Employment and Unemployment

Labour force – the working population of an economy, i.e. all people of working
age who are willing and able to work. Dependent population – people not in the
labour force and thus depend on the labour force to supply them with goods
and services to fulfill their needs and wants. This includes students in
education, retired people, stay at home parents, prisoners or similar
institutions as well as those choosing not to work.
Employment is defined as an engagement of a person in the labour force in
some occupation, business, trade, or profession.
Unemployment is a situation where people in the labour force are actively
looking for jobs but are currently unemployed.
All governments have a macroeconomic objective of maintaining a low
unemployment rate.
Full Employment is the situation where the entire labour force is employed. That
is, all the people who are able and willing to work are employed –
unemployment rate is 0%.

Changing patterns and level of employment

Over time, patterns and levels of employment change. It could be due to the
effects of the business cycle that every economy goes through from time to
time (growth and recession). It could be due to the changes to the
demographics (population- age and gender) of the country. It could also be due
to structural changes (dramatic shifts in how an economy operates). Let’s look
at some ways in which this happens:
As an economy develops, it undergoes a structural change as output and
employment shifts from primary sector to manufacturing and then to the
tertiary (services) sectors. This can be seen in rapidly developing countries like
India where there employment in agriculture and allied industries are rapidly
falling and people are moving towards the fast-growing service sector,
especially IT and retail.
In the same way, employment moves from the informal sector (formally
unrecognised trades such as street vending- output is not included in GDP and
incomes are not taxed) to the formal sector (recognised – included in GDP and
taxes) as economies develops. People who previously worked as street
vendors may work in registered firms, as the economy develops.
Overtime, as an economy develops, the labour force also sees an increase in
the proportion of female labour. As social attitudes become progressive and
women are encouraged to work, more women will enter the labour force and
contribute to growth.
Similarly, as the country develops, the proportion of old people may increase in
proportion to young and working people (because death and birth rates fall).
This will cause the labour force to shrink and cause a huge burden on the
economy. Japan is now
facing this problem as their birth rates are falling and it is up to a shrinking
labour force to support a growing dependent senior population.
As economies become more market-oriented (government enterprises and
interventions decline), the economy will naturally see a large proportion of the
labour force shift to the private sector.
Measuring unemployment
Economies periodically calculate the number of people unemployed in their
economies, to check the unemployment rate and see what policies they should
implement to reduce it if it is too high. They can do this in two ways:
• Claimant count: unemployed people can file for unemployment claims
(benefits/allowances provided to the unemployed job seekers) by the
government. The government can count the total number of
unemployment claims made in the economy to measure unemployment.
• Labour surveys: economies conduct surveys among the entire labour force
to collect data about it. This will include data on the number of people
unemployed.

Unemployment rate = number of people unemployed / total no. of people in the

labour force
There are some problems with measuring employment.
Under-employment: people may be officially classed as employed but they may
be working fewer hours than they would like. For example, they may have a
part-time job, but want a full-time job. This is considered as unemployment
because they may not fulfil the working hours needed to be considered
employed.
Inactivity rates: the long-term unemployed may become discouraged and leave
the labour market completely. In effect they are not working, but they are
classed as economically inactive rather than unemployed. So, the
unemployment rate can be understated.

The causes/types of unemployment

• Frictional unemployment: this occurs as a result of workers leaving one job
and spending time looking for a new one. This type of unemployment is
short-lived. • Cyclical unemployment: this occurs as a result of fall in
aggregate demand due to an economic recession. When demand falls, firms
will cut their production and workers will lose their jobs. There will be a
nation-wide rise in unemployment. • Structural unemployment: this occurs due
 to the long-term change in the structure of an economy. Workers end up
having the wrong skills in the wrong place – causing them to be unfit for
employment. This can be explained by dividing it further:
– Technological unemployment: this has rose in recent times as
industrial robots, machinery and other technology are being
substituted for labour, leaving people jobless.
– Sectoral unemployment: unemployed caused as a sector/industry
declines and leave its workers unemployed.
• Seasonal unemployment: this occurs as a result of the demand for a product
being seasonal. For example, the demand for umbrellas will fall in non-
monsoon seasons, and so workers in umbrella manufacturing firms will
become unemployed over those seasons.
• Voluntary unemployment: when people choose not to work for various
reasons – they want to pursue higher education, would like to take a
break etc. Because they’re not actively looking for work, voluntarily
unemployed people do not belong to the labour force!

The consequences of unemployment

• People will lose their working skills if they remain unemployed for a long time
and may find it even harder to find suitable jobs. As people remain
unemployed, their incomes will be low, and living standards will fall.
• Unemployment will also lead to poverty, homelessness and ill health and
encourage people to steal and commit other crimes to make money–
crime rates will rise.
• People losing skills is not just detrimental to the unemployed individuals but
also to firms who may employ these people in the future. They will have
to retrain these workers.
• Firms will have to pay redundancy payments to workers they lay off. •
Workers will be demotivated as they fear they could lose their jobs,
especially in a recession.
• As firms lay off workers, they will be left with spare capacity- unutilised
machinery, tools and factory spaces, leading to higher average costs.
• Due to low incomes, people’s purchasing power/consumption will fall,
causing demand to fall.
• People will need to rely on charity or government unemployment benefits to
support themselves. These benefits are provided from tax revenue. But
now, as incomes have fallen tax revenue will also fall. This might mean
that people remaining in work will have to pay more of their income as
tax, so that it can be distributed as unemployment benefits to the
unemployed. The burden on tax
payers will rise.
• Public expenditure on other projects such as schools, roads etc. will have to
be cut down to make way for benefits. There is opportunity cost involved
 here. • The economy doesn’t reach its maximum productive capacity, i.e., they
are economically inefficient on the PPC. The economy loses output.
Policies to reduce unemployment
Both demand-side policies and supply-side policies help reduce unemployment.
Demand side policies will address the unemployment caused by demand
deficiency (cyclical) while the supply-side measures will curtail structural and
frictional unemployment.
• Expansionary policies to increase demand: expansionary fiscal policies like
cutting down taxes and increasing government spending (which also
creates jobs) and expansionary monetary policies like cutting interest
rates will help boost demand in the economy, to keep production and
employment high. However these will take effect only with a time lag.
Cutting tax rates won’t help if people don’t have confidence in the
economy and prefer to save. Similarly, cutting interest rates will also be
ineffective if banks are unwilling to lend to businesses, due to low
confidence in the economy.
• Depreciate the exchange rate: as the currency depreciates, the country’s
exports will become cheaper and so export demand from abroad will
increase, helping boost production and employment in the export
industries.
• Control inflation: higher inflation causes firms to lay off workers to reduce
costs. So if the government tries to control inflation via monetary tools, it
will help reduce firm costs and increase employment. But there is also
the argument that as unemployment rises, incomes will also rise, driving
up prices again.
• Cutting unemployment benefits to provide incentive to work: many people
don’t work because they are comfortable living off the unemployment
benefits provided by the government. Cutting down on these benefits,
will persuade them to look for work and earn. But this would of course,
go against the welfare principle of the government.
• Restricting imports and encourage exports: a lot of unemployment occurs
when good quality and cheaper foreign products put domestic industries
out of business. Controlling imports using import tariffs and quotas will
encourage domestic firms to emerge and increase production and thus
increase employment. Similarly, easing controls on labour-intensive
export industries will open up new job opportunities. However such
protectionist measures can harm the country in the long-run as efficient
competition from abroad reduces.
• Cutting down minimum wages: minimum wages increase firms’ labour costs
and so they will lay off workers. Lowering the minimum wages will
encourage firms to employ more labour.
• Remove labour market regulations: letting the market have a free hand in
the labour market – abolishing maximum working weeks, minimum wages,
making it easier to hire and fire workers – will improve the labour market
flexibility, can improve imperfections in the labour market. However, this
 can cause temporary unemployment and cause greater job insecurity.
• Training/Retraining: structural employment issues can be eliminated by
retraining the unemployed in skills required in modern industries. This will
also improve occupational mobility. This is very expensive when done on
a large scale
across the economy, requiring training centres to be built, and trainers to
be employed. The benefits of providing skills and training will only be
reaped in the long-term.
• Promote industries in unemployed areas: a lot of employment is created
when government provide subsidies and tax breaks for new industries
which set up shop in certain backward regions.
• Increase geographical mobility of labour: frictional unemployment is caused
because people can’t move around to find good jobs. The government
can improve labour mobility by investing in transport and housing
services.
• Provide information: frictional unemployment can be eliminated to an extent
by making information available about job vacancies to the unemployed
through job centres, newspapers, government websites etc.