Unemployment

• Unemployment is the state where people are willing to work but cannot find employment.
• The unemployment rate measures the percentage of the labour force that is unemployed.
• Frictional unemployment occurs when there is a mismatch between job vacancies and workers' skills, or when workers move from one area to another.
• Structural Unemployment


  Occurs when there is a change in the structure of an industry, resulting in workers becoming unemployed
• Causes of Structural Unemployment

  • Technological Change
  • Shifts in Demand
  • Obsolete Products
• Technological Change


  • Improvements in technology enabling capital to replace labour
  • Mismatch between existing skills base of labour force and needs of labour market
  • Capital stock cannot efficiently absorb existing labour force
• Shifts in Demand


  • Falling demand for an export, forcing firms to reduce output and employ less labour
• Obsolete Products


  • Technological progress making products of an industry obsolete, causing demand to fall and resulting in structural unemployment
• Classical or Real Wage Unemployment

  Unemployment exists due to excessively high real wage level, rendering market mechanism unable to clear
• Trade unions succeed in raising wage rate above equilibrium level, causing supply of labour to exceed demand for labour</b>
• Keynesian, or Demand Deficient or Cyclical Unemployment


  Major cause is insufficient level of aggregate demand, leading to firms reducing output and employment
• Trade or Business Cycle

  Tendency of national income to fluctuate upwards and downwards in a sequential fashion
• Labour Market Imperfections


  • Imperfect knowledge and barriers to entry contributing to unemployment
• Labour Force Participation Rate

  Fraction of population that is in the labour force, positively related to unemployment rates
• Policies to Reduce Unemployment

  • Fiscal Policy
  • Monetary Policy
  • Wage Subsidies
  • Retraining Programmes
  • Investment Tax Credit
  • Employment Tax Credit
  • Government Employment Programmes and Projects
  • Reducing Market Imperfections
  • Regulations and Agreements
• Fiscal Policy


  • Governments can use fiscal tools to manipulate aggregate demand, e.g. increase government spending or reduce taxes
  • Reflationary fiscal policy reduces unemployment through multiplier effect and direct job creation
• Monetary Policy


  • Expansionary monetary policy increases spending in economy, boosting output and employment
• Wage Subsidies


  Employment generation programme where government provides funding to employers to encourage them to increase employment
• Retraining Programmes


  Augment skills base of labour force, reducing structural unemployment by making labour more employable
• Investment Tax Credit


  Facility allowing firms to reduce tax burden by investing in physical capital, increasing willingness to hire more labour
• Employment Tax Credit


  Fiscal facility providing tax credit and reduction in tax burden to firms, incentivising them to increase employment
• Government Employment Programmes and Projects

  • Provide unemployed with tools to obtain employment, e.g. teaching skills, work-based learning, job centres
  • Government projects creating jobs in areas with unemployment
• Reducing Market Imperfections


  • Improving information dissemination and access, and enhancing skills base, to reduce frictional and structural unemployment
• Regulations and Agreements


  Avoiding demands to increase wage rate above equilibrium, to reduce real-wage unemployment
• There are two types of unemployment - frictional and structural
• Structural unemployment arises due to changes in technology, globalisation, automation, and other factors leading to structural change.