The Causes of Unemployment
According to the Keynesian economic theory, unemployment results from insufficient effective demand for goods and services in an economy. Some believe that structural problems and inefficiencies in the labor market cause unemployment. Others believe that regulations like minimum wage laws imposed on the labor market lead to unemployment. Some thinkers believe that unemployment is a result of the law of demand and supply not being applied in case of employing people. A decline in the demand for products or services of a company does not result in the decrease in wages of the company employees. And this may strike an imbalance in the economy. The causes of unemployment need to be analyzed carefully to find a solution to this calamity called unemployment, which eclipses life.
Frictional Unemployment
This is voluntary or transitional unemployment due to people moving between jobs: For example, newly redundant workers, or workers entering the labour market for the first time such as graduates and school-leavers take time to find jobs at wage rates they are prepared to accept. Many of the frictionally unemployed are out of work for a short time whilst engaged in job search.
Imperfect information in the labour market may lead to frictional unemployment if the jobless are unaware of the available jobs. Often this information failure is localised – for few workers scan the vacancies available across the whole economy, they tend to restrict their search for work to a local area.
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Incentives to look for work are also important! Some people may opt not to accept jobs at prevailing market wage rates if they believe the income tax and benefit system will reduce the net increase in income people can expect from taking paid work. This problem is referred to as the unemployment trap.
Structural Unemployment
Structural unemployment occurs when people are made jobless because of ‘capital-labour substitution’ which reduces the demand for labour in an industry, or when there is a long run decline in demand which causes redundancies and worker lay-offs. Structural unemployment exists where there is a ‘mismatch’ between their skills and the requirements of the new job opportunities.
Skills are required to cope with structural changes in output and employment
Structural change is a constant feature of a flexible economy. As some sectors decline, so other sectors – requiring different skills – will expand. The pace of technological change and global integration will increase demand for a more highly skilled workforce with the ability to adapt to changing technologies and shifting product demand.
Source: HM Treasury, the Benefits of a Flexible Economy, April 2004
Many of the unemployed from coal, steel and heavy engineering have found it difficult to gain re-employment without re-training. This problem is one of the occupational immobility of labour. The long-term decline in industrial employment has continued (a process known as deindustrialisation) and there has been a huge shift into service-based employment, especially in banking, finance and insurance, other business services and distribution, hotels and restaurants.
The labour market has very few job creation possibilities whereas new entrants to the
Workforces continue to pour in, driven by strong demographic growth. The types of work
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The increasing unemployment rate among the graduates in Malaysia is a worrying trend. For many years, the issue cropped up again and again, made the news headlines, and even hit the parliament. The days have passed when a degree scroll can become your automatic passport to employment. Higher education is no longer a symbol of career success. This may sound painful for graduates but let’s face it. ...
Vary widely from country to country. However, in Burkina Faso, for example, where data
on employment distribution by branch of activity are available, over 84% of jobs are
provided by agriculture, but these are generally in the form of self-employment in a
family establishment (INSD, 2003).
In rural areas, whole families engage in subsistence
farming without any technical or financial resources that could help them increase their
productivity significantly. As a result, jobs created in agriculture are limited to a few
salary jobs in state structures such as government-owned agricultural concerns (ex. seed
centres), or in a few rare large-scale agricultural farms. In the majority of West African
countries, a great number of salary workers are employed by the State, local authorities
and para-public enterprises. The numbers of other salary workers, employed by the private
sector, are fewer or greater depending on the country’s level of industrialisation and the
importance of the tertiary sector.
39. In the WAEMU countries as a whole, the public administration provides 7.5% of jobs
while the private sector employs around 15% of economically active persons (INSEE et
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al., 2005).
The remaining workers, who account for the largest number of jobs, consist of
the self-employed, often poorly paid, or those in unpaid family employment. The
informal private sector (self-employment and underemployment) remains the largest
employer with 76.4% of the workforce. This configuration varies from country to country,
but the trend is fundamentally the same: employment distribution in the Capital Cities of
WAEMU is dominated by the informal sector, which provides between 71.1% (the case of
Niamey) and 80.3% (the case of Cotonou) of employment. The situation is probably
similar in the other countries in the sub-region.
40. The entities in which self-employed people work are generally referred to as « micro
enterprises » and their operators are mostly young people. For the most part, they are very
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The next step in the recruitment process is to determine whether the employees that are already working for the organization qualify for the position, or should they go out and look through an external source. There are three different methods of recruitment: internal, external, and online. Internal recruitment method is used to recruit current employees who qualify the position as they become ...
small properties, usually undeclared to the authorities, and therefore operating in
informality. A number of impediments limit their growth, including the very low level of
capital invested, poor access to credit and various financial constraints, lack of adequate
skills, and poor access to market information, including public procurement. Engaged in a
never-ending battle for survival and with little hope of achieving prosperity, these small
individual concerns also cannot create decent employment except they are given support
to overcome these obstacles. Moreover, up till now, legislation in force in West African
countries does not offer sufficient opportunities to the self-employed to have access to
decent employment and to create jobs themselves.
41. Apart from a few countries like Nigeria, Côte d’Ivoire and Ghana, the industrial sector is
at an embryonic stage in the countries of West Africa. A large part of the main local
agricultural produce (coffee, cocoa, cotton, etc.) or mineral products (oil, bauxite,
uranium, phosphates, gold, wood, etc.) undergo little or no processing before they are
exported. As a result, the local active population cannot take advantage of the jobs that
would have been created within the processing chain of these resources just as the
countries cannot derive the wealth that should have accrued from the economic gains
attached to them. In fact, this explains, in part, why productivity growth is stronger than
economic growth (cf 3.1 above), and why the volume of work supply has stagnated or
diminished since the wave of independence and is now lagging behind population growth.
Getting a grip on energy remains another key constraint that must be addressed to boost
the manufacturing sector and diversify the production base through increased creation of
enterprises. Other basic infrastructure (water, ICT, roads and other communication links)
require similar attention, without which it will be difficult to invest with confidence.
42. As a result, new entrants to the labour market (qualified or otherwise), have little chance
of finding new employment. They are, therefore, left with little choice but to swell the
ranks of the unemployed or find some means of becoming self-employed themselves,
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Capitalism is characterized by maximization of profits. In this tendency of trying to maximize profits capitalist usually would like to exploit the labour force to the maximum. This was the situation since then when capitalism roots were emerging. It was marked by long working hours and poor working condition to the workers. Luddism and Chartism owe their origin from the inhospitable working ...
without hope of ever receiving remuneration commensurate to their work. Worse still, at
the same time that the rural workforce is ageing, rural exodus is increasing with unending
hordes of the young and not-so-young trooping to the cities from the countryside,
increasing unemployment and vulnerability. Ultimately, this phenomenon will lead to
progressive diminution of the mass of family labour and self-employment in agriculture,
thus of the total national employment.
43. Moreover, education and training programmes show inherent weaknesses with the result
that many of the young graduates they produce for the labour market come out with skills
and qualifications that are not relevant to the needs of employers. Education systems are
often biased in favour of non-technical university qualifications. This situation limits the
14
availability of vocational, technical and qualifying training that could open wide vistas of
opportunities for those entering the labour market. In addition, many young people tend to
consider the vocational education path as a second career option.
44. Lastly, for a very long time, employment policies consistently fell short of the
expectations of the population. Most of the first generation poverty reduction strategies
(PRS) paid only cursory attention to employment issues, especially in terms of the
quantity of jobs created and their quality. It is the second generation strategies, more
geared towards accelerated development, that have begun to consider employment
creation as one of the objectives to target in the context of poverty reduction.
3.3.5 Main cyclical causes of unemployment, underemployment, vulnerability
45. The cyclical causes of unemployment, underemployment and vulnerability have to do
with the effects of the recent food, financial and economic crises. Faced with crisis for
which they were not prepared, countries had to take measures to appease/avoid social
troubles and these included lowering or scrapping customs duty on certain goods. These
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The economic policy of a government needs to be supportive of a country’s best interests. It may be argued that the main objective of a government is to promote sustained economic growth to improve and increase the nation’s prosperity (Nellis and Parker, 1996). This can only be achieved with structural policies used to enhance the long term economic performance and the creation of a stable ...
economic or social policy options reduced their budget incomes and a number of
investments or programmes that could have created new jobs had to be shelved. At the
same time, the employment situation was further compounded by the decline in foreign
direct investments (FDI) as a result of the recession and the economic slowdown in the
countries in the North, declining inflows of remittances from the diaspora (itself grappling
with one or other of these crises), economic lay-offs, the reluctance of local investors
fearful of economic and, sometimes, political uncertainties, and the decline in exports and
in the prices of exportable local goods. The ILO, in its study on Global Employment
Trends 2010, considers that the unemployment rate, which has remained unchanged at 8%
for two years (2007-2008), could rise to 8.5% in 2009 in the Sub-Saharan zone, which
includes West Africa.
46. Moreover, internal crises in some countries have exacerbated the employment situation.
This is the case of Côte d’Ivoire and Niger, for example, where the relocation of certain
institutions (enterprises, international organisations) and/or suspension of cooperation
have undoubtedly affected jobs, even if there are no statistics to buttress this analysis.
4 SOME JUSTIFICATIONS
Effects
1. 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. 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.
3. Loss of national output: Unemployment involves a loss of potential national output (i.e. GDP operating well below potential) and is a waste of scarce resources. If some people choose to leave the labour market permanently because they have lost the motivation to search for work, this can have a negative effect on long run aggregate supply and thereby damage the economy’s growth potential. Some economists call this the “hysteresis effect”. When unemployment is high there will be an increase in spare capacity – in other words the output gap will become negative and this can have deflationary forces on prices, profits and output.
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4. Fiscal costs: The government loses out because of a fall in tax revenues and higher spending on welfare payments for families with people out of work. The result can be an increase in the budget deficit which then increases the risk that the government will have to raise taxation or scale back plans for public spending on public and merit goods. The problems facing the UK government at the moment are closely linked to the surge in unemployment.
5. Social costs: Rising unemployment is linked to social deprivation. For example, there is a relationship with crime and social dislocation including increased divorce rates, worsening health and lower life expectancy. Regions that suffer from persistently high long-term unemployment see falling real incomes and a widening of inequality of income and wealth. The recent figures on poverty in the UK are
Unemployed individuals have to go through a tight economic crunch. They are unable to meet their financial obligations. This may lead to a decline in their standard of living. Lack of funds is sure to have a deep impact on their expenses. The consequences of unemployment can be as grave as homelessness due to failure of the unemployed individuals to repay home loans or pay house rents. Underemployment is one of the serious consequences of unemployment. On losing jobs, people are forced to take up jobs that do not befit their skills, experience and educational qualification. The other major consequence of unemployment is anxiety in the minds of the unemployed people. Unemployed individuals become pessimistic about life and may have to face psychological problems resulting from mental stress.
Unemployment hampers the economic as well as the social status of society. Unemployment benefits serve as a strong support during the period of one’s unemployment. An individual can claim the unemployment benefits if he/she has been forced to quit the job. To know more about this, read about applying for unemployment benefits. Unemployment benefits are a temporary relief from unemployment.
Solutions
The government does not have a specific target for any particular rate of unemployment. Instead its objective for the labour market is expressed in terms of a broad ambition to keep employment high and provide employment opportunities for all.
Distinction can be made between demand-side and supply-side policies to improve the working of the labour market in matching people to the available jobs and to the changing demands and requirements of different industries. There are inevitably limits to what the government can do to achieve sustainable reductions in unemployment. And often the policies that are introduced to boost employment can be costly and involve an opportunity cost.
Reducing occupational immobility of labour (supply-side policy)
Immobility of labour is a cause of labour market failure and structural unemployment. Policies aimed at reducing this problem aim to provide the unemployed with the skills they need to find re-employment and also to improve the incentives to find work. Improvements in the availability and quality of education and work-place training will increase the human capital of unemployed workers and help to ensure that more of the unemployed have the right skills to take up the available job opportunities.
Relating aggregate demand (demand-side policy)
The government can use the traditional weapon of macro-economic policies designed to increase aggregate demand and thereby generate a higher level of national income and employment. Reflationary policies can help to mitigate the effects of an economic recession but there are risks involved in using both fiscal and monetary policy simply to boost demand when output is low.
The government might also make more active use of regional policies to encourage inflows of foreign investment from multinational companies particularly to those areas and regions where unemployment is persistently above the national average. The main weakness of relying too heavily on demand-management policies to reduce unemployment is that much unemployment is not cyclical; rather it is frictional and structural in origin and cannot be solved simply by injecting vast amounts of money into the circular flow of income and spending.
Summary: The government’s current labour market strategy is firstly to rely on monetary and fiscal policy to maintain a stable rate of economic growth as a pre-condition for high and stable rates of employment. Macroeconomic stability is regarded as essential for creating the right climate in which new jobs become available. Secondly, supply-side policies and in particular active labour market strategies such as New Deal and other welfare and education reforms are given a higher weighting in seeking to reduce structural aspects of the unemployment problem.
The British economy has made substantial and significant progress in reducing unemployment over the last fifteen years. Despite a recent upturn in unemployment (the result of a slowdown in growth) the UK still has one of the lowest unemployment rates in the European Union.
