Unemployment and Its roots

Chiranjibi Neupane

Nowadays, the pandemic of Covid19 makes everyone alert regards the word "Unemployment". Basically it would be grateful when we could able to understand this topic in inclusive manner. Here I would like to pick this unemployment topic because this is hot topic for this time. Here we go with in-depth information and knowledge about the unemployment.

Summary of Unemployment types

• Demand Deficient Unemployment – Lack of aggregate demand in the economy (e.g. unemployment rises in a recession)
• Structural Unemployment – workers lack necessary skills or suffer from geographical immobility
• Real Wage Unemployment – wages above equilibrium, e.g. due to high national minimum wage.
• Frictional unemployment – workers in between jobs
• Voluntary Unemployment. – workers prefer not to work.

Demand Deficient Unemployment

Demand deficient unemployment occurs in a recession or period of very low growth. If there is insufficient aggregate demand, firms will cut back on output. If they cut back on output, then they will employ fewer workers. Firms will either cut back on recruitment or lay off workers. The deeper the recession, the more demand deficient unemployment there will be. This is often the biggest cause of unemployment, especially in a downturn. This is also known as cyclical unemployment – referring to how unemployment increases during an economic downturn.

Diagram showing fall in AD and lower output (Y1 to Y2)- which leads to higher unemployment

Structural Unemployment

This is unemployment due to inefficiencies in the labor market. It may occur due to a mismatch of skills or geographical location. For example, structural unemployment could be due to:

• Occupational immobility. There may be skilled jobs available, but many workers may not have the relevant skills. Sometimes firms can struggle to recruit during periods of high unemployment. This is due to occupational immobility.
• Geographical immobility. Jobs may be available in London, but, unemployed workers may not be able to move there due to difficulties in getting housing etc..
• Technological change. If an economy goes through technological change, some industries will decline. This is likely to lead to structural unemployment. For example, new technology (nuclear power) could make coal mines close down leaving many coal miners unemployed.

Real Wage Unemployment / Classical Unemployment

This occurs when wages are artificially kept above the equilibrium. For example, powerful trades unions or minimum wages could lead to wages above the equilibrium leading to an excess supply of labor (this assumes labor markets are competitive) In the above example an artificial wage of W2 keeps wages above the equilibrium level of W1. This leads to a fall in demand for labor (Q2). Supply also rises to Q3.

(Keynesian analysis suggests a fall in AD can lead to real wage unemployment because wages are sticky downwards. After a fall in demand equilibrium wages should fall – but they don’t so unemployment rises.)

Frictional unemployment :This occurs when workers are in between jobs e.g. school leavers take time to find work. There is always likely to be some frictional unemployment in an economy as people take time to find a job suited to their skills.

Voluntary Unemployment :This occurs when workers choose not to take a job at the going wage rate. For example, if benefits offer a similar take-home pay to (wage – tax), the unemployed may feel there is no incentive to take a job. Reasons for voluntary unemployment may include

• Generous unemployment benefits, which make accepting a job less attractive.
• High marginal tax rates, which reduce effective take-home pay.
• Unemployed hoping to find a job more suited to skills/qualifications.
• Some jobs are seen as ‘demeaning’ or too tedious. For example, fruit picking/security guard.

Other Concepts about Unemployment

Seasonal Unemployment. In certain regions, unemployment may be seasonal e.g. unemployment rises in winter when there are no tourists.

Disguised / Hidden unemployment. Often unemployment statistics don’t include certain types of workers. For example, those put on incapacity benefit may not be counted as unemployed, but, it may really be a type of structural unemployment. (See: Disguised Unemployment)

Natural Rate of Unemployment. This is the level of unemployment when the labor market is in equilibrium. It is the difference between the labor force and those willing and able to accept a job at going wage rate. It encompasses the different supply side unemployment like frictional and structural unemployment. ( See: Natural Rate of Unemployment)

Under-employment. This is when people have a job, but it is part-time or temporary. They would like to work full time, but only have a part-time income.

Full-employment – when the economy is at a state of close to full capacity. At this level, the only unemployment will be the frictional unemployment of people in between work.

How do governments measure unemployment ? 

Unemployment officially refers to all the people in an economy who are looking for work but are unable to find it. It does not mean the same thing as not having a job. Governments measure unemployment by counting the people who are looking for work.1 People who are, for example, retired, in school, looking after children, or sailing around the world wouldn’t count as unemployed. A lot of unemployment data is generated by phone surveys, where people get asked simple questions like “Did you do paid work this week, and if not, are you looking for paid work this week?” People’s answers will vary based on what they understand to be ‘work’, so this kind of self-reporting isn’t always fully reliable, but it’s one of the most used ways of assessing unemployment levels in a country.

Dull as it sounds, the unemployment rate is actually a pretty powerful political tool. The level of unemployment is often used as an indicator of how well economies are functioning. Politicians may want to try and reduce unemployment, as it makes a good headline and makes it look like a country is doing better. However, as with most statistics you have to be careful what is really going on. A decrease in the unemployment rate does not necessarily mean that an economy is doing better, or that people are happier.2 It often depends on what kind of jobs are being offered, how well paid they are and how secure workers feel.

Then there’s the issue of underemployment, which measures how well people’s skills are matched to jobs.3 You can be underemployed for a number of reasons; you might have the experience to do a high-skilled job, like a lawyer, but actually only be working as a shop assistant. Or you might not be working for as many hours as you want to be. So even if the unemployment rate might be going down, the underemployment rate can be going up, indicating that satisfaction in the workplace is going down.

In addition to this , We have to be followed the real and gist data of unemployment worldwide .To create wider opportunities and growth for unemployed population post Covid world's policies and procedures must reachable and reliable for global communities. With new normal there should have been more inclusive and humanitarian efforts around the globe. Until and unless we could compile the real data of unemployment from each and every pole of the planet earth , then we wont able to overcome this ever-growing problem from the root . We must learn from this Covid pandemic that without having proper coordination and collaboration major issues couldn't able to dealt with. Now, modern world is seeking the data driven solution and prompt decisions from the authorities and global political leader regard this problem solving approach of unemployment. Hope global leaders will be coming up with new ideas and plan through various roadmap to eradicate major unemployment situation across the win win situation of labor force and Capital force.

References

1.How the Government Measures Unemployment, Bureau of Labor Statistics, 2015

https://www.bls.gov/cps/cps_htgm.htm

2 .Unemployment, Investopedia, 2016

https://www.investopedia.com/terms/u/unemployment.asp

3.Unemployment down but underemployment up, Jacob Himmelweit, 2013

https://www.neweconomics.org/.../latest-labour-market...

https://www.economicshelp.org/blog/2247/unemployment/definition-of-unemployment/

Source : our economy (ecnmy.com)