Employment and Unemployment

Employed: those who have to pay jobs (also includes self-employed).

Unemployed: people of working age who are willing and able to work but cannot find a job.

Labor force: employed + unemployed.

Full employment: occurs when unemployment is at its lowest.

Patterns of Employment

1. Industrial structure: The percentage of employed in a particular sector(primary, secondary, tertiary) might change according to the stage of development the country is on.

2. The proportion of women in employment: in countries where social attitudes towards working women are positive, the number and proportion of women in the workforce are larger.

3. The proportion of workers in the private and public sector: the proportion of workers working in the public sector is declining with the passage of time.

4. Full-time and part-time: most workers work full-time

5. Informal and formal economy: as countries develop, more workers are employed in the formal economy.

6. High and low-quality employment: as a country develops it offers more high-quality jobs in comparison to low-quality jobs
7. Flexible employment- a flexible workforce adjusts quickly to the changes in the market.
   1. Flexibility to hire and fire
   2. Temporal flexibility- flexibility to change working hours
   3. Location flexibility- ability to change location
   4. Function flexibility- ability to change the task work performs

Labour force participation rate

Labour force may grow as a result of:

1. An increase in working age population – increase in birth rate or due to decrease in death rate or net immigration.
2. A rise in labour force participation.
3. A combination of 1. and 2.

Labour force participation rate (LFPR) – the proportion of working age population who belong in the workforce.

LFPR = those who are economically active

Economically inactive – those who retire early or those in higher education or homemakers or long-term sick

Factors influencing LFPR

1. Wages on offer: higher wages encourages more people to seek work
2. Social attitudes towards women
3. Provision for care of children and elderly
4. Social attitudes and provision towards disabled at work
5. Proportion of school leavers who go into higher education: higher the number of school leavers who go into higher education lesser the LFPR.

Unemployment

There are three broad categories of unemployment:

1. Frictional unemployment

Unemployment of this type occurs when people are in between jobs

1. Search unemployment- when workers do not accept a job offered but wait for a more acceptable job.
2. Casual unemployment- people are out of work between jobs like actors.
3. Seasonal unemployment- affects those workers whose demand occurs during certain seasons. E.g. tourism industry or certain types of farm workers

2. Structural unemployment

• It is caused by decline in industries and particular occupations, arising from long term changes in supply and demand.
• Industries cease to exist because of:
  • Another country (countries) becoming better at producing the product – regional unemployment.
  • A substitute being found for the product.
  • Capital being substituted for labour due to advancement of technology – technological unemployment
  • Structural unemployment is more serious than frictional unemployment because it lasts longer and affects more workers.

How to reduce friction and structural unemployment

Both frictional and structural unemployment occurs due to labour immobility.

By providing incentive to increase labout mobility like provide training and education and/or providing incentives like reducaed income tax.

3. Cyclical unemployment 

• It is more serious than structural unemployment, as it can affect more workers and spread throughout the country.
• It arises due to lack of aggregate demand.
• It is also called demand deficient unemployment.
• As unemployment tends to be high, government tackles this by taking measures to increase AD

Consequences of Unemployment 

Effects of unemployment can be studies based on who they impact:

1. Unemployed

• Face a loss of self-worth
• Decline in mental and physical health
• Adverse effect on their children’s education
• Reduced the chances of getting a new job
• Longer they are unemployed, they will lose skills and confidence

2. Economy

• Resources are not being fully utilised. Output will decrease
• Tax revenue will be lower
• Pressure on government expenditure like unemployment benefits and health benefits
• May lead to increase in crime + hence expenditure on crime prevention 
• Higher opportunity cost of government expenditure.

The government tax revenue will be lower. This is because of two reasons.

1. Lesser the employment, lesser the income tax
2. Less the employment, lesser the consumption expenditure, lesser the income through indirect taxes.

3. Firms

• They can employ unemployed workers in order to expand.
• Puts downwards pressure on wages due to fear of being replaced
• For same fear workers will be more flexible in the tasks they perform and the hours they work
• High unemployment means low demand for their products leading to reduction in production activities. 

Policies to reduce unemployment

Frictional unemployment-> improving the labour market by using supply-side policy measures. For instance, it may seek to increase the gap between pay and unemployment benefits by cutting income taxes and reducing unemployment benefits.

Structural unemployment-> a government would use supply-side policy measures. It is likely to try to improve the quality of education and training. If workers are more skilled and qualified, they will be more occupationally mobile.  

Cyclical unemployment-> a government will use expansionary fiscal and monetary policy. An increase in government spending, a reduction in tax rates and a cut in the rate of interest, may be used to raise aggregate demand. 

How effective are the policy measures of the government?

This is based on a number of factors:

1. Whether or not the government has identified the cause of unemployment correctly
2. Whether or not the government judges accurately the gap between the current level of real GDP and the full employment level.