Assignment # 1

Name: Reg No: Program: Course: Faculty: Days: Timing:

Farhan Sajid 13039 MBA Economics Analysis Dr. Muzaffar Isani Friday 6:00 to 9:00

Q: We Distinguish between Frictional, Structural, Cyclical unemployment. Explain the underlying factors that produce a distinction between the various types of unemployment and the need to distinguish between these various types. ANSWER:
Frictional unemployment:

Frictional unemployment is a type of voluntary unemployment that arises because of the time needed to match job seekers with job openings. A good example is that when you make up your mind and set off looking for a better job and abandoning the current one, you are in the frictional unemployment labor force.
Structural unemployment:

This happens when a large amount of unemployed workers (labor force supply) dont qualify for a large amount of labor force demand. Its either because that the workers dont have the skills demanded by the employers or they live too far from the demanding area. Thus, unemployment caused by massive mismatch of skills or geographic location is noted as structural unemployment. Major shifts of consumption taste, technological change, tax and a variety of other factors can reduce the demand for certain skills and increase that of others, thus making structural unemployment occur. While frictional unemployment is short-term and mostly voluntary, structural unemployment poses more of a problem because workers must seek jobs elsewhere or must develop the skills demanded. The process is full of pain and frustration, and may lead to negative impacts on society.
Cyclical unemployment:

Because of business cycles, many firms reduce the demand for inputs, including labor in recessional periods when production declines. Cyclical unemployment is used to refer to the fluctuation in unemployment that is incurred by business cycles, more specifically, the unemployment caused by economic recessions. Cyclical unemployment can be zero in full expansions during a business cycle. For example, between 1942 and 1945, when the entire America is much too busy producing weaponary for WWII, business cycle arrived at an inflated expansion, thereby cyclical unemployment actually drops to zero, resulting in an average 1.6% unemployment rate during those good years.

Need for Distinction: All unemployment types are categorized in two kinds, voluntary and involuntary unemployment, 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 behavior. Voluntary unemployment includes workers who reject low wage jobs whereas involuntary unemployment includes workers fired due to an economic crisis, industrial decline, company bankruptcy, or organizational restructuring. On the other hand, cyclical unemployment and structural unemployment are largely involuntary in nature. However, the existence of structural unemployment may reflect choices made by the unemployed in the past. 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, some unemployed workers would still remain. This happens with cyclical unemployment, as macroeconomic forces cause microeconomic unemployment which can boomerang back and exacerbate these macroeconomic forces. Q: We measure unemployment by the unemployment rate. Explain in detail the construction of this measure and the difficulties that may arise in its accurate measurement. ANSWER: Macroeconomic unemployment is typically measured and comes to be known repeatedly as unemployment rate. But what exactly is unemployment rate? How is it measure? The unemployment rate (UR) expresses the number of people unemployed as a percentage of the labor force (LF). With labor force (LF) comprising of all unemployed (U) and employed (E) people, that is,

LF = U + E we have unemployment rate or UR, expressed as UR = U / LF * 100% In a case of 100,000 people in the labor force and 10,000 of whom are unemployed (lost jobs and actively seeking one), the unemployment rate would be calculated as UR = U / LF * 100% = 10,000 / 100,000 * 100% = 10% In addition to labor, land and capital can also be unemployed. With a little common sense, we would expect that a high unemployment rate of labor would result in a low level of utilization of capital, land and other forms of production factors, simply because men are the operators that make these things work for the economy and produce economic value. If more men are laid off their work, more resources are left to rot rather than utilized in production. Problems in Measuring Unemployment: Measured unemployment overstates the amount of true unemployment by including some people who are voluntarily out of work. For example, Canadas program of Employment Insurance provides protection against genuine hardship caused by job loss, but it also induces some people to stay out of work to collect Employment Insurance benefits for as long as the benefits last. Such people have, in fact, voluntarily withdrawn from the labor force, although to remain eligible for benefits they must make a show of looking for a job. Such people are usually included in the ranks of the unemployed because, for fear of losing their benefits, they tell the person who surveys them that they are actively looking for a job even though they are not really trying very hard to find one. On the other hand, measured unemployment understates the amount of true Unemployment by omitting some people who would accept a job if one was available but who did not actively look for one during the week in which the data were collected. For example, people who have not found jobs after searching for a long time may become discouraged and stop actively looking for work. Such people have withdrawn from the labor force and are not recorded as unemployed. They are, however, unemployed in the sense that they would willingly accept a job if one were available. People in this category are referred to as discouraged workers. They have withdrawn from the labor market because they believe that they cannot find a job under current conditions. In addition, there are part-time unemployed people. If some people are working six hours instead of eight hours per day because there is insufficient demand for the product that they help to make,

these workers are suffering 25 percent unemployment even though none of them are reported as unemployed. Q: Economists sometimes specify a rate of unemployment as a full employment rate. Explain this natural rate of unemployment. ANSWER: Full employment is a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so "full" employment is a rate somewhat less than 100% employment, considering slightly lower levels desirable. Full employment, or the natural rate of unemployment, is considered to be consistent with a level of unemployment that predominantly comprises voluntarily unemployed workers. In other words, those members of the labor force who really want a job have one. Leaving the nuances of who is part of the labor force for the main text, the rate of unemployment consistent with full employment is a major issue for economic policymakers. Small differences in the perceived rate of full employment lead to significant variations in the policy response to economic growth. Q: Unemployment is conductive to unrest in individuals and is frequently associated with social and political disorder. Explain. ANSWER: Social: The personal and social costs of unemployment include severe financial hardship and poverty, debt, homelessness and housing stress, family tensions and breakdown, boredom, alienation, shame and stigma, increased social isolation, crime, erosion of confidence and self-esteem, the atrophying of work skills and illhealth. In addition, unemployment falls disproportionately on already disadvantaged groups in society. Political: Politics have a major effect on unemployment, whenever government forcibly raises employment costs it causes marginal labor, that is, labor that barely covers its costs, to become sub marginal. It does not matter whether government orders

wage rates to rise or benefits to be improved, the workday to be shortened, overtime pay to be raised, funds to be set aside for sickness and old age, or any other benefit to be granted. A small boost renders few workers sub marginal, a large boost affects many. In matters of employment they now are "unproductive" and cannot be used economically. Rising unemployment has traditionally been regarded by the public and media in any country as a key guarantor of electoral defeat for any government which oversees it. Q: The economic cost of unemployment manifests itself I the form of a level of GDP lower than its potential level because available resources are rendered unproductive. Explain. ANSWER: Loss of income for individuals and outputs for economy would come up first as the costs of unemployment. For individuals and households, unemployment forces them to curtail their consumption drastically and perhaps liquidate some of the assets often at a loss to meet financial obligations. All these have negative impact on the whole economy. For economy as a whole, unemployment reduces the output of goods and services that could otherwise have been produced by unemployed labor force. An economy is producing substantially below its potential if unemployment rate is extremely high, thus everybody in the society loses by consuming and enjoying less because less is produced for distribution. The economic loss caused by unemployment can be measured as a loss in aggregate supply (total output) or aggregate demand (total income), more specifically, the difference of potential GDP minus actual GDP. Costs are not always economic, though, and its true. In non-economic aspects, unemployed individuals might be very much discouraged for their inability to secure jobs, and the feelings of frustration and dismay usually lead to anti-social activities: indulgence, theft, violence, sabotage and other forms of crime, which would pose serious problems especially if the unemployment rate is unbearable.