Unemployment, in the developed country context, is defined in two ways, one narrowly and the other broadly.
The narrow definition is based on claimant count. This means the unemployed are only those who are registered for unemployment benefit or job seeker’s allowance.
The broader definition, as given by the ILO, points out that the unemployed are all those people of working age who do not have a job but who are available to work and are actively seeking a job, or waiting to start one.
Types and Causes of Unemployment
Classical or disequilibrium unemployment comes into existence when trade unions drive the real wages to be above the equilibrium wage rates.
Seasonal unemployment variation in unemployment from season to season in some activities/areas. For example, there is much more work in Summer than in Winter.
Frictional unemployment refers to all those people who are between jobs due to voluntary quits or company redundancies. This is a short-term phenomenon.
Cyclical unemployment refers to variation in unemployment levels in the four phases of the business cycle, namely, upturn, boom, downturn and slump.
Structural unemployment is a long-term unemployment and comes about due to the changing structure of the economy in terms of movement from manufacturing to services and within manufacturing, due to declining and rising industries.
Undesirability of Unemployment
Unemployment is undesirable for both society and businesses.
For society, it is undesirable because (a) unemployment means output foregone and so GDP level and its rate of growth can be badly affected; (b) it results in burden on central government finances in terms of social security benefits out of tax revenue or borrowing; (c) it results in loss of potential tax revenues; and (d) it is demoralising and can result in increasing crime and social unrest.
For businesses, it is undesirable because (a) it results in loss of potential customers and hence revenue; and (b) businesses can fail due to lack of demand due to high unemployment.
Policies to Reduce Unemployment
The government can use demand sided or supply sided policies to reduce unemployment.
On the demand side, the government can increase business activity by increasing the aggregate demand in the system through monetary policy of reducing interest rates or through fiscal policy in terms of stepping up government expenditures by means of deficit financing. On the supply side, the government can increase the business activity and consequently the aggregate supply in the economy by making input and output markets flexible and competitive and by cutting taxes on households and businesses so as to induce more work.
The employment problem in developing countries is different from that in the developed countries. The labour force in the developed countries consists of the employed and unemployed. The employed constitute 80 to 90 per cent of the labour force. In the developed countries the employed constitute only 10 to 20 per cent of the population of working age, and the unemployed (involuntary and voluntary) constitute only 10 to 20 per cent of the people of working age. And so what about the rest of 60 to 80 per cent of the population of working age, which is present in the rural sector and the urban informal sector? They are neither employed nor unemployed like in the developed country context. They do something to survive, largely on a self-employed basis, but what they do is unsatisfactory and they are deemed as equivalent to unemployed as follows:
- Seasonal unemployment, especially in the agricultural sector
- Disguised underemployment, which refers to a situation where a small family farm supports 5 while there is sufficient work for only 3 during the whole year. It is also said to be prevalent in the government and public sector enterprises in terms of overmanning.
- Visible underemployment refers to all those who are willing to work more but get less than full time work.
- Discouraged workers: these have stopped actively searching for jobs because they could not get them for a long time.
- The working poor: These are unproductive workers in the sense of not able to earn even a poverty line level of income despite working hard and long due to lack of complementary factors like capital, information and knowledge, skills etc.
- The impaired: These are people working with low intensity due to nutritional deficiencies and health problems.
- People in hidden, non-employment activities in households and educational institutions who do not compete for the available jobs.
In the developing countries, the demand sided policies in the formal sector, like stepping investment rates, giving wage subsidies to employers, etc. are counter productive because they induce greater and greater rural-urban migration thereby resulting in more and more open unemployment as also visible underemployment and other unsatisfactory forms equivalent to unemployment. The only way to stop the rural-urban migration is to improve the living standards of rural people through productivity enhancing integrated rural development programmes.