Definition of unemployment
Unemployment occurs when individuals who are actively looking for work cannot find a job. A person is regarded as unemployed if he is able, available and willing to work at the prevailing wage rate but cannot get a job despite actively searching for work. The number of unemployed does not include those of working age who decide not to work, e.g., full-time housewives. The working age may be from 15 years to 64 years, even though there is a disparity among countries.
The factors that contribute to unemployment include structural changes, seasonal variations and recession.
The unemployment rate can be obtained by dividing the number of unemployed people by the number of people in the labour force. The labour force comprises those of working age who are either unemployed or employed.
Measurement of unemployment
Claimant count
It uses the number of individuals claiming unemployment-related benefits. It is less expensive to collect in terms of cost and time since available government records are used. It provides an indication of changes in unemployment over time even though it is not as accurate as the Labour Force Survey.
However, those who are unemployed but cannot meet the stipulated conditions for claiming benefits are excluded, leading to an understatement of the unemployment figure. Some individuals may also claim benefits even though they are not actively looking for work; this affects the accuracy of the figure.
Labour force survey
It is a standard method of measuring unemployment. It is used by many countries and organisations such as the International Labour Organisation. A sample of households is interviewed using questionnaires on labour market and related issues.
A survey is conducted to determine the number of working-age people actively seeking employment who will be available to take up a job in the next two weeks. This method is better than the claimant count as it includes those who are unemployed but cannot meet the requirements for claiming benefits. Besides, those who are claiming benefits but not looking for work are excluded. But it is more expensive in terms of money and time.
Types of unemployment
Frictional unemployment
This type of unemployment occurs when people are searching for work. It affects the young school leavers who are searching for their first jobs, previously employed people looking for another job and those trying to get another job after being fired. It is usually short-term in nature because people may just be unemployed in-between jobs.
Frictional unemployment arises from an information gap in the labour market. Employees do not know where the available jobs are, and employers are not fully aware of the kind of labour available in the labour market. This gap is often bridged by the provision of information on job vacancies by government job centres and private employment agencies.
Cyclical unemployment
One of the factors that determine the demand for labour is the demand for the underlying product. A decrease in aggregate demand in the economy would lead to layoffs by firms. This is known as cyclical unemployment. It is normally associated with the business cycle; it rises during a recession as people lose their jobs when there is less demand for products. This type of unemployment is also known as demand-deficient unemployment.
Structural unemployment
This occurs when there is no longer any demand for a particular product or when technology makes people unwanted. The pattern of demand changes and the skills possessed by the workers are no longer relevant. For example, coal miners are no longer needed because most countries now use alternatives to coal, e.g. petrol, diesel and natural gas. Computers have replaced typewriters, thereby rendering typists irrelevant these days (technological unemployment). There may be a permanent decline in an industry located in a particular area and workers cannot easily move to other areas or other jobs (regional unemployment). Both technological and regional unemployment are forms of structural unemployment. Structural unemployment is usually long-term in nature, unlike frictional unemployment.
Seasonal unemployment
It is caused by changing seasons, which lead to the loss of jobs in a particular period of the year. The weather conditions of a particular season may not be conducive to a business which necessitates a reduction of the workforce of the firm. The tourism and hospitality industry usually witnesses low sales in winter; therefore, the demand for labour is reduced during that period.
Costs of unemployment
Low tax revenue
There will be a reduction in direct taxes paid on the incomes of individuals because the unemployed do not earn income. Also, less consumption in the country would reduce the amount of indirect taxes accruing to the government. Consequently, less money will be available for infrastructural development.
More spending on unemployment benefits leads to a budget deficit
The government has to spend more on unemployment-related benefits in order to reduce the suffering among jobless people. This, coupled with reduced tax revenue, may result in a budget deficit. The government has to borrow to meet its expenditure when there is a budget deficit. Increased indebtedness of the government comes with high debt servicing costs and less money for developmental projects.
Poor living standards
An unemployed individual has no income to maintain a decent standard of living. The nutrient intake would be low due to the inability to afford a good diet. Poor diet causes poor health. And the unemployed will not be able to pay medical bills, which may result in untimely death.
Mental health issues
If a person finds it difficult to secure a job for a long time, he may become frustrated and depressed. This may lead to social problems or suicidal tendencies.
Low economic output
There will be lost output if a lot of working-age individuals have no jobs. Consequently, the economy will find it difficult to reach its potential output. That is to say, the economy would be operating within its Production Possibility Curve (PPC) but not on its PPC
Low sales by firms
Sales revenue of firms will decline in a period of high unemployment due to low consumption expenditure by unemployed people in the labour force. Profits, also, will nosedive as there may not be enough sales to cover the costs of the business.
Loss of skills
If a person becomes unemployed for a long time, he may lose his skills. This makes it more difficult for the person to get a job. In other words, the person becomes unemployable. And such a person may eventually stop looking for work and only rely on unemployment benefits, which do not assure a decent living standard. This is known as hysteresis, a situation in which people get accustomed to the low standard of living associated with unemployment and do not want to take up any job again, even when vacancies are available.
High crime rate
The government would have to spend more money to combat crimes in the society since some people may resort to crimes to eke out a living.
Promotes income inequality in the economy
The gap between the rich and the poor is widened in the society as more and more people have no jobs. Only the few who have jobs could meet their wants while the unemployed wallow in poverty.
Benefits of unemployment
More people available for work
Unemployment makes it easy for businesses to fill their vacancies. There may be disruptions if there are not enough people to take up jobs. Disruption of production can lead to the loss of revenue and customers for businesses.
Low labour costs for businesses
In a period of high unemployment level, businesses are not pressured for higher wages. People who have jobs would want to hold on to them, no matter how small the wages are, as they may be replaced easily. Trade unions also do not have high bargaining power when the unemployment rate is high. Low labour costs for businesses may result in higher profits.
Industrial stability
People hardly go on strike when unemployment is high. Thus, there is more industrial peace and minimal disruption to productive activities. This will ensure that the Gross Domestic Product (GDP) does not fall as a result of production stoppages in the country.
Low consumption reduces inflationary pressure
An increased unemployment rate would reduce consumption and aggregate demand. Lower aggregate demand is capable of curtailing rising prices or inflation.
Motivation to improve skills
Unemployment encourages people to acquire more skills through education and training in order to easily change their jobs and reduce the negative effect of technology on employment.
Policies to reduce unemployment
The policies of government are divided into three types, namely fiscal policies, monetary policies and supply-side policies. The type of policies used to correct or reduce unemployment depends on the cause of the unemployment.
Cyclical unemployment
This type of unemployment is caused by a fall in aggregate demand; that is why it is also known as demand-deficient unemployment. Therefore, the solution is to increase aggregate demand using expansionary fiscal or monetary policies. Expansionary fiscal policies involve tax cuts and increased government spending. Reducing tax rates increases disposable income for consumption and profit for investment. When consumption and investment increase, aggregate demand will also increase. This would reduce cyclical unemployment. Likewise, an increase in government spending boosts aggregate demand as government spending is a component of aggregate demand.
Expansionary monetary policy involves lowering the interest rate, increasing the money supply and reducing the exchange rate to influence aggregate demand. If the interest rate is lowered, both consumption by households and investment by firms will rise because it is cheaper to borrow. Aggregate demand, as a result, rises, leading to the correction of cyclical unemployment.
If the exchange rate is lowered or devalued, exports are cheaper while imports are more expensive. Consequently, exports rise while imports decline. Net exports will rise and aggregate demand will rise, thereby reducing cyclical unemployment.
The central bank can increase the money supply by influencing the lending ability of commercial banks. If commercial banks lend more, money in circulation will increase. This will increase economic activities and total demand. Firms will have to create more jobs in order to meet up with strong aggregate demand.
Structural unemployment
Structural unemployment is as a result of the mismatch of skills when there is a technological improvement or when a particular industry is in permanent decline.
Supply-side policies are useful in combating this type of unemployment, e.g., education and training, tax and benefit reforms and reducing the power of trade unions. Education and training, for example, helps train the redundant workers on new and relevant skills such as cloud computing, artificial intelligence, etc. For instance, a coal miner might be retrained as an information technology professional due to the declining demand for coal.
Many countries are reforming their tax and benefit systems to incentivise people to look for work. A low tax rate would encourage more people to look for work as they have to keep a lot of their earnings to themselves rather than paying a lot in taxes to the government. If benefits are reduced or made difficult to claim, people would look for work to do and not depend on the unemployment benefits paid by the government.
Furthermore, reducing the power of trade unions encourages investment in high-growth industries, which reduces the impact of those that are declining and laying off workers. The activities of trade unions increase labour costs for businesses, such as when firms have to pay higher wages and improve working conditions.
Finally, the government can give financial assistance to those who want to relocate to areas where jobs are available by giving them relocation cost. It can also make housing cheaper so that people can easily move to other areas by paying subsidies to builders or giving individuals rent subsidies to cover part of their rents. This will make housing affordable in those areas where people can get jobs.
Frictional unemployment
Frictional unemployment is caused by information failure; people have no work temporarily when they are searching for jobs. Therefore, the solution is to provide information on available vacancies to job seekers, either by the government or private agencies.
Seasonal unemployment
Seasonal fluctuations make work unavailable during certain periods of the year. The government should embark on continuous job creation so that people can secure a second job whenever they are seasonally unemployed. For example, a tourist guide who does not have anything to do in winter can decide to engage in factory work until the summer when he would be employed again.