UNEMPLOYMENT

Unemployment refers to people of working age who are actively looking for a Job at the
given wage rate but who are not employed.
Working Age
Individuals within the age range suitable for employment
Actively Looking for a Job
-Individuals actively searching for employment opportunities
Given Wage Rate
The prevailing wage level in the market
Not Employed
Individuals who are not currently holding a job

A closely related term is underemployment, referring to people of working age with

part-time jobs when they would rather work full time, or with jobs that do not make full use
of their skills and education.

Calculating unemployment: the unemployment rate

The labour force is defined as the number of people who are employed (working) plus the
number of people of working age who are unemployed (not working but seeking work).

labour force = number of people who are employed (working) + number of people of
working age who are unemployed (not working but seeking work).

Excluded Groups
Children
Retired
Persons
Adult
Students
People with
Illness/Disability
People Not a Wanting to

Unemployment Rate= Number of unemployed/ Labour Force *100

Difficulties In measuring unemployment

The unemployment rate is one of the most widely reported measures of economic activity,
used extensively as an Indicator of economic performance. Yet it is actually difficult to obtain
an accurate measurement of unemployment.
Official statistics often underestimate true unemployment because of hidden unemployment,
arising from the following:

●​ Unemployment figures include unemployed persons who are actively looking for
work. This excludes 'discouraged workers', who are unemployed workers who gave
 up looking for a job because, after trying unsuccessfully to find work for some time,
they became discouraged and stopped searching. These people in effect drop out of
the labour force.
●​ Unemployment figures do not make a distinction between full-time and part-time
employment, and count people with part-time Jobs as having full-time Jobs though In
fact they are underemployed.
●​ Unemployment figures make no distinction on the type of work done. If a highly
trained person works as a waiter, this counts as fully employed.
●​ Unemployment figures do not include people on retraining programmes who
previously lost their jobs, as well as people who retire early although they would
rather be working.

Costs of unemployment
Unemployment of labour is one of the most important economic concerns to countries around
the world. Reduction of unemployment is a key objective of governments everywhere, as its
presence has major economic and social consequences.
Economic costs
Unemployment has the following economic consequences:

1.​ A loss of real output (real GDP). Since fewer people work than are available to
work, the amount of output produced is less than the level the economy is capable of
producing. This is why unemployment means that an economy finds itself somewhere
Inside Its production possibility curve (PPC; see Chapter 1, Section 1.3), producing a
lower level of output than it is capable of producing.
2.​ A loss of Income for unemployed workers. People who are unemployed do not have
an income from work. Even if they receive unemployment benefits, they are likely to
be worse off financially than if they had been working.
3.​ A loss of tax revenue for the government. Since unemployed people do not have
income from work, they do not pay income taxes; this results in less tax revenue for
the government.
4.​ Costs to the government of unemployment benefits. If the government pays
unemployment benefits to unemployed workers, the greater the unemployment, the
larger the unemployment benefits that must be paid, and the less tax revenue left over
to pay for important government-provided goods and services such as public goods
and merit goods.
5.​ Costs to the government of dealing with social problems resulting from
unemployment. The social problems that arise from unemployment (noted below)
often require government funds to be appropriately dealt with.
6.​ Larger budget deficit or smaller budget surplus. A government budget deficit
occurs when tax revenues are less than government expenditures, while a budget
surplus is the opposite, involving greater tax revenues than expenditures.
Unemployment leads to a loss of tax revenue for the government as we have seen, but
at the same time greater expenditures for unemployment benefits as well as social
problems due to unemployment. As expenditures rise while tax revenues fall, a budget
 surplus will become smaller while a budget deficit will become larger, in turn leading
to more government debt.
7.​ More unequal distribution of Income. Some people (the unemployed) become
poorer while others (the employed) are able to maintain their income levels. Since
certain population groups (ethnic groups, regional groups, etc., discussed earlier) may
be affected more by unemployment than others, the effects of increasing income
inequalities and resulting poverty are often concentrated among population groups
who are more disadvantaged to begin with. If unemployment is high or tends to
persist over long periods of time, this may lead to increased social tensions and social
unrest.
8.​ Unemployed people may have difficulties finding work in the future. When
people remain out of work for long periods, they may not find work easily at a later
time in the future. This can happen because the unemployed workers may partly lose
their skills due to not working for a long time, or because in the meantime new skills
may be required that workers have not been able to keep up with, or because firms
have found ways to manage with fewer workers. This process is known as hysteresis
(from the Greek word otepno meaning 'delay' or 'lagging behind something"', in this
case the lagging behind of employment).

Personal and social costs

Unemployment has the following personal and social consequences:

1.​ Personal problems. Being unemployed and unable to secure a job involves a loss of
income, increased indebtedness as people must borrow to survive, as well as loss of
self-esteem. All these factors cause great psychological stress, sometimes resulting in
lower levels of health, family tensions, family breakdown and even suicide.
2.​ Greater social problems. High rates of unemployment, particularly when they are
unequally distributed for the reasons noted earlier, can lead to serious social problems,
including increased crime and violence, drug use and homelessness, arising from
growing poverty.

Padlet Link: [Link]

Structural unemployment occurs because of:

Change in demand of a particular type of labour skill
Change in geographical region of the industry
Labour market rigidities
The consumer price Index (CPI) Is a measure of the cost of Ilving, or the cost of goods and
sefvices purchased by the typical household in an economy.

The value of this basket is calculated for a particular year (called a base year); this is
done by multiplying price times quantity for each good and service in the basket, and
adding up to obtain the total value of the basket.

Price index for a specific year = value of basket in a specific year ÷ value of same basket in
base year ×100

PRICE INDEX FOR THE BASE YEAR IS ALWAYS 100

Year 2017 2018 2019

Consumer price index 100.0 105.5 119.0

Value of basket $756 $798 $900

% change in A = [(final value of A - initial value of A) = initial value of A] × 100

Problems with the consumer price index (CPI)

Different rates of inflation for different income earners.
Different rates of inflation depending on regional or cultural factors.
Changes in consumption patterns due to consumer substitutions when relative prices change.
Changes in consumption patterns due to increasing use of discount stores and sales.
AChanges in:
consumption patterns due to introduction of new products.
Changes in product quality.
International comparisons.
Comparability over time.

The core rate of inflation (Supplementary material)

○​ There are certain goods, notably food and energy products (such as oil) that have highly volatile prices (meaning
they fluctuate widely over short periods of time).
○​ Reasons for price volatility include wide swings in supply or demand, causing large and abrupt price changes.
○​ When such goods are included in the CPI, they may give rise to misleading impressions regarding the rate of
inflation.
○​ To deal with this problem, economists measure a core rate of inflation, which usually is done by constructing a CPI
that does not include food and energy products with highly volatile prices.

% change in real income (or purchasing power)= % change in nominal income –% change in
the price level (or the rate of inflation)

Hyperinflation consists of very high rates of inflation. It is defined as occurring when

the price level increases by more than 50% per month, though it can reach thousands or
even millions of % points per year.

Hyperinflation results from very significant increases in the supply of money, which impact directly on the price level.
Hyperinflations occur when governments resort to printing money, thereby increasing its supply.

• Serious hyperinflations result in a massive disruption of economic activity:

1.​ businesses stop investing in productive activities and invest instead in assets that are believed to maintain their
value as prices rise (gold, real estate or jewels);
 2.​ firms also withhold goods from sale in the market so that they can sell them later at higher prices;
3.​ lenders (creditors) suffer massive losses as the real value of debts falls dramatically.
○​ At the extreme, money loses its value altogether and people resort to barter (the direct exchange of goods or
services, eliminating the need for money), which in itself makes production and exchange extremely difficult.
○​ Serious hyperinflations can also lead to political and social unrest.

Costs of deflation
Redistribution effects
Increase in the real value of debt
Uncertainty
Deferred consumption, high and increasing cyclical unemployment: risk of a deflationary spiral
Risk of bankruptcies and a financial crisis

Redistribution effects
The redistribution effects of deflation are the opposite of those of inflation: with a falling price level, individuals on fixed
incomes, holders of cash, savers and lenders (creditors) all gain as the real value of their income or holdings increases. By
contrast, borrowers (debtors) and payers of individuals with fixed incomes lose with a falling price level, as they must pay
out sums that have an increasing real value.
Increase in the real value of debt
In view of the above, the real value of debt increases. If you hold $1000 and the price level falls, this means that the
purchasing power of your money increases because you can buy more things with that amount. In just the same way if you
owe this $1000, its real value in terms of its purchasing power increases when the price level falls.
Uncertainty
Deflation, like inflation, creates uncertainty for firms, which are unable to forecast their costs and revenues due to declining
price levels.
Risk of bankruptcies and a financial crisis
As we saw above, deflation results in an increase in the real value of debt. If the economy is in recession, and incomes are
falling while the real value of debt is increasing, the result will most likely be bankruptcies of firms and consumers who are
unable to pay back their debts. If such bankruptcies become widespread, banks and financial institutions will be affected, and
a large risk of a major financial crisis arises.
Inefficient resource allocation
As we saw earlier, high rates of inflation lead to inefficient resource allocation because the signalling and incentive functions
of prices are unable to work effectively. In deflation, prices of all goods and services do not fall uniformly, with the result
that the price signals and incentives get distorted, leading to resource misallocation.