What are the causes and effects of unemployment

Unemployment occurs when a person is able and willing to work but currently without work. The prevalence of unemployment is usually measured using the unemployment rate, which is defined as the percentage of those in the labour force who are unemployed. The unemployment rate is also used in economic studies and economic indices such as the United States’ Conference Board’s Index of Leading Indicators as a measure of the state of macroeconomics.

The causes of unemployment are disputed. Keynesian economics emphasizes unemployment resulting from insufficient effective demand for goods and services in the economy (cyclical unemployment). Others point to structural problems and inefficiencies inherent in labour markets; structural unemployment involves mismatches between demand and supply of laborers with the necessary skill set, sometimes induced by technologies or globalisation. Classical orneo classical economics tends to reject these explanations, and focuses more on rigidities imposed on the labor market from the outside, such as unionization, minimum wage laws, taxes, and other regulations that may discourage the hiring of workers (classical unemployment). Yet others see unemployment as largely due to voluntary choices by the unemployed and the time it takes to find a new job (frictional unemployment). Behavioral economics highlights phenomena such as sticky wages and efficiency wages which may lead to unemployment.

There is also disagreement on how exactly to measure unemployment. Different countries experience different levels of unemployment; traditionally, the United States tends to experience lower unemployment levels than countries in the European Union,[2] although there is some variation there, with countries like the UK and Denmark outperforming Italy and France and it also changes over time (e.g. the Great Depression) throughout economic cycles.

Types of unemployment

Economists distinguish between various types of unemployment, including cyclical unemployment, frictional unemployment, structural unemployment and classical unemployment. Some additional types of unemployment that are occasionally mentioned are seasonal unemployment, hardcore unemployment, and hidden unemployment. Real-world unemployment may combine different types. The magnitude of each of these is difficult to measure, partly because they overlap.

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Though there have been several definitions of voluntary and involuntary unemployment in the economics literature, a simple distinction is often applied. Voluntary unemployment is attributed to the individual’s decisions, whereas involuntary unemployment exists because of the socio-economic environment (including the market structure, government intervention, and the level of aggregate demand) in which individuals operate. In these terms, much or most of frictional unemployment is voluntary, since it reflects individual search behaviour.

On the other hand, cyclical unemployment, structural unemployment, and classical unemployment are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by the unemployed in the past, while classical (natural) unemployment may result from the legislative and economic choices made by labour unions and/or political parties. So in practice, the distinction between voluntary and involuntary unemployment is hard to draw. The clearest cases of involuntary unemployment are those where there are fewer job vacancies than unemployed workers even when wages are allowed to adjust, so that even if all vacancies were to be filled, there would be unemployed workers. This is the case of cyclical unemployment, for which macroeconomic forces lead to microeconomic unemployment.

Frictional unemployment

Frictional unemployment is the time period between jobs when a worker moves from one job to another. Frictional unemployment is an example of a productive part of the economy, increasing both the worker’s long term welfare and economic efficiency, and is also a type of voluntary unemployment.

Frictional unemployment is always present in an economy, so the level of involuntary unemployment is properly the unemployment rate minus the rate of frictional unemployment, which means that increases or decreases in unemployment are normally under-represented in the simple statistics.

Classical unemployment

Classical or real-wage unemployment occurs when real wages for a job are set above the market-clearing level, causing the number of job-seekers to exceed the number of vacancies.

Libertarian economists like F.A. Hayek argued that unemployment increases the more the government intervenes into the economy to try to improve the conditions of those with jobs. For example, minimum wage laws raise the cost of labourers with few skills to above the market equilibrium, resulting in people who wish to work at the going rate but cannot as wage enforced is greater than their value as workers becoming unemployed. They believed that laws restricting layoffs made businesses less likely to hire in the first place, as hiring becomes more risky, leaving many young people unemployed and unable to find work.

Some, such as Murray Rothbard, suggest that even social taboos can prevent wages from falling to the market clearing level.

Some economists theorize that this type of unemployment can be reduced by increasing the flexibility of wages (e.g., abolishing minimum wages or employee protection), to make the labor market more like a financial market

Cyclical or Keynesian unemployment

Cyclical or Keynesian unemployment, also known as deficient-demand unemployment, occurs when there is not enough aggregate demand in the economy. It gets its name because it varies with the business cycle, though it can also be persistent, as during the Great Depression of the 1930s. Cyclical unemployment is caused by a business cycle recession, and wages not falling to meet the equilibrium level. Cyclical unemployment rises during economic downturns and falls when the economy improves. Keynesians argue that this type of unemployment exists due to inadequate effective aggregate demand. Demand for most goods and services falls, less production is needed and consequently fewer workers are needed, wages do not fall to meet the equilibrium level, and mass unemployment results.

Some consider this type of unemployment one type of frictional unemployment in which factors causing the friction are partially caused by some cyclical variables. For example, a surprise decrease in the money supply may shock participants in society.

With cyclical unemployment, the number of unemployed workers exceeds the number of job vacancies, so that if even all open jobs were filled, some workers would remain unemployed. This kind of unemployment coincides with unused industrial capacity (unemployed capital goods). Keynesian economists see it as possibly being solved by government deficit spending or by expansionary monetary policy, which aims to increase non-governmental spending by lowering interest rates.

In contrast, Austrian economists argue that government spending and policies are the root cause of economic cycles and cyclical unemployment and should be reformed or removed.

Classical economics rejects the conception of cyclical unemployment, seeing the attainment of full employment of resources and potential output as the normal state of affairs.

Structural unemployment

Structural unemployment occurs when a labor market is unable to provide jobs for everyone who wants one because there is a mismatch between the skills of the unemployed workers and the skills needed for the available jobs.[10]

Structural unemployment is hard to separate empirically from frictional unemployment, except to say that it lasts longer. As with frictional unemployment, simple demand-side stimulus will not work to easily abolish this type of unemployment.

Structural unemployment may also be encouraged to rise by persistent cyclical unemployment: if an economy suffers from long-lasting low aggregate demand, it means that many of the unemployed become disheartened, while their skills (including job-searching skills) become “rusty” and obsolete. Problems with debt may lead to homelessness and a fall into the vicious circle of poverty. This means that they may not fit the job vacancies that are created when the economy recovers. Some economists see this scenario as occurring under British Prime Minister Margaret Thatcher during the 1970s and 1980s. The implication is that sustained high demand may lower structural unemployment. This theory of persistence in structural unemployment has been referred to as an example of path dependence or “hysteresis”.

Much technological unemployment (e.g. due to the replacement of workers by machines) might be counted as structural unemployment. Alternatively, technological unemployment might refer to the way in which steady increases in labor productivity mean that fewer workers are needed to produce the same level of output every year. The fact that aggregate demand can be raised to deal with this problem suggests that this problem is instead one of cyclical unemployment. As indicated by Okun’s Law, the demand side must grow sufficiently quickly to absorb not only the growing labor force but also the workers made redundant by increased labor productivity. Otherwise, we see a jobless recovery such as those seen in the United States in both the early 1990s and the early 2000s.

Seasonal unemployment may be seen as a kind of structural unemployment, since it is a type of unemployment that is linked to certain kinds of jobs (construction work, migratory farm work). The most-cited official unemployment measures erase this kind of unemployment from the statistics using “seasonal adjustment” techniques.

Long-term unemployment

This is normally defined, for instance in European Union statistics, as unemployment lasting for longer than one year. It is an important indicator of social exclusion.

Hidden unemployment

Hidden, or covered, unemployment is the unemployment of potential workers that is not reflected in official unemployment statistics, due to the way the statistics are collected. In many countries only those who have no work but are actively looking for work (and/or qualifying for social security benefits) are counted as unemployed. Those who have given up looking for work (and sometimes those who are on Government “retraining” programmes) are not officially counted among the unemployed, even though they are not employed. The same applies to those who have taken early retirement to avoid being laid off, but would prefer to be working. The statistic also does not count the “underemployed” – those with part time or seasonal jobs who would rather have full time jobs. Because of hidden unemployment, official statistics often underestimate unemployment rates.

Full employment.

In demand-based theory, it is possible to abolish cyclical unemployment by increasing the aggregate demand for products and workers. However, eventually the economy hits an “inflation barrier” imposed by the four other kinds of unemployment to the extent that they exist.

Some demand theory economists see the inflation barrier as corresponding to the natural rate of unemployment. The “natural” rate of unemployment is defined as the rate of unemployment that exists when the labor market is in equilibrium and there is pressure for neither rising inflation rates nor falling inflation rates. An alternative technical term for this rate is the NAIRU or the Non-Accelerating Inflation Rate of Unemployment.

No matter what its name, demand theory holds that this means that if the unemployment rate gets “too low,” inflation will get worse and worse (accelerate) in the absence of wage and price controls (incomes policies).

One of the major problems with the NAIRU theory is that no one knows exactly what the NAIRU is (while it clearly changes over time). The margin of error can be quite high relative to the actual unemployment rate, making it hard to use the NAIRU in policy-making.

Another, normative, definition of full employment might be called the ideal unemployment rate. It would exclude all types of unemployment that represent forms of inefficiency. This type of “full employment” unemployment would correspond to only frictional unemployment (excluding that part encouraging the McJobs management strategy) and would thus be very low. However, it would be impossible to attain this full-employment target using only demand-side Keynesian stimulus without getting below the NAIRU and suffering from accelerating inflation (absent incomes policies). Training programs aimed at fighting structural unemployment would help here.

To the extent that hidden unemployment exists, it implies that official unemployment statistics provide a poor guide to what unemployment rate coincides with “full employment”.

Causes of unemployment.

Causes of frictional unemployment

Frictional unemployment may be a result of the following reasons:

Mobility of labour:

People generally seek another job either because they are fired from the existing job or because they are they want to get a better job. In the transition period they are unemployed.

Expansion of the Labour force

Every year more and more individuals join the labor force. During the phase of their job search they are unemployed. 

Many economists have termed frictional unemployment a sign of economic well being. Frictional unemployment can exist only in a fast growing economy where the labor force is expanding, mobile, flexible and adaptable. People generally seek another job either because they are fired from the existing job or because they are they want to get a better job. In the transition period they are unemployed.

Expansion of the Labour force

Every year more and more individuals join the labor force. During the phase of their job search they are unemployed. 

Many economists have termed frictional unemployment a sign of economic well being. Frictional unemployment can exist only in a fast growing economy where the labor force is expanding, mobile, flexible and adaptable. 

Labour mobility

In the presence of perfect information and mobility of labor, people out of job can easily find in an industry, which is in need of labor. This way, structural unemployment may be reduced.

Structure of the regional economy

If certain industries are closing down then it may so happen that industries may get concentrated in a certain part of the nation. This may make employment difficult and increase the resulting structural unemployment. 

High Gross Domestic Product, it is seen, is not indicative of a low structural unemployment :

The main reason for the high level of unemployment is technological progress. Don’t get me wrong; progress is good and it makes life easier. But if every year we produce the same amount of goods with fewer people — in a few years far less working hours are needed to produce all the goods that are required. The historical trend has been to use less and less working hours per week. If we do not continue this trend, the supply of working hours is greater than the demand. An oversupply of working hours means they are worth less, wages and salaries get reduced. Also many persons are out of work; their working hours are no longer needed. Those that are out of work have no income and therefore the demand for goods goes down. With fewer sales, less gets produced, more persons are laid off. This is a vicious circle that accelerates unemployment and produces crime; because some will turn to crime to obtain income .

Causes Of Unemployment In Pakistan:

Economy of an individual is at the utmost priority of every democratic as well as welfare state. Since the dawn of human history, individual needs have been prioritized by every human being. These individual needs can be met by proper sources of employment. After the transformation of the world from a feudal to an industrial society, the needs of an individual have risen sharply, giving due importance to finance.In Pakistan, due to gigantic rise in population, individual finances have been disturbed a lot. This is because of rising unemployment. The major cause of unemployment in Pakistan are following.

The first cause of unemployment or joblessness in Pakistan is worsening law and order situation. Owing to this negative social phenomenon, foreign direct investment is sliding down to the bottom. According to the economic survey of Pakistan, in the current decade FDI was minimum last year.Also investors are loosing confidence in the political and economic system of the country therefore they are reluctant to invest in any new business venture. Resultantly, new jobs are not generating while the job seekers are rising continuously in the country.

Secondly, Agriculture is account for the maximum job provision in the country. Agriculture sector is facing severe challenges of water shortage, climatic changes and technological backwardness in recent years. These factors have hit the per acre yield negatively which caused loosing of jobs of several people. In 2009-10, agriculture showed a growth of only 2% against the target of 3.8% while nearly 62% of Pakistan population is living in rural areas, and is directly or indirectly linked with agriculture for their livelihood.

Thirdly, Industry is also a heaven for educated as well as semi-educated labour force in the country. Pakistan industry is short listing its labour because of gradual decrease in demand as well as acute energy shortage. Energy shortfall crosses 5500 MW at time causing severe damage to production capacity.

Fourthly, World economic depression coupled with American war against Terror has also put negative impacts on our economy. It has not only doubled our expenditures on military front but also defaced Pakistan’s image in international arena. These factors have put international investment in Pakistan at risk. Therefore, Pakistan is not attracting new investment causing unemployment in the country.

Fifthly, United States of America spent 368 billion in 2007 on research and development whereas Pakistan’s attention towards this sector is the least. By spending on education and research, we can create more specialized fields thus generating more jobs. In the 2010 budget, Pakistan has earmarked only 2% of its GDP on education which is the lowest in whole of the region.

Sixthly, Population increase is also a cause of unemployment in Pakistan. Till 2010, Pakistan’s population is 173.54 million wheras most of the population is unable to survive in the financial race because of illiteracy. In Spite of these factors poor governance, deep rooted corruption, faulty educational system, lack of quality educational institutions and feudalism are also aggravating the situation further.

Finally, we can hold the government responsible for the its poor performance in financial sector. Poor governance have marred the performance of our economic sector by every side and government has taken only cosmetic measures to redress the problem. Dr. Ishrat Hussain suggestions to improve the governance have been put on the backburner.

Economy of an individual is at the utmost priority of every democratic as well as welfare state. Since the dawn of human history, individual needs have been prioritized by every human being. These individual needs can be met by proper sources of employment. After the transformation of the world from a feudal to an industrial society, the needs of an individual have risen sharply, giving due importance to finance.In Pakistan, due to gigantic rise in population, individual finances have been disturbed a lot. This is because of rising unemployment. The major cause of unemployment in Pakistan are following.

The first cause of unemployment or joblessness in Pakistan is worsening law and order situation. Owing to this negative social phenomenon, foreign direct investment is sliding down to the bottom. According to the economic survey of Pakistan, in the current decade FDI was minimum last year.Also investors are loosing confidence in the political and economic system of the country therefore they are reluctant to invest in any new business venture. Resultantly, new jobs are not generating while the job seekers are rising continuously in the country.

Secondly, Agriculture is account for the maximum job provision in the country. Agriculture sector is facing severe challenges of water shortage, climatic changes and technological backwardness in recent years. These factors have hit the per acre yield negatively which caused loosing of jobs of several people. In 2009-10, agriculture showed a growth of only 2% against the target of 3.8% while nearly 62% of Pakistan population is living in rural areas, and is directly or indirectly linked with agriculture for their livelihood.

Thirdly, Industry is also a heaven for educated as well as semi-educated labour force in the country. Pakistan industry is short listing its labour because of gradual decrease in demand as well as acute energy shortage. Energy shortfall crosses 5500 MW at time causing severe damage to production capacity.

Fourthly, World economic depression coupled with American war against Terror has also put negative impacts on our economy. It has not only doubled our expenditures on military front but also defaced Pakistan’s image in international arena. These factors have put international investment in Pakistan at risk. Therefore, Pakistan is not attracting new investment causing unemployment in the country.

Fifthly, United States of America spent 368 billion in 2007 on research and development whereas Pakistan’s attention towards this sector is the least. By spending on education and research, we can create more specialized fields thus generating more jobs. In the 2010 budget, Pakistan has earmarked only 2% of its GDP on education which is the lowest in whole of the region.

Sixthly, Population increase is also a cause of unemployment in Pakistan. Till 2010, Pakistan’s population is 173.54 million wheras most of the population is unable to survive in the financial race because of illiteracy. In Spite of these factors poor governance, deep rooted corruption, faulty educational system, lack of quality educational institutions and feudalism are also aggravating the situation further.

Finally, we can hold the government responsible for the its poor performance in financial sector. Poor governance have marred the performance of our economic sector by every side and government has taken only cosmetic measures to redress the problem. Dr. Ishrat Hussain suggestions to improve the governance have been put on the backburner.

Five steps to helping Pakistan’s educated unemployed:

While the problem of individuals who are highly educated but unemployed can be found around the world, the situation in Pakistan is particularly dire and urgent: in 1994, nearly half of the unemployed in Pakistan were educated.

This form of unemployment is not only expensive, since it wastes valuable education dollars, it is also socially disruptive. Jobless but educated youth often become hopeless for any kind of future in Pakistan, or in a growing number of cases, become part of the brain drain and leave for countries in industrialized nations where there are more employment opportunities.

Part of the problem is the lack of emphasis on vocational and technical training and too much stress on abstract knowledge. In Pakistan, about 323,000 students pass the matriculation exam yearly. Out of these students, it is estimated that over half will choose post-secondary education and only 20 percent will seek vocational training or business education.

Of those who choose the path to higher education, the majority enter the general bachelor’s and master’s degree programs with little to no career counseling. This is explained by the fact that the state provides a 91 percent subsidy to higher education while recovering only nine percent of the total cost through fees. Therefore, it is very easy to obtain higher academic education in Pakistan. The problem though is that this education does not teach skills that will be marketable in the job market after graduation, thus creating a mismatch between the degrees students earn and the jobs available to them, especially in the private sector.

The other option is to seek employment with the government. This too, however, is problematic, since regional quotas and financial constraints make the pool of jobs possibly even smaller than in the private sector.

As for those who enter the job market right after high school, studies indicate that only two-thirds of them are able to find jobs, while the rest continue to be unemployed. In addition, 20,000 to 30,000 intermediate-level students fail to find jobs each year.

However, even in faculties that offer technical training, the skills taught are sorely lacking. One example is in the sciences.

Only one-quarter of matriculating students pursue further education in science. Among those who decide to pursue a career in engineering, the only option the Pakistani Universities of Engineering and Technology make available is a Bachelor’s of Science in engineering. That means these schools act as engineering colleges rather than universities, by churning out graduates with a bachelor’s degree level education and completely ignoring post-graduate training.

To make the problem worse, there is an too much emphasis on traditional areas like civil, mechanical and electrical engineering, while areas like computer and software engineering, which offer more opportunities, are generally ignored. This deals a nasty blow to young, bright students who have the interest and intelligence to succeed in such fields which are more likely to provide the promise of a job than in the traditional domains of engineering.

To bridge the yawning gap between qualified Pakistanis and the country’s job market, a number of urgent steps need to be taken to reform the educational system. Here are five that can help:

1. After students pass the Matriculation level, they should be required to take a National Aptitude. This will create two streams of students. One will include those students who will pursue general education and the other technical/vocational training. This is why the test must be designed to identify students with an aptitude for technical work so that a larger number of youth can be directed towards training programs and apprenticeship schemes.

2. Students who pursue higher university education should be more focused on research. Only the brightest and the most talented students who show an aptitude for scholarly research should be encouraged to choose higher university education.

3. Employment in the public sector should not be based on quotas, but rather on merit.

4. There must be career counseling and guidance provided to youth, so that trained experts can share their knowledge and help steer the next generation to fields that will benefit them and the country.

5. The Pakistani government should conduct labor market surveys to provide students with information about job prospects, labor market requirements and job descriptions. Armed with this information, students will be able to make better choices for their future.

Rate Of unemployment in Pakistan:

“Differnce between the two previous governments”

Efforts Made By Government:

GOVT PURSUING POLICIES TO REDUCE UNEMPLOYMENT: PAKISTANI PM GILANI

ISLAMABAD, Mar 4 (NNN-APP) – Prime Minister Syed Yusuf Raza Gilani has said that the government has devised a comprehensive policy for achieving sustainable economic growth.

Addressing participants of the 92nd National Management Course here Wednesday, he said the government has designed its polices keeping in view the objective to reduce poverty, unemployment and meet the targets set out in Millennium Development Goals.

He said the effective policy implementation to stabilize the country?s economy met with success in arresting the downward trend and the difficulties in this regard had been largely contained.

It is heartening to note that all economic indicators are now showing positive trend, he added.

? Governance is a shared responsibility of all the state institutions at all levels and the people can only be satisfied when their needs and problems are resolved at their doorstep,? he said adding this required coordination and harmonious relationship among all the institutions with the objective to serve the common man.

He underlined the need for every institution to function within its own ambit and discharge its responsibilities with sincerity of purpose.

Gilani said the concept of good governance has gained much importance in the present day where the public representatives implement an agenda which has the backing of mandate.

The key role in this regard is played by the civil servants as they are entrusted with the role of policy inputs and implementation of government?s initiatives, he added.

He said best practices and success stories from the private sector and the civil society have to be incorporated in the government?s working.

Motivation and initiatives are incentives of proper service delivery at the grassroots level. Similarly, the efficiency of the government agenda is based on the quality of governance, he observed.

If good governance is lacking the system becomes dysfunctional and service delivery is unattainable.

Inculcation of a spirit of public service must be the hallmark of your professional approach while discharging responsibilities at different government positions, he commented.

Gilani said primary responsibility as state functionaries is to perform duty with integrity, justice and honesty.

He quoted from the address of Quaid-e-Azam to the gazetted officers on 25th March, 1948:

?Of course you must be loyal to the Government that is in power. The second point is that of your conduct and dealings with the people in various departments, in which you may be: wipe off that past reputation; you are not rulers. You do not belong to the ruling class; you belong to the servants. Make the people feel that you are their servants and friends, maintain the highest standard of honour, integrity, justice and fair-play. If you do that, people will have confidence and trust in you and will look upon you as friends and well wishers?. 

The Prime Minister said the government is striving for a democratic, prosperous and progressive Pakistan which is the anchor of peace and stability for the entire South Asian region.

?Every country has its unique features, which require indigenous solutions. In our case too, we need to solve our problems by devising solutions according to our own conditions. That is where the role of civil servant is most crucial,? he added.

He said it is important that outdated and obstructive rules and regulations are revisited from time to time.

The implementation level of public policies itself is a big challenge before the civil servants.

He said policies are formulated with zeal and enthusiasm but at times their implementation is too slow or delayed and thereby the original purpose of the agenda is either lost or becomes irrelevant.

He said the government is committed to improving the capabilities of the civil servants to become responsive in delivering basic public services to the common citizens in an effi