Wednesday, December 9, 2015

99. Unemployment When economists talk about unemployment they are referring to ALL the production factors and not only labour. Because labour is such an important ingredient of the economic mix, the focus is usually placed there. Economists group (labour) unemployment into four categories according to the cause. The goal is “full employment” so the goal is for the economy to create an appropriate a job for every willing and able worker. If we now find in the economy that there is unemployment, we ask "why hasn’t the economy produced that job for each person?"

We then in answering the question classify the economy’s failure in to one of four reasons.





From a policy standpoint, only two are worrying - the other two non-troubling causes or types are seasonal and frictional unemployment.

Here is a short video on these classifications.

Seasonal unemployment simply means the worker is unemployed because it’s the wrong time of year. A classical example are the fruit pickers in the Western Cape. there are no policy that could be implemented to fix it.

Frictional unemployment means those people looking for jobs that they have not found yet. Again, policy, at the macro level is not needed here. At any point in time in a healthy market economy there will always be some people between jobs.

That leaves cyclical unemployment and structural unemployment.

Cyclical unemployment is workers who are out-of-jobs because employers cannot sell enough goods. In other words, the economy is depressed. If it grows faster these people will get hired. Cyclical unemployment will be fixed when the economy picks up the slack again (In interventionist economies by some macro-level stimulus policy if it becomes really serious - Like in the US in 1930's).

Another way of putting it will be to say that Cyclical unemployment exists when individuals lose their jobs as a result of a downturn in aggregate demand (AD). If the decline in aggregate demand is persistent, and the unemployment long-term, it is called either demand deficient, general, or Keynesian unemployment.

Structural unemployment is of interest to policy-makers but cannot be fixed at all by fiscal (cutting tax rates) or monetary (eg. cuting interest rates) stimulus policies . Structural unemployment occurs when there is a mismatch at the individual worker-level between the skills, experience, qualifications, and location of the unemployed workers and what’s required for the open job opportunities. Examples of structural unemployment at the national level include:

technological obsolescence – Employers no longer need those skills (or as many with those skills). The classic example is the proverbial "buggy whip" manufacturer when there was a switch to automobiles around 1910. A more modern example might include photographers or developers of film (the old silver-halide, analog stuff) after the world has switched to digital photography. The workers either did not yet train for new emerging opportunities or update their skills.

location mismatch – the unemployed workers live in one geographical area and the open job opportunities exist somewhere else and they do not wish to locate at that point.

educational mismatches – the jobs being created require higher or different educational qualifications or degrees or specific training, but the unemployed workers don’t have those qualifications or are not prepared at that point to work for less than what they want.> inexperience – the firms hiring often want highly experienced workers or only workers who are currently employed. The unemployed workers either don’t have experience or don’t have recent/current experience. Often however employers are prevented by minimum wage laws to employ persons in these categories.

legislative barriers- the jobs exist, but perhaps at a lower wage rate than the legal minimum wage, or like in the old South Africa with job reservation that prevented the entry into certain jobs by certain people. Then there are legislative minimum qualifications that are protected by interest groups such as medical doctors preventing qualified nurses to prescribe medicine. These barriers exist in many industries and are are said to be designed to keep the "riff-raff" out, but these measures are nothing else than ways to protect vested interests and in so doing keeps rates at a high level and causing unemployment. The very high "Western Standards" imposed on many industries - building codes, health codes, FICA, the credit act, etc. all contribute to inflexibility and make it difficult for people to gain the necessary experience to contribute to the economy. There are powerful vested interests that are using high entry requirements to protect their turf. One example of this phenomenon has been the Real Estate industry and the Insurance industry who, in their attempt to "professionalise"their industry, have obliterated thousands of jobs.

Jim Luke ( says "Structural unemployment can be reduced through policy actions, but they are different, more micro-level policies. For example job retraining programs can reduce technological obsolescence. Programs to help people move and relocate will address location mismatch. Educational support and grants will address educational mismatches. Both government direct-hire jobs guarantee programs and employer willingness or incentives to do on-the-job training can address technological, educational, and inexperience issues."

I however see that most causes of involuntary unemployment are examples of the job market not clearing. If you see a market not clearing at optimal level, you should look for the government intervention (use of some coercion) to find the cause. In a completely free and unregulated labour market there would be "full" employment to the degree that satisfy the participants at the price level that they are willing to transact. I disagree with Keynes when he says that the economy can be at "equilibrium" in the face of unemployment.

I do agree with him that the price level of labour is what he referred to as "sticky" because of the presence of unions and collective bargaining involved in the process of wage determination in the real world. It is however safe to say that in a free and unfettered market the is no such thing as unemployment.

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