CPA I

SECTION 2

ECONOMICS

TOPIC: POPULATION, LABOUR AND UNEMPLOYMENT

A. POPULATION

INTRODUCTION
Population and unemployment are among the greatest world concerns.
Population size is not a problem per se; so long a country has resources
to cater for it. However, increasing population is considered as a world
problem because most developing are recording high population growth
rates while their economies continue to perform poorly. Developing
countries have a high growth rate of between 2.5% and 3.5% compared
to developed countries with 0.3% and 1% but in overall, world population
has been on an increasing trend due to the industrial revolution, rapid
technical progress, increased standard of living (sanitation, education,
health, etc). Death rate has been falling drastically and this has led to a
high population growth rate especially in Sub-Saharan Africa. If this
population growth rate is maintained, the world population is likely to
double after every 40 years.

Why Study Population?

The study of the population is referred to as demography and almost all
countries of world have developed an interest of studying their
population. This is because knowledge in population is crucial in the
decision making process. Information on population, which are
important include:

 Composition of population: This deals with age and sex composition

of the population. It tries to address questions such as: How many
men or women exist in an economy? Does the economy have more
young or old people?

 Change in population. This refers to the absolute number of

population. It tries to examine whether the population is increasing or
decreasing, and the reasons behind that change.

Decisions that Require Prior Knowledge of Population

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 Provision of social services: It is necessary to know where to
construct more schools, hospitals or roads. In many respects, the
prior knowledge of population is necessary.

 Planning: In planning the economy needs to know her resources

including human resources. It would like to know when to place
factories, etc.
 Income distribution: In order to know the income per capital, we
must first know the total national income and the total population so
as to divide the income by the population as follows:

Per Capita Income = National Income

Population

The size of population and the rate of its growth are also important. The
rate of growth shows whether population is increasing or decreasing, and
also shows the factors underlying the population growth.

KASNEB PAST PAPER QUESTION

June 1998 Question 2(b)
Discuss why economists should be interested in the changing structure
of the population in a country such as Kenya or any other developing
country. (9 marks)

EARLY THEORIES OF POPULATION: THE MALTHUS THEORY

Population study has attracted both economists and non-economist from
early time. This is because population has always been a world problem.
Early theoreticians came up with a lot of writings on population among
them was Rev. Thomas Malthus and this is the only economist whose
theory has been accepted on population, although most of his writings
were speculations. Rev. Malthus was a British Economist, who by
profession was a reverend. He was the first to give special attention to
population when he wrote a book entitled “The Principle of
Population”. At first, Rev. Malthus wrote that the British population was
increasing tremendously. He foresaw an increase in population to terrible
extents unless checked. This population would in the near future reach
disastrous extents since his views were purely pessimistic.

The Malthusian basic proposition was that there was a direct

relationship between population growth and supply of food. A given
increase in food supplies and thus living standard would tend to cause
an increase in country's population. Malthus judged society's welfare by
strict criteria of the amount of food available to the people of the country.

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Rev. Malthus employed the law of diminishing returns to support his
view that food production grew more slowly than population. He asserted
that population tended to grow in a geometrical progression, i.e.,
1,2,4,8,16, 32,etc., while food production tended to grow in an
arithmetic progression, i.e., 1,2,3,4,5, 6 etc.

These two propositions are illustrated in the table below for a

hypothetical country:

Year Population Food Supply Food Supply Per

(Million) (Million tonnes) Head (tonnes)

1970 10 10 1
2000 20 20 1
2030 40 30 0.75
2060 80 40 0.5

In the above table, the population doubles itself after every 30 years, i.e.,
it increases at geometrical ratio while food supply only grows at
arithmetic ratio. Thus, food supplies must fall as population increases, a
situation referred to as population explosion.

Rev. Malthus gave remedies to this situation, which he described as

"checks" to population increase. In fact, he identified two types of
checks:

(1) Positive check such as vice and misery like famine, diseases,
epidemics, such as HIV/AIDS), wars, infanticide, plague, genocide,
etc., which increase death rates and,

(2) Preventive checks such as early marriages, celibacy, and voluntary

restraints, all of which slow down birth rates.

Being a clergyman, Rev. Malthus was a strong advocate of preventive

checks. He warned that if people failed to control their birth rates, nature
would apply and more unpleasant positive checks would occur to reduce
population.

Criticism of Malthusian Theory

 It underestimates the impacts of economic development in general
and food production in particular because of technological advances
and international trade. These two factors enable a country to
increase the production of food and other goods, which support
growing population and labour force.

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 The well-publicised instances of mass starvation in several countries
of sub-Saharan Africa have been as a result of drought and civil wars
rather than the law of diminishing returns which underlies the
Malthus theory.

 Rev. Malthus argued that population would not grow without in food
supplies or a rise in living standards above the subsistence level. The
population of developing countries however has grown without
significant rises in food production or income per head.
 Malthus remedies were criticised as being unnatural letting people die
in inhuman circumstances. As a Reverend, he was so pessimistic and
he himself could do nothing to change things.

KASNEB PAST PAPER QUESTION

June 1998 Question 2(a)
Explain the Malthusian theory of population. (6 marks)

THE CONCEPT OF OPTIMUM POPULATION

A country's optimum population can be defined as the size of population
at which given the volume of all capital and land resources, and the state
of technology, income per head (i.e. per capita income) is maximized. In
other words, optimum population is a situation whereby when labour is
combined with the other available factors of production, maximum
output is attained. This can be illustrated in the diagram below: -
National Income

A
Under population Over population

O P Population
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In the above diagram, curve OA shows income per head for different
population sizes. Income per head is maximised at population OP and
this, therefore is the optimum population. If the country’s population is
below OP, it can be described as under-populated: This means that the
country does not have sufficient labour resources to exploit all other
resources to the full and an increase in population will give rise to an
increase in income per head. In other words, under population can be
defined as a situation whereby a country has insufficient labour to make
the most effective use of its land and capital.

On the hand, if a country's population is above OP, it can be described

as overpopulated: in this case, the law of diminishing returns is
operating and a decrease in population would increase income per head.
In other words, Overpopulation is a situation where a country’s
population is in excess of optimum population. This means that the
economy has redundant labour force or excess labour force and its
population outstrips the resources. To overcome the problem of over
population, a country has to look for resources and check the population
by decreasing birth rate. It can also, be more innovative by introduction
of new resources.

The optimum population is not static. It can at any time be eroded away
by certain forces such as discovery of new resource, which will lead to a
new optimum point. Another factor, such as accumulation of more
factors of production, is also likely to result to a new optimum
population.

Criticism of the Concept of Optimum Population

 Estimation of optimum population usually faces calculation problems:
It is a cumbersome process and this could result to errors.
 Continuous change in data for economic development implies that no
sooner are the estimates calculated, than they become outdated.
 The concept of optimum population is based on narrow economic
viewpoint and fails to take into account social and political factors.

KASNEB PAST PAPER QUESTION

June 1998 Question 2(c)
Discuss the concept of optimal population. (5 marks)

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IMPACTS OF CHANGING IN POPULATION
Population is always dynamic, that is, either increasing or decreasing.
Generally speaking, change in population comes about in two ways: -

(1) Natural Means: This refers to birth rate and death rate, both of
which can alter the population greatly. For instance, population will
decline when the birth rate is lower than the death rate, and it will
increase if the birth rate is high. The current population changes in the
world today denote an increasing trend. Moreover, as population
experiences better standards of living due high income, which is
accompanied by better food diet, improved medical care, etc., it will
increase.

(2) Migration: Many people leave their own countries for other countries
(emigration). This reduces population in a country where people are
migrating from and increases the population of the country receiving the
immigrants.

Relationship between Birth-rates, Death-rates, and Growth Rates

Generally, the world population is always on an upward trend; a fact

attributed to birth rates being in excess of death rates. Birth rate is
defined as the number of births per a thousand population per annum.
Natural population growth rate is equal to birth rate minus death rate.

Impact of Natural Growth Rate on Population

Population is likely to increase overtime if growth rate is positive
meaning that the birthrate is in excess of death rate. On the other hand,
if death rate is in excess of birthrate, it means that growth rate is
negative. The consequence is that total population will, in the long run,
diminish. However, this is unlikely to happen in reality due to other
factors such as immigration, which affect population changes.

Several factors determine the growth rate of a country's population.

Improvements of health facilities and availability of food leads to
reduction in mortality rate and hence an increase in population growth
rates. However, for an economy to provide better health facilities, its
national income must be growing.

Family planning policies on the other hand lead to reduction in growth

rate. The level of education coupled with the standard of living also
determined the growth rate. Educated people are more responsive to
family planning. A person with a high income provides a better care his
family and because he would like to maintain such a standard, he is
likely to accept family planning. Factors such as famines, wars,
epidemics, plagues, etc., lead to negative growth rates.
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Impact of Growth Rate on Age Structure
If growth rate is positive, there will be many more young people in an
economy than old people. In such a case the goods demanded will be
those young people need such as educational services. Conversely, if
growth rate is negative, there will be more old people than young people
and the goods demanded would mostly be those of old people such as
medical services, oldage homes, etc.

Impact of Growth Rates on Dependency Ratio

If growth rate is positive, there are more young children than old people
in an economy, thus leading to a high dependency ratio. Young children
do not support themselves economically and thus, they need to be
maintained by the smaller proportion of the adult and this is the
situation in most developing countries. On the other hand, when there is
a negative growth rate, there will be more old people, and thus
dependency ratio will be low and this is the case in developed countries.

Consequences of a Declining Population

Depending on the rate at which the population is declining, a country's
resources will remain underutilized due to lack of sufficient labour force.
Moreover, if such an economy has been experiencing unemployment, the
number of unemployed will drop. However, there will be a general drop in
the level of productivity resulting to a fall in aggregate demand.

Population and Economic Development

A high population can both be an asset and a liability to an economy.
Population plays a leading role in a developing economy as it provides
labour force and market for goods and services. This will however depend
on the country's ability to create more employment opportunities to
absorb the excess labour and its income distribution so as to provide a
sustained market for goods and services. Conversely, a high population
can be burden to a poor economy since it must be provided with services
such as education, health, security, housing, sanitation, etc, which will
constrains its limited resources.

Population and Labour Force

The size of the population determines the size of a country's labour force.
An increasing population will lead to a high labour force supply
irrespective of its qualities and its willingness to work. On the other
hand, a small population results to low labour supply in an economy.

Population and Investment

As population expands, it becomes necessary to increase investment due
to market for goods and services. In order to meet this demand, capital
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must be accumulated so as to expand the output. This means that all
sectors of the economy must grow not only to provide goods and services,
but also to provide jobs to its labour force. Conversely, when population
is declining, the demand for goods and services and hence accumulation
of more capital stock will grow at a relatively slow pace slow. However,
such a country can produce with the aim to exploring external markets.

POPULATION CONTROL POLICIES

Most developing countries are incapable of supporting a large population.
Rapid population growth, which is an impediment to development, has
three major effects:

 The challenge of future job creations. As the population increases,

a country will need to come up with policies and strategies of creating
more jobs so as to absorb its excess labour force, failure to which it
will experience the problem of unemployment.
 Dependency burden: A high dependency ratio will result from an
increasing population due to its high birth rate. This implies that a
country will require more resources to support its dependants with
education, health, housing, etc. However, this will only be possible if a
country have a sustainable economic growth and development.
 Poverty: An increasing population without corresponding high
economic growth rate could result to majority of its people suffering
from abject/absolute poverty.

Unless developing countries check their high population growth rate in

the long run they may face serious macroeconomic problems such as
unemployment, high dependency ratio and abject poverty. They should
therefore consider adopting family planning programmes as a remedy.
When adopting it as a population control measure, certain issues need to
be taken into account:

 To bring about social and economic development, people must be

better of socially.
 Family planning is linked to material and child health services.
 Family planning programme is supposed to be voluntary and it must
take in consideration people's inclinations, customs and beliefs.
 Family planning programme should lay emphasis on the spacing of
birth rather than the number of children.

However, family planning programme has not succeeded in many

developing countries due to several factors such as:

 Lack of personnel for family planning programme implementation.

 There is lack of technical facilities.

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 People are repulsive to programme, having scanty knowledge about it.
 High level of illiteracy in most developing countries.

When World Population Council (WPC) recommended the policy of family

planning, Kenya became the first Sub-Saharan African country to
implement this programme, and to extent it has succeeded to bring down
population rate from 3.5% to 2.9% annually. Developing countries can
also consider adopting other measures that can to bring down their high
population growth rates, though some of them sound quite controversial:

 Taxing people who produce an extra child above the maximum

number permitted.
 Delaying marriage by promoting girl child education.
 Giving allowance to families with few children.
 Abortion be legalized.
 Emphasis on sex education in schools.

If all the above methods fail, most developing countries' population in the
long run will be one of miseries, plague (HIV/Aids scourge), war, etc. so
that in the end, Rev. Malthus' prophecy is proved right.

B. LABOUR
Definition of Labour: Labour is a factor of production, which comes
from the population of a country. The population, which is working is

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referred to as labour force. This constitutes mostly the active part of the
population between the age of 15 – 49 years. The size of labour force of a
given economy depends on certain factors, which are as follows:

 Standard of civilization
 Social organisation of a country
 Attitudes of the people towards work
 The employers
 The mobility of labour

THE STRUCTURE OF LABOUR

Labour structure deals with the skills which the labour force posses:
This refers to the quality of Labour force. We have skilled labour,
unskilled or semi-skilled. Skills also refer to willingness to work and the
adaptability of labour force. In developing countries there is a high
supply of non-skilled and semi-skilled labour.

DEMAND AND SUPPLY OF LABOUR

1. DEMAND FOR LABOUR
As regards the demand for labour as a factor of production the following
propositions or observations can be made:

 Demand for labour is derived demand and this means that labour
is not demanded by firms for its own sake but for the production
of goods and services. This means that the greater the demand of a
product, the greater will be the demand for labour employed for its
production.

 The elasticity of demand for labour can be said to be directly

related to the elasticity of demand for the product. Under a
situation of elastic demand for a product, it will be more difficult to
pass an increase in wages in form of higher prices because the higher
prices will cause a relatively large reduction in the demand for labour.
If, on the other hand, labour is producing a commodity, which is
relatively inelastic in its demand, an increase in wages will not have a
significant effect on demand for labour.

 The elasticity of demand for a certain type of labour depends on

the proportion of the total cost accounted for labour cost. In case
where labour accounts for only small proportion of the total cost the
demand will tend to be inelastic. This is common in capital intensive
industries such as chemicals and oil refining. On the other hand, in
case of labour intensive industries, like construction and agriculture,
labour cost makes a significant proportion of the total cost. Hence, if
these increased costs of labour are passed on inform of higher prices,

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 the effects of demand for labour are likely to be much more
significant.

 The easier it is to substitute labour for other factors, the more

elastic it is the demand for labour as the cost of labour rise
relative to other factors the more elastic will be the demand for
labour relative to other factors of production. This is a case
whereby labour can easily be substituted to labour savings equipment
such as computers. This means where it is relatively easy to
substitute capital for labour the demand for labour will become more
elastic as wage rise relative to other factors inputs.

Marginal Productivity Theory of Wage Determination

Since marginal product is the change in total output that occurs when
an additional unit of a variable factor is added to the fixed factor, how
does this help to explain the marginal productivity theory of wages
determination?

The marginal productivity theory states that under perfect completion

every work of same skill and efficiency in a given category will receive
wage equal to the value of the marginal product revenue (MPR): of that
type of labour. But what is MRP? MRP of a variable factor refers to the
total revenue change resulting from the employment or hiring of one
more or one less of the unit of the variable factor. MRP can be regarded
as the amount by which the output would be increased if one more
labour or worker is employed while quantity of the other factors of
production remains constant.

MPR is calculated as the Marginal Physical Product of the variable

factor multiplied by Marginal Revenue (MRP) = MPPL X MR). Under
conditions of perfect competition the price of a product does not change
as the firm varies its output and as such MRP of labour is clearly equal
to MPP of labour multiplied by the price of a product. That is MRP L X
Price.

Marginal Factor Cost (MFC)

MFC is the change in total cost resulting from employment or hiring one
or more unit of a variable factor. It is expressed as follows: -

MFC = TC Where TC = Total Cost

L L = Labour

In case of a perfectly competitive labour market the wage rate will be

fixed which implied that each additional worker adds his/her own wage
to the total cost.

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Average Revenue Product (ARP)
ARP represents in monetary terms (money value) the average return per
unit of labour employed. It is calculated by multiplying the average
product of labour by the price of that product. That is

ARP = AP X P Where AP = Average Product

P = Price

P
Wages (ARP1 MPR)

W0

W1

ARP
C
MPR

0 Q1 Q0 No. of workers

From the above diagram both MPR and ARP rise at first but eventually
decline because of diminishing returns.

The MPR curve cuts the ARP curve at its maximum point. A profit-
maximizing firm will employ additional workers as long as those workers
are adding more to the firm revenue than the firm total costs. From the
above diagram labour will be employed up to the point where MRP is
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equal to the wage rate. If from the above diagram prevailing wage rate WO
is determined by the market, the firm will continue to employ additional
labourer up to Q0 as this will add more to revenue than to cost. Above Q0
additional labour will cost more than its marginal revenue and will as
such not be employed. At a higher wage rate W1 the firm will employ
fewer workers Q1 therefore MRP curve tells us how much labour will be
demanded at any given wage or price of labour. This implies that MRP
curve in the firms demand curve for labour.

NB: The relevant section of MRP curve in the section B1C since in this
section MRP lies below ARP and the part that lies above B1C cannot be
part of the demand curve for labour as the firm will be making losses on
each worker employed.

Weaknesses of Marginal Productivity Theory of Wage Determination

 The theory ignores the supply side of labour and it cannot therefore
be regarded as a complete theory of factor price. That is, it assumes
that supply of labour is constant or fixed.
 This theory is based on weak assumptions because it assumes that
all units of labour are the same or homogeneous. In reality
however, labour is not a homogeneous factor of production because of
differing innate characteristics and skills. (Innate means inborn part
of someone’s nature or a talent.)
 The theory is based on assumption that all firms aim to maximise
profits, although this may not always be the case in practice.
Public corporations/enterprises, for example, do not surely attempt to
maximize profits and in such cases the theory is unlikely to explain
adequate explanation of demand for labour.
 The theory assumes that the level of wages and labour
productivity are independent, although this is not necessarily valid
since increased wages may lead to additional efforts from the work
force such that productivity increases.
 It is difficult to calculate the marginal productivity of labour especially
in service industries such as restaurants, banking, communication,
Insurance, management, services etc. It becomes even more difficult
to calculate marginal physical revenue as it is assumed that other
factors of production are held constant.
 The marginal productivity theory assumes that labour is free to
enter market or leave for alternative employment. This is far from
being the case in reality.
KASNEB PAST PAPER QUESTIONS
1. June 2007 Question 6
(a) State the marginal productivity theory of wage determination. (2 marks)
(b) Outline five limitations of the marginal productivity theory of wage
determination. (10 marks)

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 2. May 2002 Question 7(c):
Discuss the effects of imposing a minimum wage rate above the market
rate:
(i) In a competitive market. (3 marks)
(ii) Under conditions of monopsony (3 marks)
3. May 2001 Question 4(c):
What are the determinants of demand for labour? (6 marks)

DETERMINANTS OF LABOUR SUPPLY

 Number of hours worked (see the backward bending curve of labour)
 Size of the population
 Age composition of the population.
 Alternatives of self-employment
 Structure of education and training
 Utility and disutility of available jobs
 Geographical preference of labour
 The role of the government
 If the government influences the supply of labour through minimum
wage registration.
 Retiring age
 Marital status
KASNEB PAST PAPER QUESTIONS
1. June 2007 Question 5(c):
Discuss the barriers to occupational mobility of labour. (10 marks)
2. Dec. 2006 Question 3(b):
Using a diagram for illustration, describe the backward bending supply
curve of labour. (6 marks)
3. Nov. 2004 Question 5(a):
(i) Explain the factors that determine the supply and demand for labour.
(6 marks)
(ii) Explain the backward bending supply curve for labour. (5 marks)
4. Dec. 2003 Question 6(a):
Explain with a sell labelled diagram how an individual supply curve of
labour (man-hours), initially slopes upwards and then backwards at
higher level of wage. (4 marks)

5. Dec. 2001 Question 8(c):

List and briefly explain the main determinants of the size of the
economically active population of a country. (6 marks)

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WAGE DIFFERENTIALS
A wage differential exists both between occupations and even within the
same occupation. There is also a striking wage differential between
agricultural and industrial sectors.

Factors responsible for wage differentials between occupations

(1) Non-homogeneity occupations: The demand and supply in such a
market determines wage rate in certain occupations. Each type of labour
has its own level of demand and supply. The greater the demand the
higher the wage rate and the lower the demand the lower the wage rate.
In occupations where relatively unskilled labour is used, prices tend to
be depressed by the fact that unskilled labour is abundant in supply.

(2) The effectiveness of the trade unions: The more effective the trade
union in a given occupation, the higher the wage rate in that occupation
is likely to be. Organization and strength of trade unions in some
occupations may increase their collective bargaining power. Thus, for
example, unions in industry tend to be stronger than unions in
agriculture thereby accounting in part for higher wages in industry.

(3) Job satisfaction: Some jobs offer a higher level of satisfaction than
others and as such even though wages are lower some workers in these
jobs may not go for higher paying jobs despite qualifying for them.

(4) Job Security: Different jobs offer different levels of job securities and
therefore a worker may prefer a low paying job because of is added
security e.g. in civil service compared to private sector.

(5) Sex gender: Occupations which are predominantly "women" tend to

gain or pay less than those that are pre-dominantly men occupation.
This is because women are unlikely to form strong trade unions and also
could less access to educational opportunities.

(6) Existence of international barriers: People working in different

countries will earn different wages simply because it is not easy for them
to move from low paying countries to high paying countries because of
barriers such as the necessity to possess a work permit.

(7) Ignorance of wage differential: Individuals are sometimes simply

unaware that some jobs may pay more than others may.

(8) Where labour constitutes different proportion of inputs in

different economic activities: Where it constitutes a lower proportion
demand tends to be inelastic and this means workers are likely to be
paid a higher wage rate compared to where it constitutes a large
proportion of the total cost.
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(9) Value added: The value added by labour in different activities differs.
A higher value added often justifies a higher wage and vice versa.

(10) Limited mobility of labour between occupations: There are

certain jobs where it is difficult to move from one occupation to another
especially jobs that are very technical in their orientation. Such jobs
include medicine, engineering, architecture, actuarial science, etc. Such
jobs are likely to be paid highly compared to occupations where it is easy
to enter e.g. accountancy, law, journalism, teaching, etc.

(11) Pleasantness of jobs and their social esteem prestige:

Unpleasant jobs often have to pay high wages in order to attract workers
who in some cases are performed by poorly paid and unskilled labour
who do not have any other opportunities.

(12) Irregularities or regularity of employment may also account for

wage differentials, as regular employment tends to offer low wage rates.
KASNEB PAST PAPER QUESTIONS
1. Dec. 2006 Question 6(b):
Wage differentials exist both between occupations and within the same
occupation. Discuss the factors that are responsible for wage differentials
between occupations. (10 marks)
2. Dec. 2003 Question 6(b):
Explain the factors responsible for wage differential between different
occupations. (6 marks)

Why Agricultural wages are lower than Industrial Wages

Factors explaining why agricultural wages are lower than industrial
wages are:

(a) Use of relatively unskilled labour, which is abundant in supply in

agricultural sector and this, tends to depress wages.

(b) Productivity determines price of factors of production. Farmers'

product (i.e. agricultural produce) has little value added and the
value of marginal product is generally low in the agriculture, thus
further depressing wages in the sector.

(c) Labour unions tend to be stronger and better organised in

industrial and commerce than in agriculture.

(d) Agriculture workers accept lower wages because they supplement

their farm wage incomes with subsistence production of their family
plots, which are sometimes provided by the employer.

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(e) Labour constitutes a small proportion of the industrial inputs but a
higher proportion in agricultural sector. This implies there is more
inelastic demand in the industrial sector compared with agricultural
sector.

KASNEB PAST PAPER QUESTIONS

1. Nov 2004 Question 5(b):
Explain the factors responsible for wage differentials in the agricultural
and industrial sectors. (4 marks)
2. May 1999 Question 7(b):
Explain the factors that may cause wage differentials between urban and
rural economic activities in your country. What are the economic
implications of such wage imbalances? (10 marks)

Wage Differentials within the Same Occupation

Wage differential also exists in the same sector. This is explained by the
following factors:

(1) Experience: Older workers are likely to earn more than younger ones
for doing the same work because they seem more experienced and skilled
at it.

(2) Paid by result jobs: In jobs where pay varies with the results e.g. tea
picking, dress making, etc. People may do the same occupation and earn
differently for some of the workers may work harder than others.

(3) Job security: The same kind of work done by different employers may
result in different, due to differences in job securities offered by different
employers e.g. a doctor in a private hospital, but in turn may enjoy
higher job security.

(4) Geographical and economic factors: As regards geographical,

workers working in remote areas are paid hardship allowance and thus
leading to wage differentials. On the other hand, economic factors also
affect this where workers working in the urban areas are paid higher
compared to workers in rural areas because in urban areas the cost of
living is considered to be high compared to rural areas.

(5) Sex differentials: Men earn more than women in the same
occupation because married couples are considered to be earning the
same income for the household. Therefore the wife’s wage is considered
to be the second income and she is often prepared to accept a lower wage

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than a man. However, such discriminations are removed due to
affirmative action under equality campaigns.

(6) International barriers: Same occupations may pay differently

indifferent countries because of barriers to the national restrictions
imposed in foreign workers.

TRADE UNIONS
Trade unions are workers organizations or associations whose objectives
are to protect the interest of their members. The wages and salaries of
the working population majority settled by a kind of collective bargaining
procedure.

What is Collective Bargaining?

This is a process whereby the representatives of the employers in the
working industries may negotiate with the representatives if workers in
that industry.

A trade union is a monopolist in the sense that it is the only seller of a

particular type of labour, while employers association is a monopsonist
if it is the only buyer of a particular type of labour.

Functions of Trade Unions

The traditional functions of trade unions fall into five categories, viz.:
 To bargain for increase wages of its members.
 To bargain for the efficient and sound fridge benefits for it’s members
such as house allowance, medical benefits, protection from harmful
chemicals, better working physical conditions, etc.
 To protect members against unfair dismissals.
 They advise the government in the economic planning process.
 They educate their members through seminars, workshops and
courses that they organize.

The Basis for Wage Claims by the Unions

Trade unions demand for higher wages are normally based on one or
more of the following four grounds: -

(1) The cost of living arguments: High cost of living produces the real
income for the work force. This could due to higher rate of inflation.

(2) Differential arguments: Workers doing similar jobs should get the
similar rewards, that is, benchmarking their pay with their counter-parts
either within or outside the country.

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(3) Profitability argument: Workers argue that they are often
responsible for increase in company's profit and therefore they should be
paid more.

(4) The productivity argument: Workers will argue there is

improvement in labour productivity and they should therefore be paid
more.

KASNEB PAST PAPER QUESTION

Nov 2004 Question 5(b):
What are the bases for higher wage demands by trade unions? (5 marks)

The Effectiveness of Trade Unions in Developing Countries

What factors make trade unions in developed countries more effective
than in developing countries? Or what are the reasons, which limit the
bargaining power of trade unions in developing countries?

The following factors limit the effectiveness of the trade unions in

developing countries:

 There is no freedom to strike in developing countries and right to

strike is often limited. For example, strikes in Kenya are illegal
without good cause.
 Unskilled and semi-skilled labour is abundant in developing
countries due to high level of unemployment and therefore striking
workers can easily be replaced.
 Low income in developing countries implies that contribution by
workers to trade unions is low and so their ability to support
members while on strike is limited. Similarly, workers cannot support
themselves while on strike due to low saving resulting to low pay they
earn.
 Lack of unemployment relief: Developing countries do not have
state benefits on which workers can depend on while on strike and as
a result workers are reluctant to join the general strike.
 Most trade unions are not able to perform their functions effectively
due to lack of funds, as members' contribution is limited.
 Racial and tribal differences may divide up the members and
union leaders thereby making the union ineffective.
 Corruption among the union members often results in
misappropriation of fund which may lead to mistrust by members
who may consider their leaders to be puppets of their
employer/management.

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 A high rate of turn over in developing countries reduces the
effectiveness of trade unions because it contributes to frequent
changes in the leadership and membership of the trade unions.
KASNEB PAST PAPER QUESTION
May 2002 Question 7(c):
What reasons limit the bargaining power of trade unions in developing
countries? (8 marks)

Factors Favoring a Trade Union in its Negotiations for Higher Wages

 A finished product where demand is inelastic
 If wages constitute a small proportion of the total cost as the case in
the capital-intensive industries.
 An increase in workers productivity.
 Supernormal profits earned by an employer.
 Where there is a high employment level in the economy i.e., where
there is low unemployment rate.
 Power of the weapon of the state, that is, freedom to strike or
availability of state benefits.

C. UNEMPLOYMENT

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Definition: Unemployment is a macro economic problem where labour
force is willing and capable if being employed at a prevailing or ruling
market wage rate but it involuntarily are unutilized or underutilized. In
simple terms, unemployment is inability to obtain a job when one is
willing and to work. Unemployment rate is the ratio of the people
unemployed divided by the total work force multiplied by 100 per cent,
to express it into percentage.

Unemployment rate = No. of unemployment x 100%

Total labour force

Layoff and a greater number of school-leavers without a job increase

unemployment rate. On the other hand, unemployment rate is reduced
by unemployed people finding jobs and laid off workers being re-
employed. However, it is difficult to measure the unemployment rate in
developing countries because of the considerable size of the informal
sector where activities are rarely portrayed accurately by employment
figures.
KASNEB PAST PAPER QUESTIONS
1. Dec. 2005 Question (a):
(i) Define the term “unemployment”. (2 marks)
2. May 2000 Question 2:
Define the term unemployment. (2marks)
3. May 2000 Question 2:
Developing countries have experienced persistent and rising inflation and
unemployment problems.
(a) Define each of the two problems and explain their causes. (12 marks)
(b) Suggest economic policies that may be used to reduce the magnitude of
these problems. (8 marks)
(Total: 20 marks)

TYPES OF UNEMPLOYMENT
(1) Open involuntary unemployment: Open unemployment occurs
when a person is willing to work at a ruling or prevailing wage rate but
he/she is not able to secure a job. It is prevalent or common in the
modern urban sector where young people aspire to obtain white color
jobs and are unable to get them due to stiff competition in the
employment market. This type of unemployment is also referred to as
urban employment.

(2) Disguised unemployment: This type of unemployment, which is also

referred to as hidden unemployment occurs when the work available to
a given labour or workforce is insufficient to keep it fully employed so
that some members of the work force could be withdrawn without loss of

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output because the marginal physical product of labour (MPPL) is zero.
Therefore this type of unemployed is related to the law of diminishing
return or the law of variable proportion.

Disguised unemployment is very common in the rural areas, which have

high population density and agriculture is the dominant economic
activity, while land may be scarce or limited. In such a situation
individuals or workforce are in fact distinguisely employed since they
could be withdrawn without a fall in output because their MPP is zero or
negative. This type of unemployment is also applicable in the civil service
in most developing countries where the number of people hired often
exceeds those that are required.

(3) Unproductive unemployment – is the type of unemployment

whereby the worker’s skills are not being fully utilized due lack of
appropriate tools. As a result, the worker’s out is lower than it could if
he/she was given the right tool his/her employment remains
unproductive.

(4) General Unemployment: General unemployment is the one which is

widespread throughout the economy and not confined to any particular
region or certain category of labour force. In such a type of
unemployment, all sectors of economy are affected. Normally, as it is a
result of economic recession or depression which may lead to massive
lay-off in most sectors of economy.

(5) Structural Unemployment: This type of unemployment is sector or

industry specific because it affects a certain category of labour force or a
particular region. It results from imbalance between the supply of a
particular group of workers and the demand for their services. For
example, where technological changes affect a certain category of labour
like the information technology which renders labour with particular
skills redundant and this result to technological unemployment. On
the demand side, changes in consumer taste can result in structural
unemployment in that consumers' taste changes in favour of imported
goods. For example, due to liberalization, some locally made products are
facing competition from imported substitute products and a case in point
are the footwear and textile industries, whereby several factories have
been shut down due to consumers' preference for imported goods.

(6) Seasonal Unemployment: Regular seasonal unemployment is

caused by annual variations of seasons, which affects economic activities
in sectors such as agriculture, tourism, construction, fishing, etc. During
peak season the demand for labour will be very high where as during off
peak or low season there will be standard drop in their demand. This
affects employment activities especially for unskilled labour.
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(7) Frictional unemployment: It arises from immobility in the labour
force rather than lack of demand for labour. It is essentially short term in
nature and it also includes unemployment which arises when people are
changing jobs or because of lack of knowledge of job opportunity.

(8) Demand deficiency unemployment: Demand deficiency

unemployment, which is also referred to as Keynesian unemployment,
is associated with trade cycles. During recovery and boom phases of
trading the demand for output (and hence labour) is high and
unemployment rate is quit low. However, during depression the demand
for output and labour force is very low leading to high unemployment
rate. Demand deficiency unemployment is therefore related to lack of
effective aggregate demand which affects the production of goods and
services whereby many industries operate below their capacity, which
consequently leads to massive lay off, resulting to high rate of
unemployment. Such kind of unemployment is relatively long term in
nature. Keynes therefore directed his attention to this kind of
unemployment, which had affected American and European economies
during the World Economic Depression in the early 1930s.

(9) Voluntary unemployment: This type of unemployment is common in

developed countries where all factors of production are almost fully
utilised. A situation for instance whereby 98% of the labour force is
employed could have the remaining 2% voluntarily unemployed. This is
because the 2% unemployed is not ready to work at the current wage
rate as it has a hope of getting a highly paid job in future. In the short
run it remains voluntarily unemployed.

KASNEB PAST PAPER QUESTIONS

1. Dec. 2006 Question 3(a):
Distinguish between “disguised unemployment” and “demand deficient
unemployment. (4 marks)
2. Dec. 2005 Question 5(a):
(ii) State and explain any five types of unemployment. (10 marks)
3. Dec. 2002 Question 3(a):
Citing practical examples, explain the differences between the following
types of unemployment listed below and how each affects economic
growth.
(i) Seasonal and casual unemployment. (7 marks)
(ii) Disguised and unproductive unemployment. (7 marks)
4. May 1999 Question 3(b):
Explain any four major types of unemployment experienced in your
country. (8 marks)

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5. Dec. 2008 Question 5(a):
Distinguish between "demand deficient unemployment" and "frictional
unemployment". (4 marks)

CAUSES OF UNEMPLOYMENT IN DEVELOPING COUNTRIES

(1) Lack of cooperative factors of production: These are either
essential factors, which are combined with labour in the production
process. A firm can only employ additional labour if it has more of other
cooperating factors such as capital and land. Most developing countries
however lack these factors especially capital and foreign exchange. As a
result, much of their labour force remains unutilized or underutilized.

(2) Rapid population growth: In many developing countries,

population grows faster than the overall growth of the economy. This
leads to a situation whereby labour force entering the labour market is
faster than the absorption capacity of the economy, resulting from
general unemployment.

(3) The use of inappropriate technology: In developing countries

technology is often labour saving or capital-intensive, which is
inappropriate since most developing countries are labour surplus (excess
labour) economies. A high capital-labour ratio implies that less labour is
absorbed in production process and hence causing unemployment.

(4) Distortion of relative factor prices: In many developing countries

government distorts prices making capital relatively cheap compared to
labour through policies such as investments incentives, tax allowances,
subsidized interest rate, low tariffs, etc, on capital inputs. On the other
hand, labour is made artificially expensive through minimum wage
legislation and trade unions. When labour becomes expensive, firms
substitute it with capital; leading to high rate of unemployment will
absorb not much of it.

(5) The nature of education system: Education systems in many

developing countries were adopted from developed countries and are
geared towards white-collar jobs, which don’t confirm to the realities of
the labour market. The rate of job creations in the formal sector in most
developing countries where white-collar jobs are found and required is
much lower than the number if people entering the labour market,
leading to open/urban unemployment.

(6) Seasonally in production: This cause of unemployment is common

in developing countries where agricultural is predominant. Changes in
weather lead to seasonal unemployment in sectors such as agriculture,
tourism and construction industries.

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(7) Limited product market: This as a cause of unemployment is
applicable where production is for export and where primary products
constitute an important proportion of the export volume. Primary
products have low prices and income elasticities of demand. This implies
that the expansion of output in the primary products is low and the
potential for employment creation is limited.

(8) Massive rural to urban migration: Rural urban migration is the

physical movement of people from rural to urban centers of a country
and it could result to results to urban/open unemployment. High rural
to urban migration can be explained by the following factors: -
 Perception of the existence on income differentials between the rural
and urban areas. This explains the standard push from subsistence
agriculture and pull of relatively high urban wages.
 The migrants perceive high chance of getting jobs in urban areas
because of concentration of industries there.
 Non-availability of social amenities in the rural areas.
 Pressure on limited land in the rural areas.
 Social factors including the desire of migrants to break away from
traditional constrains of social organization.
 Physical factors including climatic and meteorological factors or
disasters such as floods, drought, tsunami etc., which are common in
the rural areas.
 Demographic factors including a fall in mortality rate and
consequently high rate of population growth.
 Communication factors such as improved communication and
transportation, urban orientation education system and the
“modernizing” effect of introduction of radios, T.V, mobile phones,
Internet etc.

(9) Adverse effects of economic reform programmes: Many

developing countries are undertaking economic reform programmes
which entail the liberalization of certain key sectors of the economy such
as textile, footwear, sugar, etc. Such policies may contribute to domestic
unemployment if locally produced goods are unable to compete with
cheap foreign imported products. This will results in some domestic firms
shutting down their operations and consequently laying off many
workers. In addition, economic reform programmes may have a
component of civil service reform, which may lead to retrenchment of
many workers in civil service and this will lead to unemployment.
KASNEB PAST PAPER QUESTIONS
1. May 2006 Question 8(a):
(i) Highlights the economic implications of a high rate of rural to urban
migration in developing countries. (4 marks)

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(ii) Identify the policy measures that can be implemented in developing
countries to minimize the rising trend of rural to urban migration. (5 Marks)
2. Dec. 2005 Question 5(b):
Regional development imbalances are widespread in less developed
countries. Discuss policy recommendations that the governments in these
countries may adopt to curb the imbalances. (8 marks)
3. May 2001 Question 1(b):
Discuss the main causes of unemployment and suggest possible measures
that would implement to contain unemployment problems. (18 marks)
5. May 2000 Question 3(c):
Discuss some of the economic implications of a rising trend in the rural-
urban migration and offer policy recommendations to reverse it. (10 marks)
6. May 1999 Question 7(b):
Explain the factors that may cause wage differentials between urban and
rural economic activities in your country. What are the economic
implications of such wage imbalances? (10 marks)

REASONS FOR CONCERN ABOUT UNEMPLOYMENT

Why should there be concern about unemployment as a macro-economic
problem? In other words, what are the adverse effects of unemployment
in an economy?

 Unemployment represents a waste of potentially productive human

resource. When labour is unemployed, this means that the economy
is not producing as much as it could. This is also an indication that
national income is lower than it could be and hence national welfare
is lower when unemployment rate is high.

 Greater unemployment means a higher dependency ratio since the

few employed have to support a large number of dependants.

 A high rate of unemployment leads to an increase in social problems

such as crime, commercial sex workers, drug abuse, family breakups,
child labour, etc. Unemployment also contributes to other problems
like personal suffering and distress, which can lead to rising incidents
of mental disorders.

 A high level of unemployment can also result to overcrowding in

urban areas leading to urban unemployment which is caused by
rural-urban migration. As a result a city/town council is not able to

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 provide sufficient services such as sanitation, housing,
transportation, etc.

 Unemployment also represents a loss of human capital since the

unemployed labour will gradually loose its skills. This is because
constant work and practice maintain skills.

 In order to maintain the unemployed the government will be forced to

increase it’s expenditures in social amenities and this contributes to a
drain in its expenditure, which could be used for other development
projects.

KASNEB PAST PAPER QUESTION

Dec 2008 Question 5 (b):
Explain the consequences of high levels of unemployment in developing
countries. (8 marks)

POLICIES TO COMBAT UNEMPLOYMENT IN DEVELOPING

COUNTRIES
Government policies to influence employment are armed at reducing the
total number of unemployed people and to increase the level of job
creation. This may be achieved through the formulation and
implementation of various policies as discussed below:

(1) Increasing employment in the private sector: Potential for

employment in the public sector is limited. The government should
therefore come up with policies that can support the private sector
development so that it generates more jobs. These are: -

 Reduced budget deficit will have the effect of lowering interest rate
and this will facilitate private sector development, as this will lower
the cost of credit therefore encouraging investment and hence
creation of more jobs.
 Reduced budget deficit also means that the government will
concentrate on improvement of infrastructure which facilitates the
private sector investment and hence creation of jobs.
 Government can also provide incentives to Micro Finance-Institutions
(MFIs), which provide capital to small and medium enterprises and
because they are labour intensive they could create more jobs.
 Government should promote the informal sector (i.e., Jua Kali) given
that the possibilities of job creation in the formal sector are limited.
Informal sectors tend to be more labour intensive and hence it can
generate more jobs.
 The government should give tax incentives to private sector so that it
invests more and create more employment opportunities.

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(2) Pricing policies that can encourage the use of appropriate
technology: This means pricing policies that can guide investment
towards labour- intensive technology in different sectors of economy.
Government policies should aim at lowering the relative price of labour
so as to create more jobs. However, before such a policy is implemented,
possible reaction of the trade unions should not be overlooked, as they
can be counter-productive.

(3) Relevant education system be adopted: Education system adopted

should emphasis skills required by the labour market since
indiscriminate educational expansion contributes to unemployment.
Education expansion should thus balance the need to provide general
education and professionalism skills since the later are often more ready
marketable. There should be more emphasis in technical and science
education. Furthermore, the government should design an education
system, which would prepare people for self-employment.

(4) Seasonal unemployment: This can be solved by diversification of

economic activities and more innovation. This may include providing
manufacturing and service industries to regions which depend on
agriculture and tourism with alternative jobs during off-peak seasons.
This will bring down seasonal unemployment.

(5) Diversification of products and markets: Diversifying from primary

products into other lines if production where demand and income are
more elastic can also help to solve the problem of unemployment. This
includes further processing of primary products and adding more value
on them. However, such diversification policies should still utilize labour-
intensive technology. Firms should also seek new markets for their
products if the current markets are unlikely to expand. For example,
they should exploit the opportunity created by regional economic
integration such as COMESA and East Africa Corporation (EAC) trading
blocs.

(6) Intensive rural development: The long-term way to combat rural-

urban migration is by emphasizing rural development. To achieve this,
the government should give incentives for industries to be located in
rural areas so as to create more employment opportunities. The
government should also provide infrastructure in rural areas such as
electricity, roads, communications, water, etc so as to exploit the
resources available in those areas. All these will minimize rural-urban
migration, which will eventually reduce urban unemployment.

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(7) Encouraging Foreign Direct Investment (FDI): To attract FDI,
developing countries should aim at making political and economic
environment conducive to the inflow of foreign capital. Foreign capital
can contribute substantially to enhancing domestic employment
opportunities.

(8) Encouraging the use of domestic resources: Developing countries

should promote domestic resource utilization whenever possible because
exploitation of such resources can lead to creation of more job
opportunities. They should avoid the use of foreign inputs as this creates
employment abroad.
KASNEB PAST PAPER QUESTIONS
1. Jun 2007 Question 6(c):
Identify and briefly explain policy measures that can be adopted in
developing countries to reduce the level of unemployment. (8 marks)
2. Dec 2002 Question 6(c):
Outline policies which if implemented would alleviate the problem of
unemployment. (6 marks)
3. May 2001 Question 1(b):
Discuss the main causes of unemployment and suggest possible
measures that would implement to contain unemployment problems.
(18 marks)
4. May 2000 Question 2(b):
Developing countries have experienced persistent and rising inflation and
unemployment problems.
Suggest economic policies that may be used to reduce the magnitude of
these problems. (8 marks)
5. May 1999 Question 4(c):
Discuss ways and means of alleviating the unemployment problem in
developing countries. (6 marks)
5. Dec 2008 Question 5(c):
In the context of developing economies, suggest policy measures that
could be adopted to combat unemployment. (8 marks)

THE RELATIONSHIP BETWEEN INFLATION AND UNEMPLOYMENT:

THE PHILIP CURVE
Professor A.W Phillips tried to explain the relationship between money
wage rate of inflation and unemployment. He asserted that it is
difficult for any economy to solve the problem of inflation at the same
time solve the problem of unemployment. If for example an economy
wants to reduce unemployment rate, then it will be forced to expand

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money supply through the use of monetary policy instrument which will
cause inflation, as money supply in circulation will expand especially
when economy is at full employment. On the other hand, if an economy,
wants to control inflation the government will be forced to reduce money
supply using either fiscal or monetary policy instruments resulting to
unemployment since interest rates will rise and hence lowering
investments. According to Prof. Phillips this relation implies that as the
rate of inflation fell unemployment rate increased.

This further means that zero inflation will be associated with some
unemployment rate and it is not possible to achieve zero inflation and
zero unemployment at the same time as illustrated below: -

Long run Phillip curve

Pc1 Pc2

 1.5%

 1.5%

0
Unemployment rate (%)

In the above diagram, assume that initially there was unemployment rate
at 2.5% and “0” price and wage inflation assume further that the
government now increases aggregate demand in order to reduce the level
of unemployment to say 1.5% of the labour force. This implies a
movement along Phillip curve and the new unemployment rate of 1.5% is
associated with a 3% increase in inflation. This in effect implies that
Phillips curve has shifted outward from Pc1 to Pc2 in the long run
because this cannot be achieved in the short run. Thus, in order to
achieve full employment some acceptable level of inflation and
unemployment are inevitable for an economy to have a standard

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economic growth. This is because where inflation is “0” nobody will
invest in such an economy. Similarly where there is no unemployment
nobody will invest there because all the labour force is fully utilized.

Weakness of Philip’s curve

The Philip curve does not explain for a situation with simultaneous rise in
inflation and unemployment a phenomenal common in developing
countries especially where an in developing countries especially where an
economy is faced with cost push inflation.

KASNEB PAST PAPER QUESTIONS

1. May 2005 Question 6(b):
(i) Using the Phillips curve, explain the relationship between
unemployment and inflation. (5 marks)
(ii) Explain whether this relationship always holds. (4 marks)
2. May 1999 Question 4(a):
Briefly explain the concept of “Phillips Curve”. (4 marks)

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