REPORT

Unemployment can be defined as the number of people who are actively seeking for a

work but are currently without a job as defined by John Sloman in is book “Economics”.

Unemployment carries various cost with it, which is a result of its causes, however the

government of Jamaica put policies in place to reduce unemployment.

The Keynesian view of unemployment is that, “the contention that the unemployment

which characterizes a depression is due to a refusal by labour to accept a reduction of money

wages is not clearly supported by the facts”. Keynesian economist believes that unemployment

can be reduced by; having a maximum level of national output which will eliminate real wage

and cyclical unemployment which are of major concern.

The Classical view of unemployment is that, “unemployment would occur only if labour

market failed to clear: if real wage cost did not fall sufficiently. The Classical Treasury view

states that people should be encouraged to take wage cuts. This would also help to reduce

prices and restore export demand, thus correcting the balance of payment. People should also

be encouraged to save. This would, via flexible interest rates, lead to more investment and

hence a growth in output and demand for labour.

The Jamaican economy has a labour force (the number employed plus the number

unemployed) of one million three hundred and eleven thousand (1,311,000) in the 2008 to

2009 period, of this labour force during the 2008 and 2009 period the economy had an

unemployment rate (the number expressed as a percentage of the labour force) between the

region of eleven percent (11%) and fifteen percent (15%). Figure 1 shows the fluctuation of the

unemployment rate as the recession (a period where national output falls for months or more)

intensify and unemployment rate increases from eight point five percent (8.5%) in 2007 to

eleven percent (11%) in 2008 and to fourteen point five percent (14.5%) in 2009.

Underemployment can be defined as where people want full time works are only able to

find part time works. People sometimes confused underemployment with unemployment;

however they are two different terms. Underemployments can however lead to

unemployment, were person are seeking for a full time job and not a part time job, which will

lead to frictional unemployment.

There are various types of unemployment; each type of unemployment has it specific

cause. These types of unemployment are namely real wage, cyclical, frictional, structural and

seasonal unemployment. All the mention types of unemployment affected the Jamaican

economy during the period being investigated, 2008 to 2009.

Real Wage unemployment can be defined as real wage being driven up above the

market-clearing level, whether by the government or by some employers. During 2008 the

Jamaican economy faced a problem of real wage unemployment when the government of

Jamaica increases minimum wages from four thousand dollars ($4000.00) a week to four

thousand eight hundred dollars ($4800) a week, as shown in figure 2. This move increase the

supply of labour from two hundred and fifty thousand (250,000) to three hundred thousand

(300,000), while the demand fall from two hundred and seventy thousand to one hundred and

eighty thousand (270,000 – 180,000) also shown in figure 2.

Cyclical unemployment can be defined as a fall in aggregate demand with no

corresponding fall in the real wage rate. In the mid to late 2008 when the Jamaican economy

was hit by the global recession it began also to be hit by cyclical unemployment. Signs of the

cyclical unemployment were shown when Air Jamaica, a member of the tourism industry laid

off five hundred workers (500), and several bauxite companies in the mining industry laid off a

total of seven hundred workers (700). As shown in figure 3 Gross Domestic Product (GDP) fall

from twenty four billion, thirty three million dollars ($24.33 billion) in 2008 to twenty three

billion, thirty six million dollars ($23.36 billion) in 2009 and total demand for labour fall from

one million, two hundred and six thousand (1,206,000) in 2008 to one million and sixty five

thousand (1,065,000) in 2009 while the supply of labour increases from one million, three

hundred thousand (1,300,000) in 2008 to one million three hundred and eleven thousand

(1,311,000) in 2009.

Seasonal unemployment is where the demand for labour is lower at certain times of the

year. In the Jamaican economy without a throughout research it would not be obvious that

there is seasonal unemployment. This is due to the fact that some industries might lay off

workers in one season while others will employ in those seasons. For the tourism sector for

example as shown in figure 4, the demand for labour decreases in the autumn and spring and

rises back in the summer and winter periods.

Frictional unemployment is as a result of imperfect information in the labour market. A

series of frictional unemployment affected the Jamaican economy after a lot of persons were

sacked and it took months for others to find a job, due to employers not able to locate persons

with the particular skills or ability to get the job done and prospective employees having

incorrect information on jobs available in the market. In figure 6 it shows where frictional

unemployment increases from three thousand (3000) in the first quarter of 2008 to three

thousand eight hundred (3800) in the second quarter to four thousand five hundred (4500) in

the third quarter and to five thousand one hundred (5100) in the last quarter. When the 2009

year stepped in it saw a decline to four thousand nine hundred (4900) in the first quarter, to

four thousand three hundred (4300) in the second quarter, three thousand eight hundred and

fifty (3850) in the third quarter and to three thousand two hundred (3200) in the last quarter,

when jobs were taken up in the agriculture sector.

Unemployment during 2008 and 2009 had several blows at the Jamaican economy.

These can be seen as the cost of unemployment, which involved a reduction in government

revenue, redistribution of income, decreased profit for firms and reduced benefits for

employees. Due to the fact that majority of the Jamaican revenue source is from taxation an

increase in unemployment will see a decrease in the total earnings for the country, shown in

figure 7 where it show where the total earnings from the country is sourced. Another effect of

unemployment on the government was that it increases the government spending via

beneficiary offices such as PATH in order to issue out benefits. Unemployment also caused a

redistribution of income from poor to rich, where it sought the poor using up savings in order to

finance their daily needs. Firms in the Jamaican economy had a blow from the increase in

unemployment, where it helps to decrease the total net profit if there was full employment,

where there will have full consumer spending. Persons who are employed also was affected by

the hike in unemployment since they weren’t allowed the same amount benefits as before

when they had a lower unemployment rate.

Aggregate demand can defined as the total spending on goods and services in the

economy. Aggregate demand consists of consumer spending, investment, government

spending and net export. Aggregate demand in an economy can be affected by unemployment.

In 2009 when unemployment increased to fourteen point five percent (14.5%) from eleven

percent (11%) in 2008, it showed a decline in aggregate demand in Jamaica. This was as a result

of a decline in consumer spending and investment which had a large share in the aggregate

demand. Investment started declining when two bauxite plants reduced and then closed

operations in 2009 which lead to an increase in the total number of persons unemployed. This

exodus leads to a reduction in the total spending by consumers. Unemployment also caused an

increased in the net export, where export was one billion four hundred and twenty two million

dollars ($1.422 billion) in 2009 as compared to two billion six hundred and two million dollars

($2.602 billion) in 2008, while imports decline from seven billion one hundred and eighty five

million dollars ($7.185 billion) in 2008 to four billion six hundred and twenty five million dollars

($4.625 billion) in 2009, however net export increased to negative three billion two hundred

and three million dollars (-$3.203 billion) in 2009 from negative four billion five hundred and

eighty three million (-$4.583 billion) in 2008 as shown in figure 8.

Unemployment and inflation over the years has a relationship going where the other

increases when then the other decreases, it is more like a production possible curve where

both commodities can not increase neither can both have a decrease. Inflation can be defined

as a situation where an increase in price of goods and services over a period of time normally a

year. The relationship which exists between inflation and unemployment was observed by the

New Zealand economist, who observed England’s unemployment rate and inflation rate from

the 1800s to 1946. The relationship which was plotted on a graph was named the Phillip’s

Curve. In the 1970s and upwards it showed where both inflation rates and unemployment rates

increased. Economist defined this term as stagflation which means a simultaneously rise in both

unemployment rate and inflation rate; this can be caused by an increase production cost of

goods and services. As it relates to the Jamaican economy with regards to inflation and

unemployment rate the Phillip’s curve shows the exact relationship which occur in Jamaica

from 2008 to 2009, when inflation decreases from twenty two percent (22%) in 2008 to eight

point six percent (8.6%) in 2009 and unemployment rate increases from eleven percent (11%)

in 2008 to fourteen point five percent (14.5%) in 2009 as shown in figure 9.

Comparative advantage is a situation where one country has an advantage in the

production of a good, where it can produce the good at a lower opportunity cost that is if it has

to forgo less of other goods in order to produce it. Comparative advantage also has a law that

states that provided opportunity cost of various goods differ in two countries, both of them can

gain from mutual trade if they specialize in producing (and exporting) those goods that have

relatively low opportunity cost compared with other countries. However in different countries

comparative cost are different, the cause of this difference in comparative cost was examined

by two Swedish economists, Eli Heckscher and Bertil Ohlin, who developed the theory known

as the Heckscher-Ohlin theory, which states that: a country should specialize in those goods

that are intensive in the country’s abundant factor. Comparative advantage and unemployment

has a comparative advantage has a relationship where if a country has a comparative

advantage of producing a product can increase employment if it export the product. The

increase in employment will come about when the country has to meet the extra demand on

foreign market; this will in turn increase the demand for labour on the local market. However

unemployment can affects comparative advantage of a country negatively. The Jamaican

economy which has a comparative advantage in producing coffee over Japan who as

comparative advantage in producing cars over Jamaica. In 2008 when the global recession hit

Jamaica economy like a hurricane and coffee the farmers where unable to pay workers which

caused an increase in unemployment which in turn affects the comparative advantage of the

Jamaican economy.

In general the government of a country has certain policies which it put in place to

reduce unemployment or create jobs for the unemployed. These policies include fiscal policy

and monetary policy. These policies can sometimes decrease the unemployment rate as well as

increase the unemployment rate. Monetary policies are policies use by Monetarist economist

where they increase the money supply so as to increase the amount of money available to

investors. This move will increase the total investment in the economy which, will then

increases the demand for labour and in a short time unemployment will be lowered. However if

the government of the country was to use an Keynesian method to solve the problem of

unemployment, it would use a fiscal policy where it increases the amount of money allocated

for a particular sector such as health or security, so as to increase the demand for labour in

these sectors which will decreases the unemployment rate. These policies can however

increases unemployment especially the monetary policy where more money is available to

investors, instead of them spending the extra capital on labour they then invest more in

machinery to reduce the production cost and this will lead to workers bei9ng sacked leading to

an increase in unemployment.