What is meant by unemployment and what are its different types? Essay

Unemployment cannot be simply defined as the number of people without jobs. Such a definition would include children who are too young to work, pensioners and housewives and others who choose not to take up paid up employment. Since these groups pose no serious economic problems. Unemployment in a country refers to all those people who are willing to work, but are unable to find a job. Moreover unemployment is a very complex phenomenon. It is rather easy to notice but difficult to define. Broadly, unemployment may mean lack of employment. Thus, anybody who fails to work may be considered as being unoccupied and therefore unemployed for the concerned period. Ordinarily, the term unemployment denotes a condition of joblessness. In the early 1980’s worldwide unemployment rose to very high levels, higher than during some of the year 1930s although not as high as the peak unemployment rates of that earlier ‘Great Depression’ whereby the overall level of unemployment as well as the structure of unemployment was extremely varied. (References Wikipedia.com) The measurement of unemployment is very important for any economy. Unemployment is one of the most serious economic problems and it is important for the government to know the level and the rate so that it can take appropriate corrective measures. Formula for calculating rate of unemployment: Unemployment Rate = Total number unemployed x 100 Labour Force Labour Force = Number of people employed + Number of people unemployed Unemployment rate in Mauritius The graph above shows the historical trend of unemployment. In year 2004 unemployment rate was high 10.8% then it decreased from 2005. As from 2008 to 2011 we can observe that the unemployment rate was stabilized at around 7%. Which shows good reforms campaign by the government despite the economic crisis which affected Mauritius in 2008. Types of Unemployment: There is a lot of confusion and disagreement regarding the meaning and nature of unemployment. So, to comprehend the problem in a proper way and suggest remedies, we may discuss the various types of unemployment. Unemployment thus may be discussed broadly under several heads: Seasonal unemployment Frictional unemployment Structural unemployment Cyclical unemployment Technological unemployment Disguised unemployment Seasonal Unemployment: According to Beveridge, â€Å"Seasonal unemployment means the unemployment arising in particular industries through seasonal variations in their activity brought about by climatic changes.† Seasonal unemployment occurs due to lack of productive work during certain periods of the year. Certain industries or occupations are seasonal in character.Take the case of ice-cream production, which has a peak demand during the summer. In the winter season, with a fall in the demand for ice-cream, the demand for labour engaged in its production also falls, and seasonal unemployment takes place.A sugar mill may be closed for a number of months in a year, as the supply of sugarcane stops. Seasonal unemployment may also be witnessed in the case of traditional and underdeveloped agriculture. For instance, in India, the cultivators tilling the unirrigated lands very often remain idle for 120 to 150 days in a year. Seasonal unemployment takes place mainly due to the lack of suitable alternative employment opportunities in the slack season. Such unemployment usually does not lead to serious distress, as the wages in seasonal occupations are comparatively higher, which provides for the period of unemployment. Solutions to Seasonal Unemployment Such unemployment can be reduced by encouraging people to take different jobs in the â€Å"off season†. Reduced unemployment benefits and improving the flow of information may also be beneficial. 2. Frictional Unemployment The term frictional unemployment refers to the unemployment that is associated with the normal turnover of labour. People leave jobs for many reasons and they take time to find new jobs; old persons leave the labour force and young person enter it, for example, school leavers but often new workers do not fill the jobs vacated by those who leave. Inevitably all of this movement takes time and give rise to a pool of persons who are frictionally unemployed while in the course of finding new jobs. This unemployment would occur even if the occupational, industrial and regional structure of unemployment were unchanging. When the welfare payments are more attractive than the work itself, some of the unemployed believe that the tax and the benefit system will reduce significantly the net increase in income from taking paid work and choose to be on the welfare instead. Causes of frictional unemployment: The relationship between workers and employers tends to be heterogeneous in some or the other way. This mismatch can lead to frictional unemployment, which makes it closely related to structural unemployment. Fresh graduates looking for a good job, but are not able to get it right away because of certain demands by the employers in terms of skills and experience, therefore resulting in frictional unemployment. Factors related to preference, work environment, skills, remuneration, location, work timings, etc., always rise a sense of dissatisfaction in the workers or employers. This is one of the main causes of frictional unemployment. Solutions to frictional unemployment The government can make the information about the labour market more readily available. Schools can provide more guidance about the jobs in the market and invite professionals to speak about their jobs so as to provide more information to the school leavers. The government can create some part time jobs as a solution to the unemployment. Proper educational advice to college students in terms of the job demands and skills required to get job faster. (Reference tutor2u.com) 3. Structural Unemployment Structural unemployment takes place because of a change or defect in the economic structure of a country. It occurs as a result of changes in demand and supply conditions for certain categories of labour. According to Beveridge, structural unemployment means â€Å"the unemployment arising in particular industries or localities through a change of demand so’ great that it may be regarded as affecting the main economic structure of a country.† There are some distinct similarities between frictional and structural unemployment, as both arise due to maladjustment between the demand for and supply of labour. However, there are certain important differences between the two. Frictional unemployment is of a shorter duration and takes place because of temporary factors. Hence although the demand for labour may decline in certain industries this fall in demand is counterbalanced by a rise in demand in some other industries. In case of structural unemployment, the deficiency in demand for labour is more permanent, extensive and deep rooted. The barriers to mobility are rather more formidable. According to Thomas D. Simpson structural unemployment is more heavily concentrated among certain employment and demographic groups. It affects a significant number of workers in certain occupations, industries, racial, and age groups, whereas frictional unemployment tends to occur more widely. Secondly, structural unemployment is less voluntary than frictional unemployment. Solutions to Structural Unemployment: The government can retrain the workers to meet the demand for a new set of skills. For example, farmers should learn the new techniques of production using automation rather than rely only on the traditional method of farming. Workers should improve their skills and reduce occupational immobility. Policies should provide the unemployed with skills they need in order to be re-deployed. In this era of information technology, workers should have IT knowledge to remain employed. Education and training opportunities should be made available to the workers so that they can get trained and improve their chances of taking on new jobs that are available in the economy. 4 Cyclical/ Keynesians unemployment/ deficient-demand unemployment Cyclical unemployment happens to be the most common type of unemployment in an industrially developed capitalist economy. According to the classical economists, in the long run there would be a full employment equilibrium. But in reality we find that a capitalist economy is characterised by alternate periods of prosperity and depression, rising economic activity and employment and sluggish business conditions and falling employment opportunities. Cyclical unemployment is also popularly known as Keynesian unemployment, following Keynes. Keynes has culled this type of unemployment as involuntary unemployment. Lerner has termed this unemployment during an economic depression as deflationary unemployment. Moreover, cyclical unemployment is when workers lose their jobs during downturns in the business cycle. It generally happens when the economy contracts, as measured by Gross Domestic Product (GDP). If the economy contracts for two quarters or more, then the economy is in a recession. Cyclical unemployment is usually the cause of high unemployment, when rates quickly grow to 8% or even 10% of the labor force. It’s known as cyclical because, when the economy re-enters the expansion phase of the business cycle, the unemployed will get rehired. Cyclical unemployment is temporary — although it could last anywhere from 18 months (the typical time frame of a recession) to ten years (during a depression). (Reference, Wikipedia) Cyclical unemployment through a diagram As we can see in the AD/AS diagram, the fall in AD to AD1 will result in a fall in the Real output (Y1).This will force the firms to reduce their output and hence reduce their workforce from ADL to ADL1. However, due to ‘wage stickiness’ it is less likely that real wages will fall (as seen in the labour diagram). Therefore, the wages instead of coming down to W1 will remain at We. This will create a surplus situation where the aggregate demand for labour will be at ‘a’ and the aggregate supply of labour will be ‘b’. (reference tutor4u.com) 5. Technological Unemployment. Technological unemployment takes place because of rapid technological improvements. Introduction of improved machinery and labour saving know-how has a tendency to displace labour force. Myrdal cites the example of technological unemployment in the American agricultural sector in the fifties, when due to the introduction of labour-saving techniques, the agricultural workers as part of the total civilian labour force declined from 12’6 to 8’5 per cent. Introduction of improved technology in production will lower the capital-output ratio and the labour-output ratio. This will increase the productivity of capital and labour, causing technological unemployment. Probably due to this reason, even now introduction of electronic computers has always been viewed with suspicion by the workers. 6. Disguised Unemployment. As the word suggests, disguised unemployment refers to a situation when a person is apparently employed, but in effect unemployed. !t is a phenomenon of concealed unemployment, not visible to the open eyes. Here it is not possible to identify as to who are unemployed, as all â€Å"appear to be working.† As Nurkse has remarked, â€Å"In an overpopulated peasant economy, we cannot point to any person and say he is unemployed in disguise. The people may all be occupied and no one may consider himself idle.† The concept of disguised unemployment was originally conceived by Mrs. Joan Robinson. Her concept of disguised unemployment is more applicable to the advanced developed countries. According to her, â€Å"a decline in demand for the product of the general run of industries leads to a diversification of labour from occupations in which productivity is higher, to others where it is lower. The cause of this diversion, a decline in effective demand, is exactly the same as the cause of unemployment in the ordinary sense and it is natural to describe the adoption occupations by dismissed workers as disguised unemployment.† Conclusion Unemployment is something which is of great concern to individuals as well as the economy. It is surely something to worry about as it wastes economic resources and causes human suffering such as poverty, famine, depression and so on. Also experiences of unemployment are becoming much longer in duration and are increasing significantly. Hence alleviation of unemployment is a prime aim of the government in order to boost the economy. How could you measure unemployment and discuss the problem associated with each measure? Most people understand intuitively that being unemployed means not having a job. That said, it’s important to understand more precisely how unemployment is measured in order to properly interpret and make sense of the numbers. Basically there are two types of method to measure unemployment: I. Claimant count method II. The Labour Force Survey Claimant Count Method This method calculates unemployment by measuring the number of people receiving benefits (Job Seekers allowance). If the rate is up, it indicates a lack of expansion within the labor market, while it indicates economic expansion and could spark inflationary pressures if the rate is down. Generally, a decrease of the figure is seen as positive, while an increase is seen as negative. Source: www.fxwords.com Graph 2 shows: claimant count of United Kingdom An example of a claimant count chart can be illustrated above where we can analyses a decreasing trend during the years of people claiming for unemployment benefits thus indicating beneficial economic conditions, ceteris paribus. The Labour Force Survey A labour force survey is an inquiry directed to households designed to obtain information on the labour market and related issues by means of personal interviews. The information collected on the labour market can then be used to develop, manage, evaluate and report on labour market policies. According to the Mauritius Labour Force, Employment and Unemployment survey the following result were obtained: Second quarter 2012 1. Employment of Mauritians is estimated at 548,300 at the second quarter of 2012 compared to 535,500 at the first quarter of 2012 and 531,400 at the second quarter of 2011. 2. The unemployment rate is estimated at 8.2% for the second quarter of 2012 compared to 8.0% at both the first quarter of 2012 and the second quarter of 2011. 3. The main characteristics of the unemployed at the second quarter of 2012 were: (i) The 48,900 unemployed comprised 20,100 males (41%) and 28,800 females (59%). (ii) Around 22,300 (46%) of them were aged below 25 years. (iii) About 55% of the unemployed were single. Among males, the majority (80%) was single while among females, the majority (61%) was ever married. (iv) Some 7,800 or 16% had not reached the Certificate of Primary Education (CPE) level or equivalent and a further 21,900 (45%) did not have the Cambridge School Certificate (SC) or equivalent. (v) 11,300 (23%) had been looking for work for more than one year. (vi) 18,900 (39%) were looking for a job for the first time. Thus these result could be use to devise policies by the government for example whether to invest more or not, in order to combat unemployment and other economic turmoil. Reference: gov.mu Problem associated with claimant count: The criteria to be eligible for benefits often changes, usually this has been to reduce the claimant count. This makes it difficult to compare over time. The claimant count excludes: People over pension age, who will typically claim pensions rather than Job Seekers allowance People under 18, (with a few exceptions) People in full time education, who may still be classed as unemployed. People not eligible for contribution based JSA. To claim the contributions based JSA they need to have paid at least two years of NI contributions. Also, their level of savings or their partner’s income may be too high to be eligible. Any one on a government training schemes Married women looking to return to work Those looking for part time work and not full time work Some people may claim benefits whilst still working in the â€Å"black market† i.e. claim JSA fraudulently. Some people may be able to work upto 16 hours a week and still legally claim JSA (JSA- Job Seekers allowance) Problem associated with Labour force survey It could be subject to sampling errors and may not be truly representative. The sample chosen may be from just few regions of the country, instead of the whole population/every region. This will generate bias result thus it will be wrongly interpreted leading to inefficient policies to combat unemployment. It is time consuming and costly, basically conducting this survey may take months or years depending on the size of the economy and the number of population. In the same vein a lot of paper work is needed for this survey, more officers must be hired to conduct private interview. Hence there is no perfect method to measure unemployment accurately, as all measures have theirs pros and cons. For example claimant count consider various criteria to be eligible for the allowance whereas Labour Force Survey may not be representative. The method to measure unemployment also depend on the type of economy Discuss the effect of unemployment on an economy? Unemployment is universally recognized as a bad thing. It brings a lot of adverse effect to an economy. The consequences are as follows: 1. The consequences to the individual Increase health risk Unemployment increases susceptibility to malnutrition, illness, mental stress, and loss of self-esteem, leading to depression. Not everyone suffers equally from unemployment, highly conscientious people suffers more than twice. For example fresh graduates or people holding a degree but is unable to find a job are the most affected. Basically the table below shows the unemployment rate of people having a tertiary education in Mauritius. The Unemployment with tertiary education (% of total unemployment) in Mauritius was last reported at 7.90 in 2010, according to a World Bank report published in 2012. Graph 3 show: Unemployment with tertiary education (% of total unemployment) in Mauritius Source: indexmundi.com /cso Loss of income Unemployment normally results in a loss of income. The majority of the unemployed experience a decline in their living standards and are worse off out of work. This leads to a decline in spending power and the rise of falling into debt problems. The unemployed for example may find it difficult to keep up with their mortgage repayments. 2. The Consequences to the business Less overall spending When people are unemployed in large numbers, it hurts the rest of the economy, creating a cyclical problem. When people have less money to spend because of unemployment, other companies suffer from less consumer demand. Then, when companies suffer because of lost business, they might in turn be forced to make layoffs of their own, making the unemployment rate rise and overall spending drop even more. The cyclical effect of unemployment is the reason for government-issued economic stimulus packages to help businesses in difficulty. Logic suggests that when people have more money, they spend it, thereby stimulating the economy and simulating job growth. Social problems Business may be impacted by social problems associated with high unemployment (e.g. rising crime). If the market of a business is situated in a place where the crime rate is high and where there is high unemployment rate, it can have adverse effect on the business. Demand may fall due to the negative image of the areas, potential consumers may prefer to purchase their goods and services at a more secure place for personal security thus if demand fall, the firm’s revenue will decrease which can lead to bankruptcy consequently more people will be unemployment. Inferior goods Demand for inferior goods (lower price, quality) may increase, the demand for luxury goods will decrease. Thus business engage in production of inferior good will gain and those in luxury good will lose. Graph 1: demand for luxury goods under unemployment Graph 2: demand for inferior goods under unemployment As shown above, in graph 1 the demand of luxury goods has decrease from D to D1 due to unemployment, lack of potential buyers. Quantity supply has decreased from Q to Q1 leading to a decrease in price from P to P1. Area P,T,Z,P1 is the loss incurred by the firm operating under luxury goods production. On the contrary graph 2 shows the increase in demand for inferior goods from D to D1 due to unemployment. People will prefer to buy cheap goods due to lack of income. Quantity supply has increase from S to S1 causing price to rise in the long run from P to P1. Area P1,T,Z,P is the profit incurred by the firm operating under inferior goods production due to a rise in demand. 3. The Consequences for the government Fiscal costs High unemployment has an impact on government expenditure, taxation. An increase in unemployment results in higher benefit payments and lower tax revenues. When individuals are unemployed, not only do they receive benefits but also pay no income tax. As they are spending less they contribute less to the government in indirect taxes, the government will have to scale back plans for public spending on public and merit goods. Government Borrowing Spending along with the fall in tax revenues due to unemployment may result in a higher government borrowing requirement (known as a public sector net cash requirement). The Central government debt; total (current LCU) in Mauritius was last reported at 113289300000 in 2010, according to a World Bank report published in 2012. Graph 4 shows: The government of Mauritius debts 4. The Consequences for the economy as a whole Lost output of goods and services Unemployment causes a waste of scarce economic resources and reduces the long run growth potential of the economy. An economy with high unemployment is producing within its production possibility frontier. The hours that the unemployed do not work can never be recovered. Negative multiplier effects The closure of a local factory with the loss of hundreds of jobs can have a large negative multiplier effect on both the local and regional economy. One person’s spending is another’s income so to lose well-paid jobs can lead to a drop in demand for local services, downward pressure on house prices and ‘second-round employment effects’ for businesses supplying the factor or plant that closed down. Hence unemployment affects many aspects in an economy such as social, individual, economical and so on. Unemployment affects the economy in ways that most people do not visually see. Some effects are avoidable and some are inevitable. Evaluate the impact of the different policy measures adopted by the government of Mauritius in order to control unemployment? A range of government policies are available for the Government of Mauritius wanting to reduce the scale of unemployment in the economy. The Government can do many things to try and influence the level of employment. However some policies the government use can conflict with other policies for example if they were to spend more on education and training (so increasing the skills of workers) they would have to spend less on other things such as health-care. Basically the situation of unemployment in Mauritius is alarming, here is a chart to illustrate the seriousness of the issue: ChChGraph 5 : shows the Mauritius unemployed persons Unemployed Persons in Mauritius increased to 44000 Persons in February of 2012 from 43800 Persons in November of 2011, according to a report released by the Central Statistics Office, Mauritius. Historically, from 2004 until 2012, Mauritius Unemployed Persons averaged 45757.6 Persons reaching an all time high of 56100.0 Persons in May of 2005 and a record low of 35000.0 Persons in November of 2008. Source:indexmundi.com Fiscal measure: The ‘Additional Stimulus Package’ was presented in December 2008 to support enterprises on a short-term basis. The package introduced a ‘Mechanism for Transitional Support to the Private Sector’, which was eventually replaced by ‘the Economic Restructuring and Competitiveness Programme’ in 2010’ under the â€Å"Facing the Euro Zone Crisis & Restructuring for Long Term Resilience’ Memorandum presented in August 2010. This programme also included SURE (Support Unit for Re-Employment of Employees), and plans for restructuring the tourism industry, and for supporting the sugar industry. In 2012, Rs 7.3 Billion has been committed to a National Resilience Fund to help businesses better face the economic downturn. Thus this would secure current employees job and would create new jobs. During the financial crisis in the 2008, The government of Mauritius injected Rs6 billion in the economy for education, training, food security and This massive investment has been possible due to the fruit of past reforms in terms of fiscal benefits. In addition to these policy options, the Mauritian government introduced an Additional Stimulus Package in December 2008. In effect, Rs4 billion was earmarked to save employment. Much effort was made to sustain, modernise and ease the access to finance of local enterprises to help them improve their productivity and competitiveness. In year 2011, 5000 new Small & Medium Enterprises were created and were awarded grants by the government compared to 7,600 in Reunion Island in the same year. Thus creating jobs. The government proposed a tax rebate on all earnings for new entrepreneurs in the first two years, certain taxes have been suspended over two years, in tourism, construction and other sectors. Consequently, there will be a boost in their revenue and it may encourage the creation of new jobs. Source: Le Matinal(newspaper) Supply side policies (reduce frictional and structural unemployment) To educate is to empower. The government proposed more funds allocated to SMEs so that they can provide required training to their employees. The National Resiliency Fund was created last year by the Minister of Finance to encourage ‘the youth employment. The government in his last budget proposed that all secondary schools have a qualified career advisor and propose that all schools promote extra-curricular activities such as the ‘Young Enterprise Awards’. There should also be qualified staff in each state school, to help channel underperforming students in their right vocation. The Minister of Finance promised Rs 500,000 to schools around the island. The more skillful you are the more secure you are to get a job. Reflating Aggregate Demand The government succeeded in attracting foreign direct investment in Mauritius as it rose by 19.8 percent in the first six months of 2012 to 4.077 billion Mauritius rupees ($133.89 million) from 3.401 billion a year ago, according to the central bank thus contributing in enhancing the real national output consequently increasing the demand for labour. Foreign direct investment has risen causing aggregate demand to shift from AD1 to AD2 consequently the demand for labour to shift from LD1 to LD2 causing an obvious decrease in unemployment. Basically in assessing the effectiveness of these measures we just have to compare the working population to previous years: Graph 6 shows: Employed persons in Mauritius Economic policies till 2008 to 2012 had a positive impact on the labour market as there has been a rise in labour force which shows the effectiveness of these policies adopted by the government of Mauritius. Hence unemployment do not have an exact definition, it do not have a measure to calculate it exactly, its effects are vast and there are various measures to combat it. Unemployment is inevitable in an economy. The economy must see unemployment as a challenge, opportunity and tackle the issue with intelligence, not as a major economic turmoil, or be afraid of.