TERM PAPER ON THE EFFECT OF NATURAL RATE OF UNEMPLOYMEN

IN DEVELOPED AND DEVELOPING COUNTRIES

AKINGBADE OLAJUMOKE MABEL

MATRIC NUMBER 217402

AGE 702 MACROECONOMICS ASSIGNMENT

INTRODUCTION

Developed Countries refers to the sovereign (independent) nation or state whose economy has
highly progressed and possesses great technological infrastructure, as compared to other nations.
Developed countries include: Australia, with a per capita GDP of $49,144.Canada, which has a
wealth of natural resources, including oil, gas, and coal. France, which boasts the world ’s sixth-
largest economy, with a per capita GDP of $39,678. Germany, with its skilled labor force and a per
capita GDP of $47,268.

Developing Countries refers to countries with low industrialization and low human development
index. Developing countries include: Argentina, with a per capita GDP of $12,494. Brazil, with a
per capita GDP of $8,727.Chile, with a per capita GDP of $13,576.China, with a per capita GDP
of $8,123.

Unemployment is an economic condition in which individuals actively seeking jobs remain un-
hired.The problem of unemployment is a world-wide reality; the developed countries as well as
the developing countries suffer from it. With the passage of time it has become worse especially
after the global economic crisis, and it has become a threat to social development, whilst
consideration must be given to global economics. The International Labor Organization (ILO)
estimates that 178 million women and men are officially counted as unemployed in 2007 and
another billion or more people are underemployed or working low wage jobs. These numbers has
increased to 212 million in late 2009. There are many causes contribute to this global key concern
such as increased population, rapid technological change, lack of education or skills and rising
cost.This paper discusses the major causes of unemployment and associates them with long-
lasting effects that include financial, social and psychological problems.

The following are the three unemployment found in the developed countries:

 Structural Unemployment
 Frictional unemployment
 Cyclical unemployment
 Voluntay unemployment

Structural unemployment arises when there is a mismatch between the unemployed persons and
the requirement for specified workers for employment. The situation arises when we see an uptick
in the demand for one class of labour leading to a decline in the the demand for another class of
labour . This happens because of the changes in the technology or due to a change in the structure
of demand for the industrial products in the economy.
Frictional unemployment refers to an unemployment situation which occurs because of frictions
like lack of information in the market regarding both availability of jobs and perfect mobility on
the part of workers. The distinctive feature of such unemployment situation is that the number of
job vacancies is exactly the same to the unemployed person in the economy.

Cyclical unemployment occurs due to deficiency of effective demand which increases during
depression or recession. It is termed as cyclical as both recession and depression are part of the
business cycle.The situation of cyclical unemployment arises when the total effective demand of
the population is unable to absorb the entire goods produced from the existing stock of capital.

When a person has already so much money that they are not willing to do work and remains
unemployed is called Voluntary unemployment.

Effects of Natural rate of Unemployment in Developed Countries

The term unemployment is used to describe anyone who is able to work, but doesn ’t have an
occupation. Unemployment is one of the most common and chronic problems worldwide. It is a
concern for individuals as well as global communities. Unemployment is expressed as percentage
of the total available work force that is unemployed, but actively seeking employment and willing
to work which is known as the unemployment rate.The Bahrain’s unemployment rate has
dropped from an estimated average of 16.4 percent in 2006 to 3.7 percent in 2010 (Minister of
Labour Dr. Majeed Al Alawi, 2010).

Basically there are five types of unemployment: frictional unemployment, cyclical unemployment,
structural unemployment, real wage or classical unemployment, and seasonal unemployment. The
level of unemployment varies with economic conditions and other circumstances. The causes of
unemployment include increased population, rapid technological change, lack of education or
skills and rising cost lead to financial, social and psychological problems.

There are four main causes of unemployment. Firstly, the increased population which leads to
higher unemployment rates. As the number of people who are looking for jobs is increasing, it is
more difficult to arrange jobs for all these huge numbers of workers. In this situation the demand
for work will be more than the available occupations. This will result in increased number of
unemployed individuals. An unemployment situation continues as long as the demand-supply gap
persists. This is very obvious in countries like China and India.

There is a global rapid technological change which plays a big role in the increased
unemployment problem. Many jobs which were handled by hands are being done by different
machines and technology nowadays. The new advanced technology replaced the low skilled or
unskilled workers in different factories. This made production faster and more accurate, but it
resulted in more unemployed people. For example; when personal computers replaced typewriters,
typewriter become unemployed and had to find other industries to be employed in. Additionally,
according to the International Labour Office technological progress may have had a more
substantial impact. The new technological advances have eliminated the less complicated tasks;
while at the same time require workers to have higher levels of skills. However, it is doubtful
whether technological change is leading to a net destruction of employment, if both direct and
indirect impacts are accounted for. (Combating Unemployment and Exclusion: Issues and Policy
Options, Contribution to the G7 Employment Conference submitted by the Director-General of the
International Office, Lille, 1-2 April 1996. ISBN 92-2-110158-4. International Labour Office,
Geneva, 1996.)

The third cause of unemployment is lack of education or skills for employment. This happens
when the qualifications of a person are not sufficient to meet his job responsibilities. If the
education was not directed towards the labour market then a mismatch occurs thus leading to
structural unemployment. These individuals face difficulties in learning new skills applicable for
the required job e.g. computer skills, management and communication. As the need for skilled and
educated workers increase for employers, the employment opportunities for those without a
college education decrease leading to higher unemployment rate. (Morgan Drake Eckstein , nd)

Unemployment can be due to the rising cost. The rising cost makes it hard for the companies to
pay the usual optimum salary for the employees or even the minimum wage in some cases. Hence,
the employees reject low wage jobs and leave the companies. Foe example if the price of petrol or
electricity has increased this definitely will affect the industries or factories which depend on these
energy sources. Moreover, sometimes companies need to cut down the budget due to an economic
crisis, industrial decline, company bankruptcy, or organizational restructuring, so the number of
employees is reduced or some positions are cancelled which increases the unemployment rates.

There are three major effects of unemployment. First, the financial problems which are rising from
prolonged unemployment. It is known that we can not buy anything without money; the constant
income buys food, clothing and shelter. Due to the loss of income, unemployed individuals will be
unable to earn money to meet financial obligations. For example, people who fail to pay mortgage
payments or to pay rent will loss their housing properties and become homeless. Unemployment
also prevents one from doing many things and involving in different activities e.g. travelling.
Consequently, this affects the national economy leads to poverty. As a result of the financial crisis
and the reduced overall purchasing capacity of a country the unemployed individuals are unable to
maintain the minimum standard of living.

Unemployment is an economic condition in which individuals actively seeking jobs remain un-
hired.The problem of unemployment is a world-wide reality; the developed countries as well as
the developing countries suffer from it. With the passage of time it has become worse especially
after the global economic crisis, and it has become a threat to social development, whilst
consideration must be given to global economics. The International Labor Organization (ILO)
estimates that 178 million women and men are officially counted as unemployed in 2007 and
another billion or more people are underemployed or working low wage jobs. These numbers has
increased to 212 million in late 2009. There are many causes contribute to this global key concern
such as increased population, rapid technological change, lack of education or skills and rising
cost.This paper discusses the major causes of unemployment and associates them with long-
lasting effects that include financial, social and psychological problems.

There are many obvious and well-documented social problems which are caused by
unemployment. Because of the increased spare time and stress there will be an increase in the
rates of alcoholism, drug abuse and domestic violence. Moreover, high unemployment often
results in increased marriage breakdown, divisions and discrimination in society, suicide rates and
crime rates especially among the young (Garry Ottosen and Douglas Thompson, 1996).

Unemployment also has been connected to the impaired family functioning as it affects the
parents’ interactions with their children and their spouse as well. Unemployed parents spend
more time with their children, but the quality of these interactions suffers in comparison with
those of employed parents. (Liker and Elder 1983; Barling 1990) On the other hand, it is not clear
how the unemployment play a role in these adverse events and what is the significance of other
related factors.

Unemployment affects a person psychologically too. Numerous studies have revealed a

relationship between unemployment and lack of self esteem and confidence leading to depression.
Besides, there is an increased anxiety and stress levels which lead to psychosomatic diseases,
personal worthlessness and powerlessness. In a study on the “Influence of the Social
Environment on Psychology” conducted in 1979 by Dr. M. Brenner it was found that every 10%
increase in the number of people unemployed on average causes an increase of 1.2% in total
mortality, a 1.7% increase in cardiovascular disease, 1.3% more cirrhosis cases, 1.7% more
suicides, 4.0% more arrests, and 0.8% more assaults reported to the police. Furthermore, it has
shown that long period of unemployment can also reduce the life expectancy of workers by about
7 years (Alain Anderson, Economics. Fourth Edition 2006)

Effects of natural rate of unemployment in Developing Countries

1. Stock of Physical Capital:

The major cause of unemployment and underemployment in underdeveloped countries like India
is the deficiency of the stock of capitaI in relation to the needs of the growing labour force. In the
modern world, man by himself can hardly produce anything. Even the primitive man needed some
elementary tools like the bow and arrow to engage in hunting for the earning of his livelihood.

With the growth of technology and specialisation, he needs much more capital with which to
engage in the productive activity. If he is an agriculturist, he needs a piece of land and also a
plough, a pair of oxen, seeds and some foodgrains and other necessities of life to sustain himself
during the period of sowing to the reaping of the harvest. In the industrial sector, he needs
factories to work in and machines to work with. All these aids to production belong to the
community’s stock of capital.

Now, if the working force grows faster than the stock of capital of a country, the entire addition of
labour force cannot be absorbed in productive employment because not enough instruments of
production would be there to employ them. The resulting unemployment is known as the long-
term or chronic unemployment.

A nation’s stock of capital can be enlarged by increased investment which in the absence of any
unutilised resources, requires additional saving on the part of the community. The concern of the
classical economists was to ensure that the rate of capital formation was kept sufficiently high so
that employment opportunities were successively enlarged to absorb the additions to the working
force of a country as a result of population growth.

This is also the problem that the developing countries like India are facing today. In recent times,
the labour force in India has been growing at more than 2 per cent per year, yet our rate of
investment expressed as a percentage of our stock of capital has not been growing at a fast enough
rate so as to keep pace with the growth of population. As a result, the country’s ability to offer
productive employment to the new entrants in the labour market has been severely limited.

This manifests itself in two things: first, the prevalence of large-scale open unemployment in the
urban areas as evidenced by the statistics of employment exchanges; second, it manifests itself in
the form of open unemployment in the rural areas as well as disguised unemployment in
agriculture.

2. Use of Capital Intensive Techniques:

An important factor responsible for slow growth of employment has been the use of capital-
intensive techniques of production, even in consumer goods indpstries where alternative labour-
intensive techniques are available. Even before 1991, under the industrial policy resolution 1956,
the development of consumer goods industries were left open for the private sector.

However, private sector prefers to invest in highly capital-intensive plants and equipment on the
basis of technology developed in labour- scarce western countries. It is argued by them the
alternative labour-intensive techniques have low productivity and low-surplus-generating capacity.
However, the important reason for the use of capital-intensive techniques has been the availability
of cheap capital.

3. Inequitable Distribution of Land:

Another cause of unemployment prevailing in the developing countries like India is inequitable
distribution of land so that many agricultural households have no adequate access to land which is
an important asset for agricultural production and employment.

Sub-division of land holdings under the pressure of rapid population growth since 1951 has further
reduced access to land for several agricultural households. As a result many persons who were
self-employed in agriculture have become landless agricultural labourers who suffer from acute
unemployment and under-employment.

4. Rigid Protective Labour Legislation:

Another reason for the slow growth of employment in the organised sector has been the existence
of unduly rigid protective labour legislation which makes it very difficult to retrench a worker who
has been employed for 240 days. Labour-legislation is so much rigid that it is even difficult to
close down the unit and quit the industry. Thus, this excessively protective labour-legislation
induces private entrepreneurs to prefer the maximum use of capital in place of labour.

5. Neglect of the Role of Agriculture in Employment Generation:

An important factor responsible for slow growth of employment opportunities is the neglect of
agriculture for generating employment opportunities. The general perception, as existed in the first
three five year plans in India (1951-65) as well as in the theoretical models of growth for dualistic
economies such as Lewis “Economic Development with Unlimited Supplies of Labour” was
that agriculture already contained surplus labour and it was required to withdraw this surplus
labour from agriculture and employ them in the modern industrial sector. By the mid-sixties it was
realised that not to speak of employing new entrains to the labour force year after year, the modern
industrial sector could not absorb productivity even a fraction of the then existing unemployed
persons in the foreseeable feature.

6. Lack of Infrastructure:

We have explained above lack of physical capital with which labour is equipped for productive
employment as the cause of unemployment prevailing in the developing countries like India. By
capital we generally mean machines, plant & equipment, factory buildings etc. But a similar factor
responsible for huge unemployment prevailing in these countries is lack of infrastructure such as
roads, power, telecommunications, highways, irrigation facilities in agriculture. Inadequate
availability of infrastructure is a great obstacle for the generation of opportunities for productive
employment.

It follows from above that unemployment and under-employment prevailing in India and other
developing countries is not cyclical Keynesian type of unemployment caused by decline in
aggregate demand. Unemployment and under-employment in India are caused by more basic
structural factors such as lack of capital, use of capital-intensive technologies, lack of access to
land for agricultural household, lack of infrastructure, racial growth of population resulting in
large annual increments in labour force year after year. Unemployment in India, as in other
developing countries, manifests itself in both open unemployment and under-employment.