What is Unemployment? 

Unemployment is the state of being unemployed, even when an individual is actively seeking work opportunities. The unemployment rate refers to the percentage of the workforce that is currently unemployed.

The rate of unemployment is one of the key indicators of the conditions prevailing in an economy. It is therefore considered a barometer that points out the condition of an economy. Unemployment, in some parts of the world, is chronic.  It is a consequence of inadequate capital equipment or other complementary resources to support the existing workforce. Unemployment is considered a sign of economic inefficiency.

Types of Unemployment 

There are three types of unemployment:

  1. Frictional unemployment refers to constant changes in the labor market. Employers and workers are not fully aware of the workers’ capacity and the employer's job offerings, respectively. It is when someone leaves a job without getting a new one. 
  2. Structural unemployment refers to conditions when the regional or occupational pattern of job vacancies does not match the pattern of availability of workers and suitability. It is associated with a lack of adequate jobs for those able and willing to work. Some of the causes of structural unemployment include technological changes, competition, education and training, relocation subsidies, and the decrease or removal of unemployment benefits. 
  3. Cyclical unemployment arises when there is a general downturn in business activity, often due to larger economic factors or trends, such as a pandemic.  

Indicators for Unemployment 

High unemployment indicates:

  • The economy is under-utilized and inefficient, resulting in lower output and earnings. 
  • Lower expenditure, as unemployed people are unable to acquire as many things.
  • A negative multiplier effect, which is caused by a rise in unemployment. 

In summary:

  • When unemployment exists, it means lower output, as the economy will be working below full potential and tax revenues will be lower.  
  • As unemployment rates rise, more state benefits must be paid, resulting in a further loss of economic opportunity. 

Effects of Long-term Unemployment vs. Short- term Unemployment 

Long-term Unemployment Short-term Unemployment 
This unemployment may last longer than 27 weeks. This unemployment may last for a few weeks only. 
It can significantly decrease the net worth of an unemployed person. It usually does not have a significant impact on the net worth of the unemployed person. 
Long-term unemployment can make it difficult to achieve career goals in the long run. Short-term unemployment usually does not have a significant effect on the person's ability to reach their long-term career goals. 
It can lead to health consequences such as increased depression and mental stress. It may also affect family relationships. It may cause mental stress for a short time. 
Unemployed workers tend to lose job skills. Short-term employment will likely have little or no effect on job skills. 

Case Study: Unemployment Statistics in India 

India’s unemployment rate stood at 7.8% for the week ending November 22, 2020. Meanwhile, the labor participation rate was 39.3%, resulting in a sharp fall in the employment rate to 36.24%. While this was a sign of weakening labor markets, it also reflected the inability of the labor market to absorb adequate proportions of the working-age population, the Centre for Monitoring Indian Economy (CMIE) said. (Credit: https://www.cmie.com/kommon/)  

According to CMIE, the employment rate is the best measure of the health of the Indian economy, as it measures the proportion of the working-age population that is employed. The employment rate was 39.4% in 2019-20. It dropped to 27.2% in April 2020 and stood at 30.2% in May 2020, after which it rose to 37.8% in October 2020. In the long-term, India's unemployment rate is projected to trend around 6.3% in 2021 and 6.2% in 2022, according to econometric models. 

Some of the factors that are responsible for unemployment in India include: 

  • Backwardness of agriculture 
  • Rapid population growth
  • Inferior education system 
  • Exploitation of resources 
  • Low means of self-employment 

What are the Costs of Unemployment? 

Unemployment has societal repercussions that go beyond merely financial. The social costs of unemployment are difficult to calculate but no less real. They include the following:

  • Unemployed people not only lose money, but their physical and emotional health suffers as well. 
  • Societal costs of unemployment include higher crime and a reduced rate of volunteerism. 
  • Governmental costs go more toward payment of benefits, which reduces the gross domestic product (GDP). 
  • People facing unemployment may struggle with poverty, debt, alienation, increased social isolation, erosion of confidence, etc.
  • Unemployment reduces the overall standard of living. 
  • Companies face low demand for their goods, and it is also more costly for them to retain or hire employees. 

Steps to Reduce Unemployment 

There are many strategies and steps society can take to combat the unemployment rate, including:

  • Rapid industrialization 
  • Population control 
  • Reconstruction of agriculture 
  • Encouragement of small enterprises 
  • Rural development schemes 
  • Use of labor-intensive technology 
  • Accelerating investment in agriculture 
  • Diversification of agriculture 
  • Labor-intensive industrial growth 
  • Services and employment growth 
  • Monetary policy – for example, reducing interest rates to encourage aggregate demand (AD) 
  • Fiscal policy – lowering taxes to enhance aggregate demand
  • Helping to minimize structural unemployment through education and training
  • Subsidies based on location to encourage businesses to invest in underserved areas
  • Lowering the minimum wage to minimize real-wage unemployment
  • More flexible labor markets to make hiring and firing employees easier

Context and Applications 

This topic is significant in the professional exams for both undergraduate and graduate courses, especially for 

  • B.A (Economics Hons) 
  • M.A (Economics Hons) 

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