ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
Subject ECONOMICS
Paper No and Title 8: Economic Planning in India: Overview & Challanges Module No and Title 20: Unemployment
Module Tag ECO_P8_M20
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
TABLE OF CONTENTS
1. Learning Outcomes 2. Introduction
3. Theories of Unemployment 4. Types of Unemployment 5. Causes of Unemployment
6. Consequences of Unemployment
7. Unemployment in India at a glance
8. Looking Ahead
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
1. Learning Outcomes
After studying this module, you shall be able to know about
The basic categorization of unemployment
The reasons and consequences of unemployment
Reasons for soaring unemployment in India
Policy actions needed to cure this issue
2. Introduction
Unemployment is a glaring problem in mostly every nation today. Developed, developing or underdeveloped countries all face the problem with the difference lying in the extent of unemployment. According to a report by the International Labour Organisation over 201 million people were unemployed in 2014 around the world, which were over 31 million more than before the start of the global crisis of 2008. The global unemployment is expected to increase by 3 million in 2015 and by a further 8 million in the following four years. Youth, especially young women, continue to be disproportionately affected by unemployment. Approximately 74 million young people (aged 15–24) were looking for work in 2014. The youth unemployment rate is practically 3 times higher than the unemployment rate of their adult counterparts. The heightened youth unemployment situation is common to all regions and is occurring despite the trend improvement in educational attainment. This is creating social discontent.
This paper takes us through the basic concepts of Unemployment and the possible measures how to create more jobs and bring down the unemployment rate.
Unemployment can be defined as a state where people who are willing to work are unable to find work and earn a living. It occurs when the supply of labour is more than the demand for labor. To know the extent of unemployment we calculate what is known as the unemployment rate. It is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labour force. There are many debates regarding the causes, consequences and solutions for unemployment.
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
3. Theories of Unemployment
Time and again there have been various economic literature on unemployment to explain the root cause of unemployment. These have addressed the problem
1. Classical Theory: According to this theory market is characterized with a smooth labour demand and supply curve. The wage rate adjusts itself to ensure there is equilibrium between demand for labour and supply for labour. Since the market is free to adjust, everyone seeking a job finds a job. The figure represents a labor market where demand curve and supply curve of labour are given. The
equilibrium is marked as “E” which is point of intersection of both the curves. At E labour demand is equal to labour supply. At In such a scenario there is no involuntary unemployment. At any point above E there will be unemployment.
Classical economics argue that unemployment in this case can only occurs due obstruction in the functioning of the labour market. These obstructions can be
interventions such as unionization, bureaucratic work rules, minimum wage laws, taxes, and other regulations that according to them discourage the hiring of workers. This theory
proposes getting rid of all regulations and social
programs that hinder the functioning of a free market. The recommendation is based on the principle of laissez faire i.e. leave it alone.
2. Keynesian Theory: This theory on unemployment on the other hand sheds light upon the cyclical nature of unemployment and recommends government
interventions in the economy will reduce unemployment during recessions. It emphasizes on recurrent shocks that suddenly reduce aggregate demand for goods and services and thus reduce demand for workers. A reduction in demand calls for organisations to cut down on production and costs, which means they lay-off workers. Thus according to this theory unemployment is a result of fall in aggregate demand. Keynesian models recommend government interventions
E
0 5 10 15 20 25 30 35 40
10 20 30 40 50 60 70
Supply of labour Demand for labour wage rate
units of labour
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
designed to increase demand for workers; these can include financial stimuli, publicly funded job creation, and expansionist monetary policies. Keynes
believed that the root cause of unemployment is the desire of investors to receive more money rather than produce more products, which is not possible without public bodies producing new money.
4. Types of Unemployment
In addition to the above mentioned theories of unemployment, there are a few categorizations of unemployment that are used to more precisely show the effects of unemployment within the economic system
1. Voluntary Employment: At a very basic level, unemployment can be broken down into voluntary unemployment- unemployment due to people willingly leaving previous jobs and now looking for new ones
2. Involuntary unemployment- It is the unemployment that occurs due to people getting laid off or fired from their previous jobs and needing to find work elsewhere. Involuntary unemployment as a larger problem than voluntary unemployment since voluntary unemployment likely reflects utility-maximizing household choices.
3. Frictional Unemployment: Frictional unemployment is unemployment that occurs when people are moving from one job to another for a better opportunity.
The transitional period when a person is looking for a job and when he finds one he is considered unemployed. However such employment usually lasts for shorter periods and is not a cause of concern from the economy’s point of view. Students looking for jobs for first time, an individual looking for a new job because of location change or a women re-entering the work force after having children are all examples of frictionally employed people.
4. Cyclical Unemployment: Cyclical or demand deficient unemployment is the unemployment that occurs due to business cycles. In periods of high economic growth or economic boom there is high demand for goods and services and companies hire more people to produce more to meet the increasing demand.
However during recessions or depressions when there is low demand companies tend to lay-off workers to cut down production and costs. This leads to a situation
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
where supply of labor is more than the demand for labour, thus unemployment.
Since this kind of unemployment is associate with business cycles its called cyclical unemployment. As the economy recovers the unemployment tends to naturally disappear. Thus the cause of concern for economists is not cyclical unemployment but the root cause of recession, which causes it.
5. Structural Unemployment: There are two ways to look at structural
unemployment. One way is that such kind of unemployment occurs because some labor markets have more workers than there are jobs available, and for some reason wages don't decrease to bring the markets into equilibrium. Another way is that structural unemployment results when workers possess skills that aren't in high demand in the marketplace and lack skills that are in high demand. In other words, structural unemployment results due to a mismatch between workers' skills and employers' needs. Structural unemployment is considered as a significant problem, because structural unemployment tends to be largely of the long-term nature and retraining workers is not a cheap or easy task.
6. Disguised Unemployment: This kind unemployment mostly occurs in
developing and underdeveloped economies where the agriculture sector is the key source of employment. Since agriculture is a family occupation and income is on sharing basis there are usually more people working on a piece of land than required. The marginal productivity of an additional workers is zero or negligible.
Works who contribute nothing towards the output are said to be disguisedly unemployed.
7. Seasonal unemployment: It is unemployment that occurs because the demand for some workers varies widely over the course of the year. For example, Pool lifeguards. Seasonal unemployment can be thought of as a form of structural unemployment, mainly because the skills of the seasonal employees are not needed in certain labor markets for at least some part of the year. Seasonal unemployment is considered less chronic as it forms a regular pattern and resurfaces from time to time.
8. Technological Unemployment: This kind of unemployment occurs when due to adoption of a new technology workers are displaced. This one of the most
prevalent today. The use of new technology is not only bringing down costs but
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
also producing better products. Thus there is greater incentive to move towards better technology. However the adoption in technology is at much faster rate than the creation of new opportunities of the workers displaced. The economies are not able to absorb the millions losing jobs.
5. Causes of Unemployment
The theories on unemployment and the categorizations gives us basic understanding of the kind of unemployment that exists in different countries. The major concern of any country is structural unemployment as this long-term unemployment and various policy actions are required to bring down this kind of unemployment. We will now discuss various reasons for structural unemployment.
1. Slow growth of GDP: In developed economies, there is a strong link relation between GDP growth and employment creation. A sluggish growth of GDP can dampen job creation.
2. Rapid changes in technology: The use of modern technology is the one of the biggest reasons for increase in unemployment. It’s a cause that is common worldwide. As technology is progressing there is lesser need for manual labour and more demand for skilled labour. The developed nations are faster in adjusting in adjusting to the new technology have lesser people unemployed as they gave better educational and training facilities. However the countries where major labour force is unskilled the issue is even bigger. The new technology is displacing hundreds of people, as they don’t have the necessary skills or the institutions to develop these skills.
3. Lack of capital: Most countries, which face high unemployment, are those who have shortage of capital. When new projects start they create million jobs for both skilled and unskilled labour. However countries facing shortage of capital cannot invest in such projects to create such jobs. Moreover the lack of capital inhibits a country’s capacity to build institutions to train labour and meet the growing market demand. Thus such countries have large pool of unskilled labour force.
4. Over Population: Another reason for high unemployment is high rate of
population growth. Large population puts a pressure on the economy’s resources and further aggravates the unemployment issue.
5. Low Level of Education: As the technology is advancing there is a demand for skilled labour force. However if the educational level in a country is low then it cannot have a skilled set of labour force. Thus unemployment increases due to low level of education.
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
6. Poverty: Another major reason for high unemployment in a country is mass level poverty. Poverty means people cannot afford good educational facilities. This means that level of education is low and thus these people cannot get a job as they do not meet the desired level of skill set. Thus either it increases structural
unemployment or disguised unemployment.
7. Poor performance of Agriculture sector: This issue is relevant for all countries that have agriculture as a primary sector. This sector creates disguised
employment at large scale. Eg. In India agriculture provides employment to approximately 60% of the population where its contribution to GDP is just 15.1.
This means the marginal productivity of an additional labour is negligible. Just like India most of the developing and underdeveloped countries are agrarian in nature and stuck in between the transition from agriculture to service sector oriented economy
6. Consequences of Unemployment
1. Increase in Poverty: unemployment as defined earlier is the state where people willing to work are unable to find work. Thus if people cant find work it means they don’t have money which increases the extent of poverty.
2. Increase in Inequality: Unemployment has led to increase in the income gap among people. Since the rich are able to afford better education hence better skills they get easily absorbed in the labour market. However the poor or the less
privileged that have lesser access are unable to find jobs matching their skills.
Thus this further increased the inequality gap.
3. Low level of living Standard: No income means people cannot afford basic amenities such as a clean drinking water and sanitation also. Thus countries that have high unemployment rate have a low standard of living.
4. Less Access to healthcare: Poverty due to lack of unemployment opportunity further inhibits the unemployed from accessing healthcare services. Poor health itself constraints physical strength of workers lowering further employment opportunities.
5. Social Cost: As we all know an empty mind is a devil’s workshop the increase in unemployment is directly related to the growth of crime rate. People unable to find jobs find themselves stealing murdering and getting all sorts of crimes to
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
make money. Social cost is also in terms of loss in self-esteem of a person looking for a job. He/she may have the skills but due to lack of demand for his skills he/she is unable to find the job for his/her potential. Incase the person in question doesn’t want to settle for anything lower he/she might remain unemployed which also lowers the self-esteem.
6. Loss of national output: Unemployment also involves a loss of potential national output. This is because when an economy is operating below full employment level it implies GDP is below potential. It is a waste of scarce resources.
Moreover lack of opportunities may cause some people to permanently move out of labour market because they have lost the motivation of looking for a job. This can have a negative effect on long run aggregate supply and thereby damage the economy’s growth potential. Some economists call this the “hysteresis effect”.
When unemployment is high there will be an increase in spare capacity - in other words the output gap will become negative and this can have deflationary forces on prices, profits and output.
7. Fiscal costs: Government loss comes in form of loss of potential tax revenue and higher spending on welfare benefits and unemployment benefits. This results in increase in pressure on the budget deficit. This increases the risk of government raising taxes to meet the deficit or cutting down various expenditures.
7. Unemployment in India at a glance
The unemployment situation in India currently is quite grim. It has averaged around 9%
from the period from 1983-2014. Most of the unemployment is structural in nature, which means the economy is not able to absorb the growing labour force. Since India is an agrarian economy major source of occupation is this sector. However the growth in this sector has been very slow. The agriculture sector employs approximately 60% of the labour force but only contributes around 15.1% to the GDP. 1/3 of the labour force in this sector is disguisedly unemployed. The wages are extremely low due to large labour supply. Agricultural labourers and self-cultivating farmers constitute approximately 42 and 47 percent of the rural poor. Most of these people are stuck in the vicious circle of poverty. Low wages in this sector have further increased poverty and inequality. The low wages have forced people to seek work outside which has led to the growth in the informal sector. This sector consists of all the people who have shifted out of agriculture and yet not found work in the secondary or tertiary sectors. It consists of cobblers, hawkers, barbers, plumbers etc.
Low productivity of the agriculture, over population, High income Inequality, low educational level and acute poverty are factors that have contributed to unemployment.
Government has tried to implement many employment generation schemes of which MGNREGA being the biggest. This scheme ensured 100 days of unemployment to workers enrolled under this scheme.
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
Food for work is another such program providing wage employment in drought-affected areas where wages are paid partly in cash and partly in food grains. Prime Minister Employment Generation Program is another initiative by the GOI to promote self- employment ventures/projects in both rural and urban India.
Government has also initiated training programs to enhance the skills of the people. But poor implementation of these programs have not only failed the policies but increased the fiscal burden also.
8. Looking Ahead
Now the big question that arises is how can an ailing job market be cured and what can be done to create more jobs and promote decent work. There are few policy actions that can be taken by the government to reduce unemployment.
1. Increase aggregate demand: Increase in aggregate demand means increase in output to meet the demand. This means organizations need to hire more workers to increase production. This can be done through an expansionary monetary policy or an expansionary fiscal policy.
2. Government Expenditure of Infrastructure and Public Works Projects: Most developing countries do not have adequate infrastructure. So one of the best ways to create jobs is public expenditure on infrastructure such as roads, buildings, hospitals schools etc. This not only creates demand for skilled workers like engineers and managers who design such structures but also unskilled workers like masons and plumbers.
3. Developing institutes and better training programs: Another step towards combatting unemployment is to develop institutes, which gives training to workers. There is mass level unemployment due to a mismatch between the demand for skill and supply. To bridge the gap a government needs to build institutions which give professional training so that can get a better opportunities in the market. Building such institutes it self gives employment opportunities to people who have the ability to give the training like teachers for example.
4. Support to small and medium scale enterprises: Large organizations have easier access to capital and economies of scale in operation. However banks reluctance to fund the small-scale operations that have little or no cash and uncertain prospects and a relatively small number of customers. The central government should shoulder some of the risk of small business loans and provide new incentives for banks to lend to smaller businesses.
ECONOMICS PAPER No. 8: Economic Planning in India: Overview &
Challenges
MODULE No. 20: Unemployment
Government should support the struggling business enterprises as they have the potential to create many job opportunities.
5. Providing Unemployment Benefits: Unemployment benefits should be provided to those who register them as unemployed with an undertaking that they will actively look for work. This is a form a social security for the unemployed. It prevents them from falling into acute poverty. Increase in unemployment also means fall in the purchasing power of these people. By government ensuring social security to these people government can prevent fall in aggregate demand and ensure the unemployed do not resort to crime and other means of income.
Unemployment is a disease affecting millions of people world wide and it is time joint effort be made to cure this problem.
