Chapter 21: Unemployment
Costs of unemployment
Unemployment pool
❖ Level / rate of employment is a stock concept
❖ Continuous flows in & out of employment pool
❖ Inflows into unemployment pool:
⬧ New entrants / re-entrants into labour force
⬧ Previously employed job seeker
⬧ Laid-off person
⬧ Retrenched/fired person
❖ Outflows out of unemployment pool:
⬧ Death
⬧ Person hired
⬧ Laid-off person recalled
⬧ Person becomes discouraged & stops looking for job
Informal sector
❖ Those who can’t find employment in formal sector
❖ Those in illegal activities
❖ Whose who don’t want to pay tax
Costs of unemployment to individual
❖ Loss of income, shock, frustration, criminal activity
❖ Hunger, cold, ill health, death, suicides
❖ Loss of experience & human development
❖ Psychological costs: demoralising, loss of confidence + self-esteem, psychological disorders
❖ Unemployment benefits & social welfare programmes = ↓ costs
Costs of unemployment to society
❖ Crime, riots, violent unrest
❖ Overthrow of democratic institutions + processes
❖ Unemployment benefits & social welfare programmes = ↑ financial + opportunity cost
Types of unemployment
Frictional unemployment (search unemployment)
❖ Arises cause it takes time to find job
❖ Unavoidable & not serious problem
❖ Composition always changes
Seasonal unemployment
❖ Arises cause some occupations only require workers for part of year
Cyclical unemployment (demand-deficiency unemployment)
❖ Occurs when recession in economy (due to lack of demand) gives rise to unemployment
❖ Due to business cycle
Structural unemployment
❖ Occurs when there’s mismatch between worker qualifications & job requirements OR
❖ Jobs disappear due to structural changes in economy
❖ Serious problem with no easy solution
❖ Reasons:
⬧ Lack of education, training, skills
⬧ Changes in production methods (technologically unemployed if replaced by machines)
⬧ Changing consumer preferences
⬧ Foreign competition
⬧ Structural decline in certain industries
⬧ Discrimination
Policies to reduce unemployment
Measures aimed at supply of labour
❖ Limit population growth (quantity)
⬧ 1 child policy
⬧ Stricter immigration control
❖ Improve education, training, skills (quality)
⬧ Reduces oversupply of unskilled & semi-skilled labour
Measures aimed at demand of labour
❖ ↑ aggregate demand of g+s
⬧ ↑ gvrn spending needs to be financed by ↑ taxes / borrowing / money stock = ↑ inflation
⬧ ↑ exports through maintaining realistic exchange rate & keeping domestic production in
check
❖ ↑ labour intensity of production
❖ Special employment programmes help small businesses & informal sector (expensive)
❖ Tax incentives
❖ Wage subsidies (but employers may keep subsidies for themselves)
❖ ↓ relative price of labour (wage discipline)
❖ Amend labour legislation to make it less strict
Unemployment, inequality, poverty
Inequality
❖ Difference in size, degree, circumstance
❖ Uneven distribution of earnings across population
❖ Greatest contributor to income inequality = unemployment
❖ Higher inequality = less equal distribution
Poverty
❖ State when person / community lacks financial resources & essentials for minimum standard
of living
❖ State when basic human needs can’t be met (clean water, healthy food, proper housing)
Will the intro of min wages ↓ inequality & poverty in SA?
❖ Could help but only if set at right level & properly enforced
⬧ Too low = ineffective in improving living standards
⬧ Too high = risk of harming employment & causing poor compliance
❖ Brazil’s success in ↓ inequality included ↑ minimum wages + quality education & social
assistance
❖ Thus, must be combined with broader policies
Solution = Basic income grant
❖ Unconditionally paid to population
❖ Social grant paid to everyone, not only particular population group