CAPE - Economics

Module Two

Topic 1 : Unemployment

Objective one : Explain what is meant by the labour force;

In essence the labour force is the number of persons who are willing and able to
work. It accounts for all persons who are of working age, and are therefore above
the minimum working age but below the maximum or retirment age. For example, within
most economies the minimum working age is 18 years old and the maxmimum working age
is 65 years old, a person who is 25 would be considered as a person of working age
as 25 falls between the aforementioned range (18-65). The labour force is therefore
inclusive of those who are employed and unemployed (but actively seeking employment
- if the person is not employed and not seeking employment they would not be in the
labour force and they are unwilling to work – this phenomenon is referred to as the
discouraged worker effect). Morever, in elucidating the labour force some
categories of persons would be excluded on the basis of certain characterisitics,
such as those who are permanently incapacitated, institutionalized (such as
attending a educational institution) or discouraged ( the discourage worker effect
refers to a person who was unemployed and is no longer looking for employment).

Objective two : Explain the unemployment rate;

The unemployment rate is a macroeconomic variable that expresses the proportion of

the labour force that is unemployed or actively seeking employment. In essence, it
is the proportion of the labour force that is jobless. The unemployment rate is
calculated as follows:

*Unemployment rate = number of unemployed / labour force *100

Objective three: Distinguish between unemployment and underemployment;

Unemployment can further be decomposed into two categories, voluntary and

involuntary unemployment. Involuntary unemployment refers to a situation where a
member of the labour force is willing and unable to to work at the prevailing wage
rate in the labour market. For instance, a teacher who wants to work in the labour
market for secondary schools with a equilibrium wage rate of $200 is unable to find
employment, and is in a jobless state. Voluntary unemployment on the other hand
refers to a situation where a a person of working age is unwilling, but able, to
work at the prevailing market rate. For instance, a university graduate (who is not
longer studying – not institutionalized) who has a degree in Computer Science that
is able to work in the labour market at the prevailing market wage, but choses not
and is not actively searching for a job.

Underemployment is concerned with the underutilisation of the economy’s labour

force. In other words, this occurs when a persons is currently working in a job for
which they are overqualified. For instance, a person with a medical degree who is
working as a truck driver. Underemployment is also inclusive of those who work on a
part time basis, yet still is available for full-time employment. Conclusively,
underemployment represents a situation of economic wastage as members within the
labour force are not being fully utilised, whether they are employmed in an
inadequate job in respect to their training and skills or they are working for
fewer hours than they would like to work.
CAPE - Economics
Module Two

Objective four:Evaluate the costs of unemployment;

-The effect on output, growth and income;

Production Possibility Frontier elucidating the effect of unemployment on output:

Unemployment would clearly cause an economy to be producing within the bounding PPF
as labour, one of the four factors of production, is being underutilised. This
will therefore, cause a divergence between a country’s actual real GDP and the
potential real GDP. Real GDP seek to isolate the country actual economic growth by
using a base year price in order to combat the issue of inflation, a shortcomming
of nominal variables. Actual real GDP is therefore the economy’s output level given
the current usage of its available resources, whil Potential real GDP is the
economy’s output level given the full usage of it s available resources. This
figures can either coincide meaning that Actual = Potential, or a GDP gap can
exists meaning that Potential>Actual. Unemployment would result in a GDP gap
because the economy’s available resources are being underutilised, and the level of
aggregate demand will not be met. Given that Output is lower the level of national
income would also be lower given the equality between output and income, as
demonstrated in the circular flow of income model and the national income identity.
In additional, unemployment can hamper economic growth as it can result in lower
spending levels. Conclusively, unemployment can cause a economy to not meet its
potential real GDP, have a lower level of national income and can hamper a
economy’s current and future attempts to economic growth.