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18 February 2011 PETER PARIAG 44
THANK YOU
THE END
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