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UNEMPLOYMENT
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Objectives
• The meaning of unemployment
• Types of unemployment and their causes
• Consequences of unemployment
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Defining UNEMPLOYMENT
• To be considered unemployed, a person must:
be out of work and willing to accept a suitable job or start an
enterprise if the opportunity arises, and actively looking for ways
to obtain a job or start an enterprise.
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How Is Unemployment Measured?
• The Labor Force Survey is conducted by Department of Statistics
(DOS), Malaysia to collect data related to employment and
unemployment.
• Based on the answers to the survey questions, the DOS places each
adult into one of the following categories:
• Labor Force
• Employed
• Unemployed
• Not in the labor force
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The Breakdown of Population
Employed
Labor Force
Working
Population
Unemployed
Not in labor force
How Is Unemployment Measured?
• Labor Force
• The World Bank defines the labor force as the sum of the employed and
the unemployed aged between 16 and 64.
Labor force = Number of employed + Number of unemployed
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How Is Unemployment Measured?
Labor Force
• Employed
• The DOS considers a person an adult if he or she is over 16 years old.
• A person is considered employed if he or she has spent some of the previous
weeks working at a paid job.
• Underemployed – employed person at work and who had worked less than 30
hours during the reference week because of the nature of their work or due
to insufficient work and were able and willing to accept additional hours of
work.
• Unemployed
• A person is unemployed if he or she is on temporary layoff, is looking for a
job, or is waiting for the start date of a new job.
• A person who fits neither of these categories, such as a full-time student,
homemaker, or retiree, is not in the labor force.
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How Is Unemployment Measured?
• Not in the Labor Force
• All persons not considered as employed or unemployed as stated above
are classified as outside the labor force.
• Included housewives, students (including those going for further
studies), retired or disabled persons, and those not interested in looking
for a job.
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How Is Unemployment Measured?
• The unemployment rate is calculated as the percentage of the labor
force that is unemployed.
Number unemployed
Unemployment rate =
 100
Labor force
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How Is Unemployment Measured?
• The labor-force participation rate is the percentage of the adult
population that is in the labor force.
Labor force participation rate
Labor force X
=
100
Adult population
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Does the Unemployment Rate Measure What
We Want It To?
• It is difficult to distinguish between a person who is unemployed and
a person who is not in the labor force.
• Discouraged workers, people who would like to work but have given up
looking for jobs after an unsuccessful search, don’t show up in unemployment
statistics.
• Other people may claim to be unemployed in order to receive financial
assistance, even though they aren’t looking for work.
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Are they part of the labor force?
• A part-time sales clerk who is also going to college
• A full-time nurse
• A stay-at-home mother
• A factory worker whose plant closed and who is applying for jobs at
other firms
• A college graduate who volunteers in a community center
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Are they part of the labor force?
• A recent college graduate interviewing at different companies for her
first job
• An engineer who goes back to school to earn a teaching degree
• A discouraged worker who has been looking for a job for 18 months
but has given up the job search
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Labor Force Participation Rate (LFPR)
• Labor Force Participation Rate (LFPR) is the ratio of the number of
people in the labor force to the entire working-age population of a
nation.
• An important determinant of its potential for economic growth.
• The greater the proportion of the working-age population that is in
the labor force, the greater the nation’s production possibilities, since
the main factor that can increase a nation’s production possibilities
frontier is the quantity of resources.
• How can government promote a growth in the LFPR?
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Full-Employment
• An economy in which national output is at its full-employment level
has achieved equilibrium in the labor market.
• This means at the equilibrium wage rate almost everyone who wants
a job has a job.
• Does not mean that there is no unemployment, rather that the
unemployment which exists is natural unemployment, consisting only
of those workers who are in between jobs, those whose skills no
longer match up with the demand for workers in the economy and
those who are voluntarily unemployed.
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Why Are There Always Some People
Unemployed?
• In an ideal labor market, wages would adjust to balance the supply
and demand for labor, ensuring that all workers would be fully
employed.
Labor Supply
Wage
WE
Labor Demand
QE
Quantity of labor
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Natural Rate of Unemployment
• At the full-employment level of national output,, the
unemployment prevails is known as the natural rate of
unemployment.
• The natural rate of unemployment is unemployment that does not
go away on its own even in the long run.
• It is the amount of unemployment that the economy normally
experiences.
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Unemployment can be classified into three
types:
1. Frictional and seasonal unemployment
2. Structural unemployment
3. Cyclical unemployment
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Why Are There Always Some People Unemployed?
Unemployment and Full Employment
Frictional and seasonal unemployment
• Refers to workers who are in between jobs or just entering the labor
force for the first time. In other words, it takes time for workers to
search for the jobs that best suit their tastes and skills.
• Usually short term (3 months or less) and it often voluntary in nature,
meaning the unemployed person has chosen to seek employment in
a different location or industry. Frictionally unemployed individuals
possess skills that are demanded – employment prospects are
generally positive.
• Seasonal workers may be unemployed between seasons. It’s
voluntary unemployment.
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Why Are There Always Some People Unemployed?
Unemployment and Full Employment
Structural unemployment
• When a worker loses his job due to changing structure of the nation’s
economy, the individual becomes structurally unemployed.
• Created by changes in technology and foreign competition that change the
skills needed to perform jobs or the locations of jobs.
• May seem undesirable but a natural form of joblessness as it is only natural
that as a nation grows and becomes incorporated into the global economy,
some workers are made “redundant”.
• Structural unemployment lasts longer than frictional unemployment.
• Strategies for reducing lie primarily in the realm of increased worker
training and improved education.
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Why Are There Always Some People Unemployed?
Unemployment and Full Employment
Cyclical unemployment
•
•
•
•
Workers whose skills are in demand given the structure of the nation’s
economy but who nonetheless lose their jobs due to a fall in total
demand for the nation’s goods and services are cyclically unemployed.
Arises due to fluctuations in the nation’s business cycle.
Occurs when a contraction in private or public spending (components of
GDP) reduces AD and leads to a fall in national output. As output of
goods and services falls the demand for labor falls and there is
downward pressure on wages and prices.
A worker who is laid off because the economy is in a recession and is
then rehired when the expansion begins experiences cyclical
unemployment.
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Effects of Unemployment
• Unemployment is a common phenomenon. However, high
unemployment rate will affect a country’s economy growth.
• Unemployment due to reduced job opportunities caused by recession
such as cyclical unemployment, will bring about negative effects on
the country’s economic stability. The negative effects of
unemployment can be divided into two – effects on the economy and
effects on the individual and population.
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Effects of Unemployment
Negative effects of unemployment on the economy:
Negative Effectss Description
Unemployment High unemployment rate will ruin the economic growth and
does not
performance. There will also be excess capacity from the industrial
encourage
machines. This will indirectly cause a drop in investment level.
economic growth
Drop in
government
revenue
When people are unemployed, the tax collection is also reduced.
Government then has to reduce its expenditure to boost economic
growth.
Wastage of
production
resources
High rate of unemployment forces the economy to operate at a
level below maximum. The wastage of resources bring about
output production far below than the potential output.
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Effects of Unemployment
Negative effects on the Individual and Population:
Negative Effectss
Description
Loss of job
Temporary unemployment will not ruin the lives of the people as
daily activities can be carried out using savings or loans. However,
continuous unemployment will create unhealthy side effects such as
being forced to partake in illegal activities to obtain money.
Loss of skills
Some skills can only be maintained if they are used or practiced often.
Long-term unemployment might cause an individual to lose his/her
skills.
Political
instability
Long-term or continuous unemployment can create chaos and the
government will be under pressure and receive criticisms from many
parties. This indirectly contributes towards social problems and
causes an increase in crime rates. Increase in crime rates can cause
foreign investors to shy away.
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