Employment/ Unemployment (Copy)

9.3.1 Definition of Full Employment

• Full Employment:
  • Situation where all willing and able workers are employed at the current wage rate, except for those unemployed due to normal labour market turnover (frictional unemployment).
  • Unemployment rate is low, typically around 4-5%, accounting for natural unemployment.
  • Does not mean zero unemployment because some unemployment is unavoidable.

9.3.2 Equilibrium and Disequilibrium Unemployment (Including Hysteresis)

• Equilibrium Unemployment:
  • The unemployment rate when the labour market is in balance — supply equals demand at the prevailing wage.
  • Includes frictional, structural, and voluntary unemployment.
• Disequilibrium Unemployment:
  • Occurs when there is excess supply of labour at current wages, causing involuntary unemployment.
  • Can be caused by wage rigidity, minimum wages, or union wage demands.
• Hysteresis:
  • Phenomenon where long-term unemployment causes the natural rate of unemployment to rise, even after demand recovers.
  • Due to skill loss, reduced motivation, or stigma among long-term unemployed.

9.3.3 Voluntary and Involuntary Unemployment

• Voluntary Unemployment:
  • Workers choose not to work at the current wage (e.g., searching for better jobs, choosing leisure).
• Involuntary Unemployment:
  • Workers willing to work at current wages but cannot find employment.
  • Common in recessions or when wages are above equilibrium.

9.3.4 Natural Rate of Unemployment

• Definition:
  • The unemployment rate consistent with full employment — includes frictional and structural unemployment.
• Determinants:
  • Labour market policies and institutions.
  • Efficiency of job matching and information flow.
  • Level of skill and education.
  • Degree of labour market flexibility.
• Policy Implications:
  • Cannot eliminate natural unemployment fully; aim is to reduce cyclical unemployment.
  • Focus on training, education, and labour market reforms.

9.3.5 Patterns and Trends in (Un)employment

• Structural Changes:
  • Shift from manufacturing to services affects sectoral employment.
• Seasonal Variations:
  • Employment fluctuates with seasons (e.g., agriculture, tourism).
• Technological Change:
  • Automation can reduce demand for certain jobs, increase others.
• Demographic Trends:
  • Ageing population affects labour supply.
• Globalisation:
  • Outsourcing can reduce domestic employment in some sectors.

9.3.6 Mobility of Labour

• Forms:
  • Geographical Mobility: Willingness and ability to move location for work.
  • Occupational Mobility: Ability to switch between jobs or industries.
• Factors Affecting Labour Mobility:
  • Geographical: Housing costs, family ties, transport availability, language barriers.
  • Occupational: Skills, training availability, recognition of qualifications, retraining costs.

9.3.7 Policies to Reduce Unemployment and Their Effectiveness

Diagrams

Diagram 1: Types of Unemployment in Labour Market

Wage
↑
|  S (Labour Supply)
|   /
|  /  
| /   
|/____________________________ D (Labour Demand)
|                  
|                      Unemployment Gap (Excess supply)
|                    
|____________________________→ Quantity of Labour

- Equilibrium wage may be above market-clearing causing disequilibrium unemployment.

Diagram 2: Business Cycle and Unemployment

Unemployment Rate
↑
|          Peak
|          |
|          | 
| Trough --|  _____
|          |       ____
|__________|______________→ Time

- Unemployment rises in recessions (troughs) and falls during booms (peaks).

Diagram 3: Natural Rate of Unemployment and Hysteresis

Unemployment Rate
↑
|  Natural Rate ↑ over time due to hysteresis
|     _________
|    /         
|___/___________________→ Time

Diagram 4: Labour Mobility

Geographical Mobility Factors:
- Housing costs
- Transport availability
- Family ties

Occupational Mobility Factors:
- Skills and education
- Retraining costs
- Job availability

Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change A2 Level Economics Full Scale Course