UNEMPLOYMENT

- or joblessness occurs when people are without work and

actively seeking work

• According to International Labour Organization report, more

than 197 million people globally or 6% of the world’s workforce
were without a job in 2012

Unemployment rate – is a measure of the prevalence of

unemployment and it is calculated as a percentage by dividing
the number of unemployed individuals by all individuals currently
in the labor force

• Unemployment rate in the Philippines is reported by the

Philippine Statistical Authority (i.e. Labor Force Survey)

• During periods of recession, an economy usually experiences

a relatively high unemployment rate
Table 1. Unemployment rate (in percent) in the Phils.
Source: NSO Labor Force Survey

2005 7.9
2006 7.8
2007 7.2
2008 7.5
2009 7.4
2010 7.4
2011 7.0
2012 6.8
2013 6.5
2014 6
2015 6.4
2016 6.10
• While the unemployment rate in the Philippines has been
declining overtime, the 7.0 percent posted in 2011 is the highest
compared to the unemployment rates of neighboring Southeast
Asian countries during the same period (i.e. Indonesia, 6.7%;
Malaysia, 3.1%; Thailand, 1.0%; Singapore, 1.9%)

• In January 2012 Labor Force Survey, the number of unemployed

persons in the country was estimated at 2.9 million
• Almost 49% of the unemployed were in the age group 15-24
years
• Of the total unemployed persons, 33.7% were high school
graduates, 17.8% were college graduates and 13.5% were college
undergraduates

• Only one-fourth of the Filipino that enter the labor force are able to
find good jobs in the country, and the rest of them find jobs
overseas, leave the labor force, or end up becoming unemployed
or underemployed
• Thus, three-fourth of the workers is unemployed or informally
employed, with lack of opportunities to find good jobs
• Though jobs are being generated, there’s a need to generate jobs at
a much faster rate, to be able to bring down the unemployment rate
• Many of the unemployed individuals are college graduates. Many
wait for job opportunities abroad, and many families depend on
remittances from family members who are staying abroad.

Large Excess Supply of Labor

• In the Philippines, a large supply of excess labor exists
• While the unemployment rate has been decreasing overtime, the
number of underemployed in the country remains in double digit
figures
• Underemployed persons – include all employed persons who
expressed the desire to have additional hours of work in their present
job or an additional job, or to have a new job with longer working
hours (NSO, 2005)
Table 2. Underemployment rate (in percent) in the Phils.
Source: NSO Labor Force Survey

2005 22.3
2006 22.7
2007 19.5
2008 19.1
2009 19.5
2010 18.7
2011 19.1
2012
2013
2014
2015 17.8
2016 18.4
• In the 2012 January LFS, the number of underemployed workers was
estimated at 7 million. Of these, 59% were working less than 40 hours per
week
• The large pool of unemployed and underemployed (i.e. estimated at 7.9
million, combined) has resulted in rigidities in the labor market and in the
wage structure of the country
• Wages account for a large share of production costs. These costs are
passed on to consumers through price changes. However, high
unemployment rate and underemployment have contributed to wage
stickiness in the country. This has caused the declining sensitivity of inflation
to changes in the domestic output and unemployment rate

• Inadequate skills + insufficient jobs = High unemployment or High

Underemployment

• Creating new jobs and training workers and students with skills needed in
existing and emerging labor markets are the two most serious challenges for
the Philippine economy in the next two decades
Different Causes or Reasons for Unemployment
1) Job Search and Frictional Unemployment
• It takes time to match workers and jobs, hence it tends to
reduce the rate of job finding. It takes time to find work
• Workers have different preferences and abilities,
• Jobs have different attributes
• Flow of information about job candidates and job vacancies is
imperfect (Assymetric Information)
• Geographic mobility of workers is not instantaneous
• This is unemployment caused by the time people take to move
between job (e.g. graduates or people changing jobs)
• Frictional unemployment – the unemployment caused by the
time it takes workers to search for a job
Other reasons:
• Sectoral shift – a change in the composition of demand
among industries or regions
• When firm fails
• Job performance is deemed unacceptable
• When their skills are no longer needed
• Change careers or to move to different parts of the country
• As long as the supply and demand for labor among firms is
changing, frictional unemployment is unavoidable

2) Real-wage rigidity or classical unemployment and wait

unemployment
Wage rigidity – the failure of wages to adjust until labor supply
equals labor demand
• In the equilibrium model of labor market, the real wage
adjusts to equilibrium supply and demand.
• Yet wages are not always flexible; sometimes the real
wage is stuck above the market-clearing level.
• Therefore, real-wage rigidity reduces the rate of job finding
and raises the level of unemployment
• Wait unemployment – the unemployment resulting from
wage rigidity and job rationing
• Workers are unemployed because, at the going wage, the
supply of labor exceeds the demand.
• Workers are simply waiting for jobs to become available
 Real Supply
wage
Amount of
Rigid real unemployment
wage

Demand

Amount Amount Labor

of labor of labor
hired
willing
to work
Fig. 1. Real-wage Rigidity Leads to Job Rationing. If the real wage is struck
above the equilibrium level, then the supply of labor exceeds the demand. The
result is unemployment
• Wages could be pushed above the equilibrium level by minimum
wages or trade unions. This is sometimes called as
“disequilibrium unemployment”
• The unemployment resulting from wage rigidity and job rationing
is sometimes called structural unemployment.
• Workers are unemployed not because they are actively
searching for the jobs that best suit their individual skills but
because there is a fundamental mismatch between the number of
people who want to work and the number of jobs that are
available. At the going wage, the quantity of labor supplied
exceeds the quantity of labor demanded; many workers are simply
waiting for jobs to open up

3) Structural Unemployment
• This occurs due to a mismatch of skills in the labor market. It can
be caused by:
a) Occupational immobilities – this refers to the difficulties in
learning new skills applicable to a new industry, and technological
change, e.g. an unemployed farmer may struggle to find work in
high tech industries
b) Geographical immobilities – this refers to the difficulty in
moving regions to get a job (e.g. there may be jobs in Makati, but it
could be difficult to find a suitable accomodation or schooling for
their children
c) Technological change – if there is the development of labor
saving technology in some industries, then there will be a fall in
demand for labor
d) Structural change in the economy – the decline of the coal
mines due to a lack of competitiveness meant that many coal
miners were unemployed, however they found it difficult to get jobs
in new industries such as computers

4) Voluntary unemployment
• this occurs when people choose to remain unemployed rather
than take jobs available. For example, if benefits are generous,
people may prefer to stay on benefits rather than get work.
• Frictional unemployment is also a type of voluntary
unemployment as they are choosing to wait until they find a better
job
5) Demand Deficient or “Cyclical Unemployment”
• This occurs when the economy is below full capacity
• For example, in a recession, aggregate demand will fall leading to a
decline in output and negative economic growth. With a fall in output,
firms will employ less workers because they are producing less goods.
Also some firms will go out of business leading to large scale
redundancies

• Skills mismatch and the lack of human capital are the most commonly
cited reasons of unemployment
• In reality, the systemic failure of the economy to create enough jobs is
the main cause of massive unemployment
Fig. 2. Demand Deficient or Cyclical Unemployment

PL AS

P1

P2
AD 1

AD 2

Y2 Y1
Y
Real GDP
Economic School of Thoughts or Theories on Unemployment

1) Keynesian Economics – emphasizes the cyclical nature of

unemployment and recommends government interventions in
the economy that it claims will reduce unemployment during
recessions.
• This theory focuses on recurrent shocks that suddenly reduce
aggregate demand for goods and services and thus reduce
demand for workers.
• Keynesian models recommend government interventions
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
2) Since the 18th century, noted economists such as David Hume,
Henry Thornton, and Irving Fisher already outlined the connection
between inflation and unemployment
• However, it was not until 1958 that the link between inflation and
unemployment gained prominence in the field of economics. Using
British data from 1861 to 1957, A.W. Phillips observed that nominal
wages and unemployment tend to be inversely related
• During periods of high unemployment, nominal wages declined
and when unemployment was low, nominal wages increased
(Phillips Curve)
• Phillips eventually turned the nominal wages – unemployment curve
to an inflation – unemployment relationship by subtracting long-term
productivity growth
• A crucial implication of the findings of Phillips (1958) is that a
short-run tradeoff exists between inflation and unemployment
• Lower unemployment rate can be achieved at the expense of
higher inflation while lower inflation can be obtain by sacrificing
employment
•It is important to note that the inverse relationship between
inflation and unemployment only holds in the short-run
• In the long-run, it ceases to exist due to price and wage
adjustments

3) Mankiw (2000) argued that the short-run tradeoff between

inflation and unemployment is essentially a statement about the
effects of monetary policy on these economic variables

Fig. 3. How monetary policy affects inflation and

unemployment

Expansionary Monetary Policy --- Higher Aggregate

Demand --- Increase in the level of Production -- Lower
Unemployment --- Higher Inflation and vice versa
• In the case of an expansionary monetary policy, the Central Bank
increases the supply of money in the economy. Increase money
supply, holding all other things constant, causes a decline in
interest rates.
• With lower interest rates, consumers would have less incentive to
save and instead would prefer to increase their consumption
• Moreover, lower interest rates (i.e. lower cost of borrowing)
encourage investors to undertake business expansion or
investment projects
• Higher consumption and investment lead to higher aggregate
demand.
• The increase in aggregate demand causes an increase in
production in the economy. This, in turn, generates higher demand
for workers which reduces unemployment in the country
• However, as the economy approaches full employment
equilibrium, the increase in aggregate demand and higher
employment put an upward pressure on prices and wages which
eventually lead to higher inflation
• A change in monetary policy therefore caused inflation and
unemployment to move in opposite directions

Natural Rate of Unemployment

• It is the steady-state rate of unemployment (U/L)

What determines the unemployment rate?

• Let L denote the labor force, E – the number of employed workers,
and U – the number of unemployed workers
L=E+U (1)
• Assume L is fixed. Let s – denote the rate of job separation ( the
fraction of employed individuals who lose their job each month.
Let f – denote the rate of job finding ( the fraction of unemployed
individuals who find a job each month)
• If the labor market is in a steady state (unemployment rate is
neither rising nor falling): then the number of people finding jobs =
number of people losing jobs or fU = sE (2)
•To find the steady-state unemployment rate:
E = L – U
If we substitute (L – U) for E in the steady-state condition, we
find: fU = s(L-U)
Divide both sides of this equation by L
To obtain f U/L = s(1 – U/L)
Therefore U/L = s/s+f (3)
Meaning U/L depends on the rates of job separation s and job
finding f
Implies: the higher the rate of job separation, the higher the
unemployment rate; and
↑f → ↓ U/L
 Job Separation (s )

Employed Unemployed

Job Finding (f )

Fig. 4. The transition between employment and

unemployment
Public policy implication of U/L model
• Any policy aimed at lowering the natural rate of unemployment
must either reduce the rate of job separation or increase the rate
of job finding
• Any policy that affects the rate of job separation or job finding
also changes the natural rate of unemployment

Why labor market does not clear?

1) Minimum-wage laws – set a legal minimum on the wages that

firms pay their employees
For most workers, this minimum wage is not binding, because
they earn well above the minimum

Yet for the unskilled and inexperienced, the minimum wage

raises their wage above its equilibrium level -- hence
reduces the quantity of their labor that firms demand
2) Unions and Collective Bargaining – refers to the monopoly
power of union
• The wages of unionized workers are determined not by an
equilibrium of supply and demand but by collective bargaining
between union leaders and firm management
• Result: Decrease in the number of workers hired; a lower
rate of job finding; and increases the wait unemployment

3) Efficiency Wage Theory – holds that high wages make

workers more productive

Theories proposed by economist to explain how wages affect

worker productivity (Efficiency-Wage Theory)
a) One theory applied mostly to poorer countries, holds that
wages influence nutrition
i.e. Better paid workers can afford more nutritious diet, hence
healthier workers are more productive
• A firm may decide to pay a wage above the equilibrium level to
maintain a healthy work force
b) More relevant to developed countries, High wages reduce
labor turnover
• The more a firm pays its workers, the greater their incentive to stay
with the firm
• Paying high wages - reduces the frequency of quits in a
firm - reduces time spent hiring and training new workers

c) Average quality of a firm’s work force depends on wage it

pays its employees
• If a firm reduces its wage - Best employees may take jobs
elsewhere - Leaving the firm with inferior employees who
have fewer alternative opportunities ( Unfavorable sorting an
example of Adverse Selection)

• Adverse Selection – tendency of people with more information

(i.e. workers who know their own outside opportunities) to self-
select in a way that advantages people with less information (the
firm)
• By paying a wage above the equilibrium level - Firm reduce
adverse selection - Improve the quality of its work force -
Increase worker productivity

d) High wage improves worker effort

• This theory is based on the thought that firms can not monitor their
workers’ work effort and that employees must decide themselves how
hard to work
• Workers can choose to work hard, or they can choose to shirk
and risk getting caught and fired (e.g. of Moral Hazard)

• Moral Hazard – the tendency of people to behave inappropriately

when their behavior is imperfectly monitored
• Problem of moral hazard decreases if firm pays a high wage
• The higher the wage, the greater the cost to the worker of
getting fired
• By paying a high wage, a firm induces more of its employees
not to shirk and thus increases their productivity
Conclusion:
• A firm operates more efficiently if it pays its workers a high wage
• Firm may find it profitable to keep wages above the market
clearing level
• The result of this higher than equilibrium wage: a) Lower
rate of job finding and b) greater wait unemployment

Measures to Address Unemployment

1) Faster economic growth is viewed as a means of generating
more jobs
2) Dissemination of job vacancies by employment agencies  to
match jobs and workers more efficiently
3) Job Fair
4) Publicly funded training programs to ease the transition of
workers from declining to growing industries (e.g. TESDA)
5) Minimum wage law
6) Laws governing collective bargaining
7) Countries need to ensure that their welfare systems do not
provide disincentives to work
8) Cuts in real wages – are a reaction to the view that through their
demands for higher wages, some groups of workers have priced
themselves out of a job
9) Improvements on the education and training provided to young
people, with a greater focus on vocational skills (e.g. Alternative
Learning System)
10) Policies affect the labor market by reducing the supply of labor
(for e.g. work sharing, early retirement, and reduced migration)