“ U N E M P LOY M E N T A F F E C T S O N I N D I A N E C O N O M I C D E V E LO P M E N T”

A N D “ S U G G E S T I O N F O R I T S I M P O RTA N C E

CONTENTS

What is unemployment?

TYPES OF UNEMPLOYMENT

CAUSES OF UNEMPLOYMENT

COST OF UNEMPLOYMENT

MEASUREMENT

SOLUTIONS

DEFINITION

“Unemployment refers to a situation in which the workers

who are capable of working and willing to work do not get

employment.”

THE LABOUR MARKET

Slopes downwards because as wages decrease firms will be demand more

Slopes upwards because as wages increase workers will be willing to work

CAUSES OF UNEMPLOYMENT – D ISEQUIL IBRIUM UNEMPLOYMENT

Unemployment is Q2-Q1 or a-b

“”At the higher wage more people are willing and able to supply themselves to the labour market but less firms are willing and able to demand – there is surplus of labour (unemployment)“”

S O LU T I O N S T O R E A L WA G E U N E M P LOY M E N T

By making changes to legislation government could reduce the power of trade unionsIf the minimum wage is preventing the market from clearing then it should be reducedEvaluation

It is difficult to reduce union power This may harm the poorest workers High income workers don’t receive the minimum

wage Reducing the living standards of low income

workers – inequitable (unfair)

DEMAND DEFICIENT OR

CYCLICAL UNEMPLOYMENT

SOLUTIONS TO DEMAND DEFICIENT UNEMPLOYMENT

This is caused by low ADNeed to increase ADAny policy that increases AD should solve the problem (Keynesian demand management policies)

Monetary policy – reduce interest rates or increase money supply

Fiscal policy – Government spends more or reduces income tax or indirect taxation

Evaluation All of these things take time Unemployment is a lagging indicator

TYPES OF UNEMPLOYMENT

Frictional unemployment

Seasonal unemployment

Structural unemployment

FRICTIONAL UNEMPLOYMENT

This is when people are between jobs or they have left

education and are waiting for their first job

It is not normally seen as a serious problem

Solutions

Unemployment benefits should not be at a

level that removes the incentive to work

Improve awareness of available jobs

SEASONAL UNEMPLOYMENT Demand for certain workers falls at certain times of the yearExamples

Tourism industryFarming

Solutions?Encourage people to take different jobs in their

off seasonReduce unemployment benefitsGreater flow of information

STRUCTURAL UNEMPLOYMENTThis is the worst type of equilibrium unemploymentIt happens due to the changing structure of an economyOne reason why it is so harmful is that it tends to result in long term unemploymentDifferent causes

New technologies replace humansDemand for a particular type of labour - lower cost labour

in other countriesChanges in consumer tastes – e.g. environmentally friendly types of energy

Structural unemployment occurs when there is a permanent fall in demand for a particular type of labour e.g. coal mining

SOLUTIONS–”STRUCTURAL UNEMPLOYMENT”

interventionist policies The key is to increase occupational mobility (allow workers to move from job to job)

An education system that trains people to be more occupationally flexible

Adult retraining programmes Government gives subsidies to firms that provide training for

workers Enhance geographic mobility by building affordable housing or

give subsidies/tax breaks Set up apprenticeship programmes to allow people to gain skills

Disadvantages Involve a high opportunity cost These policies are only effective in the long term

SOLUTIONS – STRUCTURAL UNEMPLOYMENT

interventionist policies The key is to increase occupational mobility (allow workers to move from job to job)

An education system that trains people to be more occupationally flexible

Adult retraining programmes Government gives subsidies to firms that provide training for

workers Enhance geographic mobility by building affordable housing or

give subsidies/tax breaks Set up apprenticeship programmes to allow people to gain skills

Disadvantages Involve a high opportunity cost These policies are only effective in the long term

A R E D E M A N D - S I D E P O L I C I E S O R S U P P L Y S I D E P O L I C I E S M O R E E F F E C T I V E I N R E D U C I N G

U N E M P L O Y M E N T ?If it is demand deficient then demand side policies will be requiredCreate demand and firms will demand more labourEvaluation - There are concerns with using these policies

Expansionary fiscal policy - means spending more or taxing less

Either may mean running a budget deficit (spending more than taking in from revenues)

This may not be a problem in the short run but could be in the longer run

A R E D E M A N D - S I D E P O L I C I E S O R S U P P L Y S I D E P O L I C I E S M O R E E F F E C T I V E I N R E D U C I N G

U N E M P L O Y M E N T ?Even if the reduction in taxes worked there would be a lag before it came into effectBy the time it worked the economy could have recovered and the extra AD would be inflationaryWith structural unemployment supply side policies may be better such as making sure labour is suitably skilled and flexibleIn practice it is difficult to distinguish between different types of unemploymentThe economy will likely be suffering from different types at the same timeGovernments are likely to need a combination of both

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Definition

Diagram

Analysis

Example