THE CONCEPT OF UNEMPLOYMENT

Unemployment is a phenomenon that occurs when a person who is actively searching for
employment is unable to find work. Unemployment is often used as a measure of the health of
the economy of a nation. The Bureau of Labor Statistics (BLS) defines unemployment as people
who are jobless and have actively looked in the past four weeks.The most frequent measure of
unemployment is the unemployment rate, which is the number of unemployed people divided by
the number of people in the labour force. Economists divide unemployment into many different
categories.
Unemployment Rate=No. of unemployed people/No. of people in the labour force

The two broadest categories of unemployment are voluntary (Person has left job in search of
other employment) and involuntary unemployment(Fired or laid off). When the
unemployment is voluntary it means that a person has left his job willingly in search of other
employment.

It is involuntary, when a person has been fired or laid off and now must look for another job.
Both voluntary and involuntary unemployment are broken down into three major types.
Other types
Structural, Frictional and Cyclical unemployment and seasonal unemployment.
Unemployment has become rampant that many of the unemployed indulge in social ills like
armed robbery, pick pocketing, prostitution and those sometimes-called Area Boys.
Unemployment range from the weakness in the educational curriculum that is bias towards
academic courses and inability of the public sector to provide jobs for school leavers.

In recent times, students enrollment in primary, secondary and Tertiary institutions increased
tremendously, and job to opportunities are not increasing simultaneously. It is therefore, feared
that in some years to come, this problem of employment will become unbearable, except plans are
made to avert it now.

Economists worldwide agree that unemployment is an economic problem that must be solved; but many
of them have varied opinions of how to solve it, their solutions vary between two extremes. On
one end, is considered that of the classical idea. The other extreme is that which was originated by
Keynes and is known as the Keynesian model.

THE CLASSICAL DOCTRINE OF UNEMPLOYMENT:

The classical macroeconomics was the dominant system of economic thought during the one hundred and
fifty years preceding the 1930s. The foundation for Classical Macroeconomics lies in the quantity
theory of money, Says law and the notion of self- regulation markets. SAYS LAW and the system of
self-regulating markets lead to classical economists to conclude that prolonged periods of
unemployment were impossible in a competitive market economy.

This theory which emphasizes that the price at which any good is sold represents the
wages of labor, the interest of the capitalist, the rent of the
owners of the land and fixed resources and the profit of entrepreneur. Says idea was based on the
relationship among production, income and spending.

He argued that the creation of products for the market generated amount of income equal to the
value of the product produced. If business produced products worth Ksh10, 000.00 they also create
income equal Ksh10, 000.00. Since the value of their money is the same as the worth of the
products, this production process had created the income necessary to buy the goods produced
hence no unemployment.

The Keynesian Doctrine of Unemployment:

KEYNES stressed that under investment is the main cause of unemployment in an economy.
According KEYNES the national income has two components, that part saved and that part
consumed Y=C+S he emphasized that the entire amount saved must find its way to investment; if
this is not so, it will result to chronic unemployment.

However the liquidity preference of individual who desire to hold fund in the form of cash as impediment.
The amount of employment in an economy will depend on the volume of the national income. In
order to maintain a high level of employment as previously, the amount of investment should be
kept as high in the present period.

This has to be followed in some instance with the interest rate low enough to encourage saving
and investment. Keynes said that even though it is possible saving and investment to be equal a
level high enough to achieve full employment equilibrium is more likely to be reached at a lower
point and demand for labour will not be enough at that point to ensure employment to those who desire
job.

Some later followers of Keynes laid emphasis on interest rate as a method of inducing investment.
They said that the decision of businessmen is more influenced by profit expectation and also by
any cost reduction, which might be obtained from theological invention.

General unemployment shows that If the government fails to generate adequate level of aggregate
monetary demand there will be general unemployment in the economy.

Government can influence the level of aggregate monetary demand by the manipulation of tax
rates and public sector expenditures, so as to maintain full or nearly full employment.

Types of Unemployment

1. Structural Unemployment
2. Frictional Unemployment
 3. Demand deficiency or Cyclical Unemployment
4. Seasonal Unemployment
1. STRUCTURAL UNEMPLOYMENT:(TECHNOLOGY)
Structural unemployment comes about through technological advances, when people lose their
jobs because their skills are outdated.

These are people who are laid off from sectors that are in decline and are in the process of
making a transition to sectors that are expanding. For example, if the textile industry is shrinking
while the health care industry is expanding, workers have to retrain and retool for the new
opportunities.

It occurs when production structure changes from labour intensive method to capital intensive
method. This type of change leads to job losses and unemployment.

Structural unemployment is due to changes in demand. This unemployment is cause by changes in

the country’s industrial structure through the switching of production from one kind of work to
another. Such a change produces unemployment only because of the immobility of factor of production.

It is possible for structural unemployment to occur when an industry suffers a decline in the
demand for its product without any compensating new demand arising. In this case, if labour were
perfectly mobile it would quickly be reabsorbed by other expanding industries. But if labour are
immobile the workers will have to be unemployed.

Features of Structural Unemployment:

I. It results from a mismatch between skills needed for available jobs and the skills possessed
by those seeking job.
II. It may occur because of geographical mismatch between the location of job openers and
job seekers.
2. Frictional unemployment:(IN BETWEEN JOBS)
Frictional unemployment arises when a person is in-between jobs. After a person
leaves a company, it naturally takes time to find another job, making this type of
unemployment short-lived. It is also the least problematic from an economic standpoint.

The feature of this unemployment involves a short term unemployment which follows
workers strikes, natural disasters, layoff or the conscious action of workers who quit their
job that are low paying in search of high paying ones.
 The work force has borne the worst consequences of the current economic crisis, the
rising prices, falling wages, massive retrenchment without adequate compensation, and
drastic reduction of public expenditure on social services has imposed the burden of
structural adjustment programme on the work force.

Frictional unemployment occurs because not all active job seekers would have found job
or accepted employment and not all employers would have filled their job vacancies in
this case. Unemployment rate always remains positive for the following reasons;
1. People continually quit their present job to search for new jobs.
2. People enter the labour force to seek work or job for the first time.
3. People re-enter the labour force after periods of absence
4. People move from one job to another within the 30 days.

Similarly employers consciously;

a. Search for replacement for workers who quit or retire

b. They discharge some employment in hope of finding better ones.
c. Employers seek new workers to fill jobs created by expansion of their firms.
3. DEMAND DEFICIENT OR CYCLICAL
UNEMPLOYMENT:(BUSINESS CYCLE)
Cyclical unemployment comes around due to the business cycle itself. Cyclical unemployment
rises during recessionary periods and declines during periods of economic growth.
It is as a result of decline in the aggregate demand when the aggregate demand for a product fall.
For example, if sales are low, which leads to low profit as demand falls, there would be unsold
inventories as a result, profits will drop and as a result, workers will be laid off their jobs which
will lead to unemployment.
Profits=Revenues-Costs
4. SEASONAL UNEMPLOYMENT:
 This is a situation in which particular workers chances of being employed are subjected to the
dictates of the seasons. In developed countries, there is a high incidence of seasonal
unemployment and it is usually associated with labour fluctuation or changes in the agricultural
and construction industries.

The average peasant farmer is mainly seasonally unemployed as there are certain periods of the
year in which he does virtually nothing on his farm.

There are many workers who are employed to work in cocoa plantations, rice mills, field and
maize farms during planting and harvesting periods. These often have little or nothing to do
during the slack period and if they cannot find other job these periods, they remain unemployed,
albeit seasonally.

Causes of Unemployment:

There are seven causes of unemployment. Four cause frictional unemployment. That occurs
whenever employees leave their job to find a better one. There are two causes of structural
unemployment. That's when workers' skills, or income requirements, no longer match the
jobs available. These occur even in a healthy economy. The natural rate of unemployment is
between 4.7 percent and 5.8 percent according to the Federal Reserve.

The seventh reason for unemployment is when fewer jobs than applicants are. The technical
term is demand-deficient unemployment. When it happens during the recession phase of the
business cycle, it's called cyclical unemployment.

1. One reason for unemployment is voluntary. Some of the unemployed have saved enough
money so they can quit unfulfilling jobs. They have the luxury to search until they find just the
right opportunity.

2. The second cause is when workers must move for unrelated reasons. They are unemployed
until they find a position in the new town.

3. The third reason is when new workers enter the workforce. That includes students who
graduate from high school, college, or any higher degree program. They have more skills than if
they didn't go to school. That's a big primary reason for youth unemployment.

4. The fourth reason is when job seekers re-enter the workforce. They went through a period in
their lives when they stopped looking for work.
These include mothers who are re-joining the workforce after their children are old enough. Other
re-entrants got married and set up the household while their spouses worked. Others had to care
for elderly relatives before returning to the labour force.

5. The fifth cause is technology advances. That's when computers or robots replace worker tasks.
Most of these workers need retraining before they can get a new job in their field.

6. The sixth cause is job outsourcing. That's when a company moves its manufacturing
or call centers to another country. Labor costs are cheaper in countries with a lower cost of living.
7. The seventh reason for unemployment is when there are fewer jobs than applicants. The
technical term is demand-deficient unemployment. When it happens during the recession phase of
the business cycle, it's called cyclical unemployment.

OTHER CAUSES OF UNEMPLOYMENT:

Poor education: This is the major cause of unemployment in most countries that do not take
serious care of their education sector. Nations who do not backup what the students are taught in
their individual institutions of higher learning with practical background are likely to 'vomit'
graduates yearly who cannot make good impact to the society.

When the graduates that are given out every year cannot defend what they studied, the only thing
they do is to add to the unemployment level of the country.

Linking poor education level of nations with unemployment, Democratic Republic of Congo has
one of the lowest education enrolments in Africa Continent. This poor education contributes
seriously to unemployment in that country as many of their institutions were destroyed during the
nation’s Civil wars. So, the poorer the educations sector of any country, the higher the increase in
unemployment rate of the country.
Lack of Skills: It is hard to see any person who is full of skills and still suffer from
unemployment. A skilful person can adapt in many environments and feed appropriately to the
fullness. One of the principal causes of unemployment among adults of different locations of the
world is because good skills which can give them good self-employment are lacking in them.
There are many importance of skill acquisition.

In many nations of the world, undergraduates are seriously working hard to acquire material
certificates without putting into consideration the importance of skill acquisition. A skilful human
being can stand at any point of test. When paper certificates are supported with skills their
strengths are increased.It is not a crime for someone who is studying mechanical engineering to
go to a road-side mechanic (technician) and learn how to repair vehicles. When he learns this, it
lessens insult which may be added to his injury (worsen the situation of unemployment) after his
graduation.

What do I mean? Many who have graduated from mechanical engineering department most
especially in African Continent are unable to defend their certificates when they are called for
practical interview. They may perform well in theoretical examination but failed when they were
called to show their skills from what they learnt by repairing faulty vehicles.

So to avoid worsening of the situation, they should learn skills necessary to see them through and
can help them get their dream jobs even immediately after their graduation. When they have the
necessary skills on their area of specialization, unemployment will be reduced as they will be
employed; but contrary to that, there will be consistence rise in unemployment level.
It is shameful to hear that those who graduated from electronics and computer engineering in most
developing or underdeveloped countries cannot produce or repair any electrical appliance.
The major reason for that is because the skills needed are lacking. Youths, adults, and even
the young are to go for skills to back themselves up.

Poor moral: One may ask: how can poor moral behaviour be a cause of unemployment? It is a
cause of unemployment because many citizens have lost their jobs because their moral actions are
too bad and negates the ethics of most structured organizations. Ladies wear some offensive
clothes to their places of work and after advices by their boss get fired as a result of their
stubbornness. They get sacked because their top banana (boss) could not take that from the
poor morally trained ladies.

Furthermore, some workers do not have good manner of approach. As a result of

consistence complains received by the managers from their customers, the managers have no
other option than to sack the workers before the misbehaved workers first 'sack' the customers.
When the weak morally trained are given their walking papers (sacked), their numbers add to the
number of those who have been 'swimming in the ocean of unemployment'.

There are those who suffer laziness the way patients suffer from diseases. They cannot attend
work in a week without being late in at least two work days. This cankerworm that has eaten deep
into their bodies became difficult for them to stop. After some time of lateness to duties, the Chief
Executive Officer gets tired of them and decides to 'give run to them'. In order words, the CEO
has to get the late comers sacked.

Poor government planning: A government that fails in her duty to help minimize unemployment
in any country is as bad as a shepherd that does not care for his flock. Some top government
officials are after their selfish interest without considering the importance of making provisions
for her citizens. Due to the government's weakness, unemployment becomes the major problem in
the country.

Selfish governments does not work hard in creating production companies where citizens of the
country can get employed to reduce unemployment; rather, they keep on stealing and embezzling
the public fund. When the funds that are supposed to be used by the government to provide
employment for the masses is not used, the next that follows is persistence rise in unemployment
status.

Corruption: What is corruption? How can corruption be a cause of unemployment? Corruption

can be defined as immoral action which could involve bribery and embezzlement (misuse) of
public fund for personal use. A corrupt government can be said to be a government which makes
use of public fund for their (the government officials) personal and selfish use.
Corruption is a cause of unemployment because when those in government who are to use public
money for building more manufacturing industries are busy embezzling the funds for their selfish
use, the next is massive increase in unemployment rate.

According to 2008 census calculation in Liberia, 68 per cent of Liberians were unemployed in that
year. In the same year, 2008, Liberia ranked 138 on the scale of 180 countries surveyed by
Transparency International, which is a watchdog that fights corruptions in countries and keep the
records. This means that when 138 is subtracted from the 180, Liberia is known to be the 42nd
most corrupt in the world in 2008 and that is still high when it comes to corruption.

When unemployment is connected to corruption, Liberia was the world most corrupt nation in
2013. It is clear evidence that corruption is also the major cause of unemployment.

Without going too far, Nigeria is the 8th most corrupt country in the world and this country also
have high unemployment rate. The corruption in Nigeria government makes government of the
country to spend less on the welfare of the citizens of the country.

When corruption is taken as normal routine, functions which are to be done by three persons is
being taken up by one person alone and that same one person collects salaries made for three
persons. Why won’t unemployment rate increase when such action is being observed in the
country?

Do Minimum Wages Cause Demand-Deficit or Cyclical Unemployment?

Occasionally demand-deficit unemployment occurs when wages are too high. That's one of the
arguments against higher minimum wages. It says that businesses have a fixed cost for labor.
When they are forced to pay a higher salary per person, they must let other workers go. In some
price-sensitive industries, that's true. But most other companies can pass the cost onto their
customers.
Consequences of Unemployment:

Unemployment is not a friend and nobody of any kind even a mad person will not like to make it
his friend. The reason is because there are many consequences it can bring. The word,
consequence, is an English word, which means results or effects. So, consequences of
unemployment are those things which unemployment can result to. Hence, the consequences of
unemployment are:

 Migration;
 Conflict;
 Crime;
 Low national industrial output;
 Poverty;
 Kidnapping and robbery; and
 Lawlessness

Migration: Who will like to stay in any country where unemployment is on the high increase?
Will you like to stay there if you are unemployed when you have other places to migrate to and
secure good job at last? I am very sure that you will leave your country to another man’s country
where there is more availability of jobs to continue life in that part of the world.

What is migration? In this context, migration is movement from one particular area where one is
located to another in search of ‘greener pasture’. Unemployment have made many citizens of
specific country to move to other countries, work in the new locations, earn their money from that
new location, and even die there at their old ages because they take the new place they
migrate to as their new homes.
Conflict: There is a popular saying: an angry man is a hungry man. What is that that make the
man angry which subsequently leads to hunger? The answer is that unemployment can make a
man angry which results to hunger. When large numbers of citizens are unemployed, conflicts
can come in because they are angry and hungry at the same time.

Many disagreements that are going on in some states of the world can be attributed to
unemployment. People who are unemployed can come up one day and plan to indulge in rioting
because of the problem of unemployment in the state. They in some cases move to Government
Houses of their states in anger to show the disagreement they have against the ruling government.

Crime: What business does an employed worker have with criminal act going on in his or her
country? Most people start thinking of one crime or the other that they will indulge in to make
money when there is no source of income for them.

It is said that: an idle mind is devils workshop. Unemployment has made many minds to be idle
which hence results to crime engagement. Many crimes committed today are because people do
not have what they do for their living-unemployment. So, when they stay alone, they ‘fabricate’
one wicked act they will carry out, which is known as crime.

Low national industrial output: It is clear that any nation which faces unemployment will have
decline in industrial production. This is because those who are to be employed into various
manufacturing companies are not given opportunities to boost the output of the country.

Employing graduates and learned persons will increase products which are yearly produced in
many nations. When there is fewer numbers of cosmetic companies in a nation instead of having
many, the yearly output made by the country will be small. But when there are many cosmetic
companies that produce the same products, the yearly cosmetic products will be of high increase.
The high increase is because more workers were employed which help in rapid outputs that were
obtained. In the contrast, due to low national industrial output because of unemployment, nations
Gross Domestic Product (GDP) decreases.

Poverty: Mathematically, unemployment is directly proportional to poverty. Even any baby who
is taught on unemployment can know that unemployment can result to Poverty. In the 2013
release of top countries that face high unemployment rate by International Labour Organization,
Africa faces the highest unemployment rate. When this is compared with poverty level of African
Continent, it is not farfetched that Africa continent is the poorest continent in the world. Yes! It is
the poorest.

From the list of the world poorest country in the year 2013, the world poorest country is
Democratic Republic of Congo located in African continent. In fact
out of the top fifteen poorest countries released by the International Monetary Fund World
Economic Outlook, fourteen of then came from Africa.

Kidnapping and robbery: What is kidnapping? Kidnapping can be defined as abduction of any
person to receive ransom which can be money before the kidnapped is released from the captive.
In criminal Law, kidnapping is the taking away or transportation of a person against the person’s
will, usually to hold the person in false imprisonment, a confinement without legal authority
(definition from Wikipedia).

Kidnapping is of higher increase in the recent time and government and other important
organizations are fighting on daily basis to see that the menace is reduced in many parts of the
world.

Missing of human beings is a daily occurrence in the United States of America. An astounding
2,300 Americans are reported missing every day, including both adults and children. This is as
reported by the body in charge of keeping the records of the missing persons.

The question is: what are they used for or where can the abducted be found? Many persons said
that some of these persons are used for sacrifices while others said that they are sold out to people
in the form of slavery but nobody can really tell. According to a justice department study, nearly
90 per cent of the abductors are men.

According to the report on kidnapping, in the year 2000, Iraq was known to be the country with
highest kidnapping activity with total of about 1, 500 foreigners kidnapped in that year. In the
year 2004, Mexico registered the highest in kidnapping activity. Again, an estimate of about 12,
500 to 25, 500 persons are kidnapped per year in the world.

In totality, the cause of the kidnapping can be traced to be unemployment as one who has no job
to sustain him can indulge in such act to make some money which he or she will use for daily
expenses.

I do not think that a full flesh human being who makes enough money from where he is employed
will have time to plot evil in the name of kidnapping to get ransom in return. Even if there
are those who are working and still engage in kidnapping of people, they are of minimal
number.
 Robbery is another social criminal activity which can to be as a result of unemployment. One
whose conscience is dead and wants to make money either by hook or crook can force himself
into robbery to make money. Robbers have caused a lot of injuries to innocent persons and have
shaded lots and lots of blood.

Many do this because they want to meet up with the demand of life, which they think that the only
option available to them is by armed robbery attacks.

Lawlessness: To make Law is good as it is a set of rules that govern group of persons living is a
particular society or state. Laws are made by the Lawmakers and anyone who goes against it faces
the ‘kind of music’ attributed to the offence. In a nutshell, any citizen that goes contrary to the
Laws governing the state faces the punishment attributed to it.

Notwithstanding the importance of Law in any society, unemployment has made some Laws to be
Lawlessness. How is that possible? People are no longer obedient to certain Laws that govern a
group of persons because the government who made the Laws are not able to provide
opportunities for the citizens to get employed in many places of work.

The constitution of every nation prohibits armed robbery, yet people break this Law as a result of
what unemployment caused.

Using Monetary Policy in Solving the Problem of Unemployment:

There are two main strategies for reducing unemployment

 Demand side policies to reduce demand-deficient unemployment

(unemployment caused by recession)
 Supply side policies to reduce structural unemployment / (the natural rate of unemployment)

Quick list of policies to reduce unemployment:

1. Monetary Policy – cutting interest rates to boost AD

2. Fiscal Policy – cutting taxes to boost AD
3. Education and training to help reduce stuctural unemployment
4. Geographical subsidies to help firms invest in depressed areas
5. Lower minimum wage to reduce real wage unemployment
6. More flexible labour markets, to make it easier to hire and fire workers.

1. Monetary Policy:(REDUCING INTEREST RATES)

Monetary policy would involve cutting interest rates. Lower rates decrease the cost of borrowing
and encourage people to spend and invest. This increase
AD and should also help to increase GDP and reduce demand deficient unemployment.

Also lower interest rates will reduce exchange rate and make exports more competitive.

In some cases, lower interest rates may be ineffective in boosting demand. In this case, Central
Banks may resort to Quantitative easing. This is an attempt to increase money supply and boost
aggregate demand. See: Quantitative easing.

Evaluation

 Similar problems to fiscal policy. e.g. it depends on other components of AD.

 Lower interest rates may not help boost spending, if banks are still reluctant to lend.
 Demand side policies can help to reduce demand deficient unemployment e.g. in a
recession. However, they cannot reduce supply side unemployment. Therefore, their
effectiveness depends on the type of unemployment that occurs.

Supply side policies for reducing unemployment

Supply side policies deal with more micro-economic issues. They don’t aim to boost overall
aggregate demand, but seek to overcome imperfections in the labour market and reduce
unemployment caused by supply side factors. Supply side unemployment includes:

 Frictional
 Structural
 Classical (real wage)

Policies to reduce supply side unemployment:

1. Education and training. The aim is to give the long term unemployed new skills which
enable them to find jobs in developing industries, e.g. retrain unemployed steel workers to have
basic I.T. skills which helps them find work in service sector. – However, despite providing
education and training schemes, the unemployed may be unable or unwilling to learn new skills.
At best it will take several years to reduce unemployment.

2. Reduce power of trades unions. If unions are able to bargain for wages above the market
clearing level, they will cause real wage unemployment. In this case reducing influence of trades
unions (or reducing Minimum wages) will help solve this real wage unemployment.
3. Employment subsidies. Firms could be given tax breaks or subsidies for taking on long term
unemployed. This helps give them new confidence and on the job training. However, it will be
quite expensive and it may encourage firms to simply replace current workers with the long term
unemployment in order to benefit from the tax breaks.

4. Improve labour market flexibility. It is argued that higher structural rates of unemployment
in Europe is due to restrictive labour markets which discourages firms from employing workers in
the first place. For example, abolishing maximum working weeks and making it easier to hire and
fire workers may encourage more job creation. However, increased labour market flexibility could
cause a rise in temporary employment and greater job insecurity.

5. Stricter benefit requirements. Governments could take a more pro- active role in making
the unemployed accept a job or risk losing benefits. After a certain time period the
government could guarantee some kind of public sector job (e.g. cleaning streets).

This could significantly reduce unemployment. However, it may mean the government end up
employing thousands of people in un-productive tasks which is very expensive. Also, if you make
it difficult to claim benefits, you may reduce the claimant count, but not the International Labour
force survey.

6. Improved geographical mobility. Often unemployed is more concentrated in certain

regions. To overcome this geographical unemployment, the government could give tax breaks to
firms who set up in depressed areas. Alternatively, they can give financial assistance to
unemployed workers who move to areas with high employment. (e.g. help with renting in
London)

2. Fiscal Policy:

Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate
of economic growth. The government will need to pursue expansionary fiscal policy; this
involves cutting taxes and increasing government spending. Lower taxes increase disposable
income (e.g. VAT cut to 15% in 2008) and therefore help to increase consumption, leading to
higher aggregate demand (AD).

With an increase in AD, there will be an increase in Real GDP (as long as there is spare capacity
in the economy.) If firms produce more, there will be an increase in demand for workers and
therefore lower demand-deficient unemployment. Also, with higher aggregate demand and strong
economic growth, fewer firms will go bankrupt meaning fewer job losses.
Keynes was a strong advocate of expansionary fiscal policy during a prolonged recession. He
argue that in a recession, resources (both capital and labour) are idle, therefore the government
should intervene and create additional demand to reduce unemployment.

Impact of Higher AD on Economy

However,

1. It depends on other components of AD. E.g. if confidence is low, cutting taxes may not
increase consumer spending because people prefer to save. Also, people may not spend tax
cuts, if they will soon be reversed.
2. Fiscal policy may have time lags. E.g. a decision to increase government spending may
take a long time to have an effect on increasing AD.
3. If the economy is close to full capacity an increase in AD will only cause inflation.
Expansionary fiscal policy will only reduce unemployment if there is an output gap.
4. Expansionary fiscal policy will require higher government borrowing – this may not be
possible for countries with high levels of debt, and rising bond yields.
5. In the long run expansionary fiscal policy may cause crowding out, i.e. the government
increase spending but because they borrow from private sector, they have less to spend
and therefore AD doesn’t increase. However, Keynesians argue crowding out will not
occur in a liquidity trap.
UNEMPLOYMENT IN RELATION TO LABOUR ECONOMICS:

Unemployment is the situation which exists when members of the labour force wish to work but
cannot get any job. It is therefore used in the sense of involuntary unemployment rather than
voluntary decision on the part of someone to choose leisure rather than work and properly
earn income. It is borne out of choice rather than out of no available job to do.

Measurement of unemployed people:

A person is considered officially unemployed if in a given period of time, the person is:-
a. 15 years old or above but not above 64 and was not institutionalized and the person is
not working and he is available for work.
b. The person is engaged in some specific job seeking activity for at least 4 weeks

c. The person is waiting to be called back in a job from which he or she has been laid off

d. Somebody who was looking for a job but was temporarily ill.

e. Somebody who is waiting to report for a job within 30 days.

Unemployment rate – is defined as the percentage of the total labour force that is unemployed
but actively seeking employment and willing to work. This is a measure of the extent of
unemployment of the labour force at any particular time.
Unemployment rate are used to access the macroeconomic health of the economy.We should
know that the labour foce is a composition of those who are employed and those who are
unemployed. The unemployment rate is the parentage of the labour force that is unemployed.
Unemployment rate of labour force:
Unemployment rate (%) = Unemployed Persons x 100

Total Labour force

Mathematically it is expressed as: UR = UP/LF x 100 Where;
UR = Unemployment Rate

UP = Total number of Unemployed Persons LF =

Total Labour Force
For example assume that in 2015 Nigeria’s total population was 100 million people. Out of this
number, 80 million people were in the labour force, but 10 million people were unemployed.
From the above show the unemployment rate;

Solution:

10/80 x 100/1 = 12.5 percent.

Therefore we say that Nigeria’s unemployment rate in 2015 was 12.5 percent.

Natural rate of unemployment

It is the unemployment at which no excess demand or supply exists in the overall market. It is the
rate at which job vacancy equal the number of unemployed
It is the unemployment rate that will occur in the long-run if the expected and the actual rate
of inflation are equal.
STOCK FLOW MODEL OF UNEMPLOYMENT

The stock indicates the continuous movements of flow of the pipe between the various categories
of labour force, remember that labour force categories are the employed, the unemployed and
those who are not in the labour market.

Population not in the

labour force (N)
(5) New entrant & Re-entrants
(4) Retirement & withdrawal

Unemployed (U)
(6) New hires
(1) Discharges

(7) Recalls
(3) Quits

(2) Laid
 Employed (E)

The diagram above shows that at any point in time there is a measurable stock of people in each
of the three categories which represents categories of the labour force status.
Note that the stocks are simultaneously been depleted and replenished by numerous flows in and
out of each category. None of them are in nature at each point in time.
There are some facts to know about the stock flow model of unemployment;
1. The unemployment rate u/E +u can remain constant even though the specific people in the
unemployment pool change due to the flow.

2. Several distinct flow factors can act independently or interact with one another to cause
the unemployment rate to change.
Illustration:
If for example, the rate of flow to flow increase while other flow rate remain constant this will
increase the absolute number of people who are unemployed. While leaving the size of the labour
force unchanged.

Secondly if the rate exists from the employed category (E) for example, due to retirement and
withdrawals increase, while other flows remains unchanged the unemployment rate will rise, but
in this case the absolute number of unemployed persons remain at its previous level because that
flow is from employed to the labour force or the size of labour force would rise and since
unemployment would remain constant more people would moved from the category to the
employed category.
Lesson:
1. A considerable period of unemployment is due to prolong period of unemployment
of relatively few people.
2. During recession, the rate of laid offs and discharges rise and the rate of new
hires and recalls falls more than compensating for
 decline in voluntary job and quits, consequently the overall
unemployment rate rises.
3. First time labour force entrance and people reentering the labour force
constitutes over 1/3 of the unemployed.
4. Unemployment rate stay higher than expected during earlier phases of an
economic recovery because improved job prospects entice people who are
out of labour force to seek work and become officially unemployed.