Unemployment is a state where a person is actively searching for a job but not being able to find one. It is a measure of the health of the economy. Unemployment – A Measure of the Health of Economy. Unemployment rate is used to get the exact figure of unemployment. High level of non employed worker lowers the economic output in the economy. It is a signal of economic distress. The unemployment data is published by government from time to time.
Non employment is one of the most fundamental key indicators of the health of the economy. It shows the data of the number of people who can actually work in the economy. As a result, it will increase the productivity in the economy. When unemployment level is high it signifies less of production in the economy.
When economic output is less it results in low consumption. The propensity of consumption is low in the case of high level of unemployment. As a result the production level falls in the economy. If the high level of unemployment persists it will lead to political problems. At the same time when unemployment level is low it signifies that production capacity is high. The economy is running at its full capacity. As a result, output in the economy is maximized. This helps in increasing the standard of living. Because the wages are also high in the economy.
Types of Unemployment – Unemployment – A Measure of the Health of Economy
Unemployment in the economy is broadly classified into voluntary and involuntary unemployment. Voluntary unemployment is when a person has left a particular job and is not searching for a particular one. Involuntary unemployment is when a person looses a job due to business cycles or due to any other reason. Unemployment can be broadly be categorized into four types
Frictional Unemployment – A Measure of the Health of Economy
It occurs when a person voluntarily change jobs in the economy. Frictional unemployment is that time frame when a person searches for the job after voluntarily leaving the previous one. The best example of frictional unemployment are the new graduates in the economy. Frictional unemployed normally last for a short span of time. This type of unemployment does not affect the economy much. Frictional unemployment sometimes take time because of new recruitment takes time or due to some other factors.
Cyclical Unemployment – A Measure of the Health of Economy
Cyclical unemployment rises during the phases of different cycles in the economy. The different cycles in the economy refers to the business cycles, recession periods, inflationary periods. During the recession period, cyclical unemployment increases as there is less job in the market. In this recessionary period, money supply reduces which reduces the employment level in the economy. During the oil crisis also there was cyclical unemployment in the economy. The government employs various tools to manage cyclical unemployment in the economy.
Institutional Unemployment – A Measure of the Health of Economy
Unemployment caused by institutional factors in the economy is called institutional unemployment. The institutional factors refers to increase in minimum wages, union problems etc. The other types of institutional factors are the labor market problems that arise in the economy. Rise in minimum wages affect the employment rate in the economy. The higher minimum wage in the economy leads to non employ of the unskilled workers. Unionization leads to strikes and lockouts in the company. This leads to drop in the production of goods and services in the economy. As a result, the workers are laid off by the companies.
Structural Unemployment – A Measure of the Health of Economy
The primary cause of structural unemployment is the change in technology. In the modern times, industrial reforms have changed the dimension of production in the economy. New methods have reduced the dependency on labor to complete a work. Many organizations have shifted to capital intensive method of production. Because the output produced is high and the time duration is less. When industries shift to capital intensive method of production the unemployed people level in the economy rises. Due to technological changes in the economy many unskilled workers lose their jobs. As a result, the structural unemployment increases in the economy.
Unemployment Rate – Unemployment – A Measure of the Health of Economy
Unemployment rate is the percent of the total labor force that is unemployed or jobless. The unemployment rate normally increases or decreases when economic conditions changes. When the economy is in poor state the rate is high. But when economy is in good state the rate is low.
There are various reasons of an economy to perform good or bad. When an economy is performing good it means that there is high employment level. This will increase production and the economic output will be high.
There are six different ways to calculate unemployment rate. Bureau of Labor Statistics uses different measures to calculate the employment rate. There are different formula to measure unemployment rate in the economy. The most important formula to calculate unemployment rate is (Unemployed/Labor Force) *100. This formula is expressed as percentage of labor force.
Participation Rate vs Unemployment Rate
Participation rate is the percentage of the citizens who are in the labor force in the economy. At the same time, unemployment rate is the percentage of people who are in the labor force of a country but without a job. The Bureau of Labor Statistics measures the participation rate and the unemployed rate.
Factors affecting participation rate
There are numerous factors that affect participation rate in the economy. The most important factor is the increase in population in the economy. There is a geometric rise in the population in the world. Due to the rise in population, the people in the working age group has also increased. Therefore the participation rate in many economies have increased. Specially in USA the participation rate have increased after world war II.
Another reason that affect the participation rate in the economy is the stay-at-home persons. Students, retired persons and parents prefer to stay at home. Normally they prefer to keep themselves out of the workforce in the economy. Other reasons that affect the participation rate in the economy is the job factor. The job they are getting does not interest them. Sometimes job satisfaction also matters for the development in an economy. With the job there will be economic growth but due to loss of satisfaction, development in the economy suffers.
Factors affecting unemployment rate
The part time workers are considered in the labor force while calculating unemployment level. Unemployment rate considers the total labor force in the economy. There are certain factors that lead to an increase in unemployment rate. The key factor is the unavailability of job in the economy. When there are less jobs in the economy the unemployment rate increases. Another reason why unemployment rate increases is the less demand of the skill that a person is possessing. Suppose a person possess certain skills that are not in demand. As a result the person will be unemployed. This will also increase the unemployment rate in the economy.
Unemployment Rate and Economy
Unemployment rate is the most important indicator of labor market performance in the economy. The crisis of unemployment in the economy vastly affects the disposable income in the economy. When disposable income of a person decreases it will affect the purchasing power. Because the person is unemployed it will have a negative effect on his morale. At the same time, the economy will not produce at its optimum mark. As a result it will reduce the output in the economy.
The overall impact of unemployment falls on the economy. The optimum amount of production of goods and services will be hampered. The shortage of skilled labor hampers the production lines in the country. Unemployment has a gross effect on the market forces in the economy. Demand and supply are the two market forces. Because of unemployment in the economy, the purchasing power of the people decreases. As a result, the demand for goods and services will also decrease in the economy. This will automatically reduce the overall supply in the economy.
Unemployment and Inflation
There is an inverse relation between inflation and unemployment in the economy. Inflation and unemployment are the two indicators that are studied together. They are the two closely monitored indicators in the economy. Inflation is the general increase of price level in the economy.
A.W. Phillips was first to develop a relation between unemployment and inflation. He stated that these two indicators had a stable and inverse relation. He developed the concept of Phillips curve to explain the relationship between the two.
Phillips’s Curve – Unemployment – A Measure of the Health of Economy
This curve states the inverse relation between inflation and unemployment. When there is high inflation in an economy the unemployment level is low. But when inflation level is low the employment level in the economy is also low.
When there is high inflation in the economy it means the money supply in the economy has increased. When money supply in the economy increases then production of goods and services also increase. To increase the production in an economy, organizations hire labors to work for them. This will automatically reduce the non employment level in the economy.
When there is low inflation in the economy it signifies the money supply in the economy has reduced. When money supply in the economy reduces then production of goods and services also decrease. The companies do not have money to invest in new business. This automatically reduces the demand of goods in the market. As a result the production needs to be low. To match the demand in the economy many companies lay of workers from the organizations. Thus the employment rate decreases in the economy.
By the diagram, on the X axis there is unemployment rate. On the Y axis we have inflation rate. We can see that when inflation rate is 2% the unemployment rate is 6%. But when inflation rate increases to 5% the unemployment level drops to 3%. Thus we can conclude that when inflation rate increases unemployment rate drops.
Unemployment and Minimum Wages
The issue of minimum wages since its inception in 1930 has been a political issue. Some worker unions propose higher minimum wages while some argue against it.
If workers are paid more i.e. if the minimum wages are high then companies will hire less labors for the job. This will have a negative effect on the employment rate in the economy. The unemployment level will increase. The low skilled workers will have less jobs available in the market. At the same time, higher wages will have an impact on the profits that are earned by the company.
When workers are paid more wages there will be a positive effect on the economy. When increased wages are paid to the workers the liquidity will increase. As a result, the consumer spending will increase in the economy. This will benefit the employers, because the items are purchased in the economy. At the same time, employers will retain the skilled labor force for a longer period of time that will save the cost of hiring and training.
Cost of Unemployment – Unemployment – A Measure of the Health of Economy
Unemployment in the society has a larger cost to bear. It is not just about the financial cost but more than that. Unemployed people faces the blunt of the society. Not only they loose the income opportunities but at the same time they loose their mental peace. Mental peace and physical peace are parts of development economics. When a person is unemployed, he/she looses the confidence to face the society as well. Their physical and mental health are compromised as well.
This has a larger impact on the society. It directly affects economic development as a concept. In case for society, there is an increase in crime rate. This hampers the overall development process in the economy. The impacts on the economy are far greater. Government has to pay the unemployment benefits. In case to stabilize the economy, government increases the expenditure on social activities. When unemployment rate increases it affects the GDP of the economy. Because the production is not at its optimum level.
The cost of unemployment varies from actor to actor. Unemployment for a longer period of time erodes the skill of the worker. The societal cost of unemployment is also big. When there is no employment in the economy it hampers immigration of people. The country will turn towards protectionism in such cases. As a result it will have a negative effect on the relation between countries.
Okun’s Law – Unemployment – A Measure of the Health of Economy
Arthur Okun gave this law in early 1960s. Economists consider economics growth and jobs as the primary factors in the economy. Arthur Okun established a relation between economic growth and jobs. Okun’s law look in the statistical relation between unemployment and economic growth in the economy.
Okun’s law states that there is a relationship between unemployment and economic growth in a country. It says that, when a country’s GDP increases by 4% there is a decrease in unemployment rate by 1%. Okun’s law is considered as a rule of thumb because it establishes a relation between jobs and growth.
When there are jobs in the market the level of growth will be high. The law also states that for every 4% increase in GDP i.e. when there is growth of 4% in the economy the employment rate increases. There are three versions of the Okun’s law in economics. The first version of the law is stated above.
The second version of the law states that when unemployment level in the economy decreases by 1% then GNP of the country increases by 3%. The third variant of Okun’s law is also available. The third variant of the law establishes a relation between GDP and unemployment rate in the economy. The law states that when unemployment level increases by 1% the GDP of the country reduces by 2%.
By the graph, on the X axis there is unemployment rate. On the Y axis there is GDP growth in the economy. We can see that when GDP in the economy is high then the unemployment level is low. At the same time, when unemployment level in the economy is high the GDP is low.
The government gives certain benefits to unemployed people in the country in the form of benefits. In USA government insurance system fund the unemployment benefit. The registered persons get the unemployment benefits in USA.
Unemployment benefits differ from country to country.
USA – Unemployment – A Measure of the Health of Economy
In the USA there are 50 insurance programs for the unemployed people. In certain states the benefits are high as compared to the other states. But in Massachusetts, the insurance is $783per week. But in Mississippi the insurance is $235 per week. Employees fired for misconduct to not get benefit from the government.
UK – Unemployment – A Measure of the Health of Economy
Jobseeker’s allowance is the other name for Unemployment benefit in UK. The benefits in UK are decided keeping in mind the age of the person. Over the age of 25 the person is paid a maximum of 74.35 pounds in a week. In the age bar of 18-24 the person is paid a maximum of 58.90 pounds in a week. For couples, the rules are bit different. But the maximum benefit is 116.80 pounds per week.
New Zealand – Unemployment – A Measure of the Health of Economy
In New Zealand, the unemployment benefits cover people who are looking for work or in their training period. The ministry of social development handles the matter of unemployment benefit. The distribution of unemployment benefits in New Zealand depends on age, marital status.
For a single aged person between 20-24 without child is $200.80. Above the age of 25 it is $210.13. If anyone is a single parent the benefit is $325.98. For married couple with or without children the benefit is $350.20.
Australia – Unemployment – A Measure of the Health of Economy
Unemployment benefits are of two types in Australia. They are youth allowance and jobseeker allowance. Youth allowance for 16-20. Jobseeker allowance for above 21.
For single people living with parents under 18 years of age get A$91.60 per week. For the age of 18-20 living at home it is A$110.15 per week. People between age 18-20 not living at home gets A$167.35 per week. In the case of jobseeker allowance the benefit is A$228 per week for a single person
Distribution – Unemployment – A Measure of the Health of Economy
Unemployment rate is different in different cities of the world. We will cover the states of USA and other countries in this section of distribution of unemployment. The distribution of unemployment rate is varied across different states. In Florida unemployment rate is 12.9% as of April 2020. From June 2020 the Florida non employment rate reduced to 10.3%. In Ohio, the unemployment rate is 5.50% as of December 2020. The Ohio unemployment rate rose from the previous year. The Michigan unemployment rate increased from 6.1% to 6.9%. The sight for Texas was pleasing. The Texas unemployment rate fell from 8.1% to 7.2% in November 2020. For the Washington state the number of unemployed people decreased. The Washington unemployment rate fell from September 2020 to October 2020.
In a report, Hawaii and Nevada has the highest unemployment rate in USA. For Hawaii the unemployment rate is 9.3% in December 2020. Nevada, the unemployment rate is 9.2% in 2020. It was also reported that Nebraska and South Dakota had the highest employment rate in the country. Alabama unemployment rate is close to 3.9% in December 2020.
Conclusion – Unemployment – A Measure of the Health of Economy
Employment plays an important part in the economy. When there is employment the GDP of the country increases. Not only the GDP, the standard of living of the people also increases. Employment plays a crucial role for the benefit of the society. But unemployment creates a problem that is important to tackle. Policies are being implemented by the government and banks to control unemployment in the economy. Various projects are being installed to increase the employment level in the economy. And it is not far off when the globalized world will reach the level of full employment.
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