THE LABOUR MARKET
At high rates of unemployment, full-time jobs are hard to find and workers have little
bargaining power. That tends to depress wages and incomes. Conversely, when
the unemployment rate is low, full-time jobs are easier to find. To keep their
employees and attract new ones, firms have to try harder
In the medium run we assume prices and wages to be flexible. Thus, when AD rises
we expect firms to increase production. Higher production leads to higher
employment thus lower unemployment. The lower unemployment leads to higher
wages. The higher wages may result in higher costs of production prompting firms to
increase prices. This happens if the higher wages are not in line with increases in
productivity. The higher prices lead workers to ask for higher wages which prompts
further price increases. This goes on and on.
Unemployment cannot be simply defined as number of people without jobs. Such a
wide definition will include children who are too young to work, pensioners who are
retired, housewives and others who choose not to take up paid work. Unemployment
in a country refers to all those people who are willing and able to work but are
unable to find work.
Definition of terms:
Civilian population: a country’s population minus those under 15 minus those in the
armed forces and prisons
Labour force: the sum of employed and unemployed (i.e. those who made an effort
to find work or start a business). It gives a measure of the number of people available
and providing the supply of labour for the production of goods and services at a
given point in time.
Out of the Labour force or not economically active population: The Economically
Inactive Population comprises of all persons who were neither “employed” nor
“unemployed” during the short reference period (7 days), used to measure “current
activity”. This population is split into four groups:
1. Attendant at educational institutions;
2. Retired;
3. Engaged in family duties;
4. Other economically inactive
The Economically Inactive Population are not part of the supply of labour but are
important as they are potential labour supply in the future.
Participation rate: ratio of labour force to civilian population
Long-term unemployed: those unemployed for more than twelve months
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Below is information from the 2005/6 Labour Force Survey (LFS) and 2016 Botswana
Multi-Topic Household Survey (BMTHS)
2005/6 LFS
Population 12 (15 years 1 153 227
for BMTHS) years and
above
Economically
active 787 962
(labour force)
Not Economically active
365 266
BMTHS
1 349 008
836 734 (62%
population)
512 274 (38%
population)
Of
the
economically
active:
539 150
Employed
248 812
Unemployed
Of the unemployed those:
Actively Seeking work 114 042
134 770
Discouraged job-seekers
of
the
of
the
689 528
280 482
147 206
133 276
Those included in the definition of not economically active are students, retired (65
and above), the sick and house work.
Currently employed refers to those who did some work in the reference period
either for payment in cash, payment in kind, self-employment for profit or family
gain and temporarily absent but will return to work (e.g. on leave or sick). They must
have worked for at least one (1) hour in the past seven (7) days.
Currently unemployed refers to those who did not do any work in the last 7 days.
There are two groups of unemployed:
(i)
Unemployed: those who actively looked for work or to start a business
in the last 30 days and is available to start a job
(ii)
Discouraged job-seekers: those who didn’t take steps to look for a job
in the last 30 days
The unemployment rate is:
𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑
114042
𝑈 (2005) =
=
= 14.5%
𝑐𝑖𝑣𝑖𝑙𝑖𝑎𝑛 𝑒𝑚𝑝𝑙𝑜𝑦𝑒𝑑 + 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 539 150 + 248812
147206
𝑈(2016) =
∗ 100 = 17.59%
836734
If discouraged workers are included, unemployment is:
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𝑈(2016) =
280482
∗ 100 = 33.52%
836734
Calculate unemployment rate using the BMTHS (17.6%). If discouraged workers are
included the number is 33.5%.
Those unemployed and actively seeking a job by age group, sex and residence:
18-19
= 48.1%
20-24
= 37.3%
25-29
= 23.2%
30-34
= 10.4%
Female
= 53.9%
Male
= 46.1%
Urban Villages
= 51.9%
Rural
= 28.0%
Cities & Towns
= 20.1%
Out of the Labour force or not economically active population = 378 994 of which
134 762 or 35.6% are male and 244 236 or 64.4% are female.
The labour participation rate (2005) is:
𝑇𝑜𝑡𝑎𝑙 𝑙𝑎𝑏𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒
787962
=
= 68.3%
𝑡𝑜𝑡𝑎𝑙 𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 12 𝑎𝑛 𝑎𝑏𝑜𝑣𝑒 1 153 227
Long-term unemployed: these are people who have remained unemployed for more
than 12 months. They are a concern because the longer someone stays unemployed
the higher the difficulty of getting a job. This is because their skills deteriorate, and
their confidence diminishes.
When there is high unemployment, workers are worse off in 2 ways:
i.
Employed workers face a higher probability of losing their job
ii.
Unemployed workers face a lower probability of finding a job hence they
can expect to be unemployed for a longer time.
Frictional, Structural and Cyclical Unemployment
Unemployment is divided into 3 components: Frictional, Structural and Cyclical.
1. Frictional unemployment occurs in the normal process of job search by
individuals who have voluntarily quit their jobs, were fired, temporarily laid off
due to seasonal demand, are entering the labour force for the first time, or are
re-entering the labour force.
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This type of unemployment persists as those who are unemployed find jobs,
they are often replaced in the unemployment pool by those who just got laid
off. It may be desirable as those who voluntarily leave their jobs often move
from low-paying low-productivity jobs to higher-paying, higher-productivity
ones.
2. Structural unemployment occurs when there is a mismatch between the skill
or location requirements of job vacancies and the present skills or location of
unemployed individuals. For example, some skills requirements like sewing
may decline or vanish while other skills like software design and IT may
intensify. Those who skills are obsolete may find themselves unemployed until;
they adapt and find new jobs. E.g. BCL
3. Cyclical unemployment is unemployment caused by a decline in spending and
typically begins in recession phase of the economy. It results from insufficient
demand for goods and services. It is the difference between the actual and
natural rates of unemployment.
Full employment
Unemployment consistent with full employment is called the full employment rate of
unemployment or the natural rate of unemployment (NRU). In the US is often around
5%. At the NRU, the economy is said to be producing at potential output. The
number of job seekers equals the number of vacancies.
Frictional and structural unemployment make up the natural rate of unemployment.
Structural unemployment tends to last longer than frictional as it requires people to
learn new skills. When there is cyclical unemployment, then unemployment is above
NRU. When demand in the economy is very high actual unemployment will be lower
than NRU. This occurs in a boom and often leads to inflation as the economy
overheats from producing above capacity.
Economic costs of unemployment
Unemployment that is excessive involves great economic and social costs.
Unequal burdens
The costs of unemployment are unequally distributed in society by occupation, age,
race and ethnicity, gender and district.
Occupation: workers in low-skilled occupations have higher unemployment rates
than in high-skilled occupations. Lower-skilled workers have more and longer spells
of structural unemployment than higher-skilled workers. Low-skilled works bear the
brunt of recessions while businesses generally retain most high-skilled workers
whom they spent money training. For instance, junior secondary certificate holders
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have highest unemployment of 39.5% followed by senior secondary at 22.9% while
tertiary (degree and vocational, post-graduates, etc) its at 16.6%.
Age: teenagers have higher unemployment than adults. Teenagers have lower skilled
and are paid low wages hence are easier to fire. They are less geographically mobile
than adults. BMTHS 2016 shows that 36.6% of 15-17 year-olds are unemployed while
for 18-19 year-olds its 48.1%.
Race and ethnicity: in South Africa black Africans have high unemployment rates
followed by coloreds, Indians and Whites. The same prevails in Western countries.
The high unemployment rates are due to:
 Lower rates of educational attainments
 Greater concentration in lower-skilled occupations
Gender: Females tend to have high unemployment rates. According to BMTHS 2016
female unemployment rate is 53.9%.
District: in Botswana some districts have high unemployment rates. For instance, the
following districts have the lowest employment levels: Sowa, 0.2%; Orapa 0.6%;
Ngwaketse West, 0.5%; Kgalagadi North, 1.0%, Kgalagadi South and Jwaneng, 1.2%;
Lobatse and Chobe are 1.4 and 1.7 respectively. Compare with districts with highest
poverty rates: Kweneng West 50.6%, Ngwaketse West, 40.3%, Kgalagadi South,
39.5%, Ghanzi, 36.3%; Ngamiland West 33.4%.
Non-Economic Costs
Research has linked unemployment to social ills like depression, poverty, family
disintegration, and socio-political unrest. The socio-political unrest includes racial
and ethnic tensions, violent political change. Other social problems are increases in
suicides, homicides, fatal heart attacks, strokes and mental illness.
Correction of Unemployment
If unemployment is cyclical then policies that increase aggregate demand (i.e.
demand-side policies) can be used to fight it. These are:
a. Monetary policy: reduction of interest rates to encourage borrowing and
investment.
b. Fiscal policy: increase in government spending or reduction in taxes.
If unemployment is frictional or structural then there are several ways:
a. Education and training of the unemployed.
b. Reduce power of trade unions if wages are above market clearing level
c. Employment subsidies to firms that hire long-term unemployed
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d. Labor market flexibility: highly restrictive laws make it harder to fire people
leading to firms not hiring in the first place. Laws must be less restrictive for
easier hiring and firing
e. Stricter unemployment benefits, regulations must be tight to discourage
people from leaving jobs with the belief it will be easier to get generous
benefits
f. Improve geographical mobility by offering firms benefits like subsidies and tax
breaks when setting up in depressed areas like Selibe-Phikwe.
Okun’s Law
It relates output growth to changes in unemployment rate. There is a negative
relationship between economic growth rate and unemployment rate. This
relationship is captured as follows:
𝑢𝑡 − 𝑢𝑡−1 = −𝛽(𝑔𝑦𝑡 − 𝑔̅𝑦 )
(1)
In the US from the 1970s the relationship is as follows:
𝑢𝑡 − 𝑢𝑡−1 = −0.4(𝑔𝑦𝑡 − 3%)
(2)
Where 𝑢𝑡 is the unemployment rate at time 𝑡, 𝑢𝑡−1 is the unemployment rate at time
𝑡 − 1,
𝑔𝑦𝑡 is economic growth rate at time t,
𝑔̅𝑦 is normal economic growth rate, that is the level of economic growth needed to
keep unemployment rate constant. It captures the growth of labour force and labour
productivity.
𝛽 measures the impact of changes in economic growth on the unemployment rate.
Equation (1) states that changes in unemployment rate from year t-1 to t are
negatively related to changes in economic growth from normal growth. If economic
growth is above normal growth rate, then unemployment rate falls. If it is lower,
unemployment rate rises. If equal, then unemployment rate remains constant.
From equation (2) output growth must be at least 3% to prevent unemployment rate
from rising. Unemployment rate also depends on the labour force growth rate.
Suppose labor force growth is 1.7%, then labour productivity must be 1.3% hence
3% = 1.7% + 1.3%
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That is, 𝑔𝑦𝑡 = 𝑙𝑎𝑏𝑜𝑢𝑟 𝑓𝑜𝑟𝑐𝑒 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 + 𝑙𝑎𝑏𝑜𝑢𝑟 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒
Causes of unemployment (Skip this part)
Causes and cures of mismatch unemployment
1. Lack of skills
a. Inflexibility of relative wages: high unemployment especially among the
young signals that the real wage paid to them is too high. Some have
suggested that young workers should have their own lower minimum
wage because of their low-skill. However, others argue that doing that
will harm adults in low-skill jobs.
b. Vacant jobs often have specific skill requirements. Some skills like
computer and office filing are general hence companies are reluctant
because employees may leave the firm after learning the skills. schools
may not be able to provide the services either due to lack of equipment
and/or properly trained instructors. Solution could be better public
education, subsidies for firms for training and government financed
training.
c. Discrimination: some firms do not hire women, minorities or teenagers.
Some solutions have been to allow women to go on maternity leave
and provision of child care. Minority discrimination requires legal
solutions.
2. Wrong location: often vacancies and unemployment are unequally distributed.
There maybe vacancies in one region while unemployment is in another
region. Relocating can be a problem especially if one partner is employed as
s/he cannot leave job. High rental prices, lack of skills and cash to move
maybe other factors. Solutions include creating economic special zones with
low taxes charged to companies to entice them to go to depressed areas. The
other is for government to subsidize those who are willing to move.
3. Frictional unemployed have less serious barriers to finding other jobs
compared to structurally unemployed.
a. The economics of job refusal: a worker may refuse the first job s/he
encounters because they may be a better paying and/or better working
conditions job that give greater benefits for a lifetime. Government can
help reduce unemployment due to search for a better job
i. by providing employment agencies,
ii. lessen entry into job search by reducing reasons behind quitting,
re-entry and initial entry or
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iii. to change economic incentives that unnecessarily prolong job
search. For instance, reduce taxes for the employed and
unemployment benefits.
b. Effects of unemployment compensation: the payment for unemployed
is usually high enough to discourage those who get paid just above the
unemployment compensation. Firms who experience temporary
declines in profits even in good times may be inclined to layoff workers
so they can get unemployment compensation.
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