MCOM Degree Program
Department of Commerce & Financial
Management
Unemployment
1
Unemployment means
Unemployment is a situation in which those who are
able and willing to work at prevailing wage rate do
not find jobs.
Who should and should not be included?
Which age group?
2
Unemployment means cont…..
More specifically, a person is unemployed if he or she
is not working and,
Has made specific effort to find a job
Is laid off from a job and is waiting to be recalled
or,
Is waiting to report to a new job in near future.
3
Unemployment means cont….
But those who are not looking for jobs are not
considered as unemployed even if they are not doing
a job.
4
Unemployment means
Unemployment = labour force – number of employed
5
Labour force
Labour force of a country consists of,
Persons belonging to age group of 15 to 65 years
Who are Employed and
Those who are unemployed
– But are looking for a job.
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Labour force
Labour force does not include,
Full time students
Full time house wives
Retired persons
Persons who are unable to work
7
Labour force
Number of Number of
Labour force = +
employed unemployed
8
Measuring Unemployment rate
Rate of Number of unemployed
= * 100
unemployment Labour force
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Sources of unemployment
The unemployment can be classified as follows;
Frictional unemployment
Structural unemployment
Seasonal unemployment
Cyclical unemployment
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Frictional unemployment
Unemployment (if any) at any time and is of
temporary nature.
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Frictional unemployment
Classical postulate
Economy is always in its full employment level.
There is therefore no unemployment.
If any, is of temporary nature.
Causes an abnormal gap between demand for
and supply of labour.
Wipe out through an automatic process of
market mechanism and adjustments.
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Frictional Unemployment cont….
Neo-classical thoughts
Imperfections in the labour and product markets
Lack of information about vacancies
Cost of information
Cost of training
Slow occupational mobility
Cost of transportation
Monopoly powers of unions
Labour market remains unclear even if there is
change in wages.
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Frictional unemployment cont…
The number of unemployed persons under the
condition that
The number of job vacancies equals the number of
job seekers who somehow fail to get a job.
The time required to bring together labour suppliers
and labour demanders results in frictional
unemployment.
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Structural unemployment
Structural unemployment occurs due to structural
changes in a dynamic economy.
So that some workers go out of jobs.
15
Structural unemployment
Structural changes include,
Changes in structure or sectoral composition of the
economy.
Changes in technology
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Structural unemployment
In a dynamic society, structural changes is a
continuous process and therefore structural
unemployment is usually in voluntary can last long
time.
Important feature
Vacancies are available
Job seekers are there
But still there is a unemployment in the economy
Mismatch between the demand and supply
pattern of the labour market.
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Seasonal unemployment
Seasonal unemployment occurs due to the seasonal
shifts in the labour supply and demand during the
year.
Seasonal unemployment specially occurs in the
industries such as,
Agriculture
Tourism
Fisheries
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Seasonal unemployment
Those unemployed in seasonal occupations know that
they will probably be unemployed during the
particular months of the year.
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Cyclical unemployment
Cyclical unemployment exists when overall demand
for labour is low.
Cyclical unemployment occurs during recessions.
Employment falls as a result of the imbalance
between AS and AD.
20
The main approaches of unemployment
21
The main approaches of unemployment
The Classical approach
The Keynesian approach
The Monetarist approach
Okun’s Law
22
The Classical Approach
23
The Classical approach
There will always be full employment in the long-
run.
Unemployment, if any, will be a short-run
phenomenon.
There will be neither over production nor under
production.
The economy will always be in equilibrium in the
long run.
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The Kenesian Approach
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The Kenesian approach
Associated with
Employment
Growth
Stability
The level of output and employment in an economy is
determined by the AD, given the resources.
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The Kenesian approach
The unemployment in any country is caused by
Lack of AD.
Economic fluctuations are caused by demand
deficiency.
The government should intervene to eliminate the
unemployment.
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The Monetarist Approach
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The Monetarist Approach
Role of money is central to the growth and stability of
national output.
Money supply is the main determinant of output and
employment in the short-run and price level in the
long-run.
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Okun’s Law
30
Okun’s Law
Unemployment usually moves in relation with output.
Okun’s law states that for every 2% that GDP falls,
the unemployment rate rises by 1%.
If GDP begins at 100% and falls to 98%
Unemployment rate rises by 1%.
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Current Unemployment situation in Sri Lanka
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Unemployment Rate in SL
33
Unemployment Rate in SL
34
Unemployment in Sri Lanka
Discuss the trends and patterns of the level of
unemployment in Sri Lanka during the last 10 years
with respect to,
Gender
Educational level
Age group
Economic sector
Occupational category
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Figure 5.7: Job Opportunities by Educational Attainments – 2006
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Trade-Off between Inflation and Unemployment
A useful way of representing the process of inflation was developed by the
economist A. W. Phillips, who quantified the determinants of wage inflation.
After careful study of more than a century's worth of data on unemployment
and money wages in the United Kingdom, Phillips found an inverse
relationship between unemployment and the changes in money wages.
Higher Prices
Inflation
Producers tend to
produce more
Trade Off ????
Higher Output
Reduce
Unemployment
More Employment Opportunities
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Trade-Off between Inflation and Unemployment
The Phillips curve is useful for analyzing short run movements of
unemployment and inflation.
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Stagflation
Stagflation is the situation in which high inflation and the
high unemployment occurs simultaneously.
In this situation real GDP is down and the inflation is high.
This is called an adverse supply shock because supply shocks
have a direct impact on the price level.
This stagflation provided a set of circumstances for which
Phillips curve had no ready analysis or answers.
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Inflation & Unemployment in SL
Compare and discuss the trends and patterns on the
relationship between inflation and unemployment
during the last 15 years in Sri Lanka and discuss its
policy implications.
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