UNEMPLOYMENT AND SUGGESTED POLICIES 1

Unemployment and Policy Measures

Priyanshi Agrawal

1933360

Christ (Deemed to be University)

UNEMPLOYMENT AND SUGGESTED POLICIES 2

Abstract

The paper identifies the problem of unemployment as key macroeconomic variable in

different types of economies. It aims to describe and critically analyze the causes of

unemployment in three types of economies – developed, developing and emerging economies. It

further continues to provide policy measures for the same to cure the problem for the respective

economies.

Keywords: unemployment, economies, policies, skills.

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Unemployment, one of the vital macroeconomic variables, plays a very important role in

determining the state of economic growth of a country. It has been one of the key reasons for

severe economic slowdowns be it during The Great Depression of 1930s, Great Recession of

2008, jobless recovery of 2002 or present economic slowdown in India. Eradicating

unemployment should be the utmost preference of an economy as well-defined employment to

the people is the source of their happy livelihood and for the proper functioning of the business

cycle.

From classical economist to Keynesian economists, there are many theories on

unemployment and employment equilibrium. Both set of economists assumed that out of four

factors of production, only two factors are employed i.e., capital(K) and labor(L). Capital is

assumed to be constant and only labor supply changes in the long-run. According to classicists,

levels of output and employment are determined solely by labor supply which in turn is

determined by flexible real wage and leisure in a free market. Classical unemployment is caused

by external interference like floor price, ceiling price and trade unions. Keynesian economics

which developed in response to The Great Depression, stated inadequate demand as a sole cause

of unemployment. It stated the implementation of monetary and fiscal policies to stimulate

aggregate demand in order to combat unemployment. Thus, both set of economists have different

views to resolve the problem of unemployment. However, in the current scenario, it is not

feasible to implement only one set of policies and policies have to be modified and constantly

reframed according to the changing scenario and time path. (Froyen, 2013)

Generally, developed economies as the name itself suggests have advanced and

technological infrastructure and are more industrialized economy. Emerging economies are on

one hand associated with more industrialized development and transition towards advanced
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economies consisting more of working class while developing economies is generally

characterized by agriculture and low middle-income group.

Unemployment rate which is stated as the proportion of unemployed workforce in an

economy, is considered as ideal between 3.5-4.5% for different economies. However, zero

unemployment can never happen because of structural and frictional unemployment as economy

can never utilize its resources efficiently even at full employment level. While the average

unemployment rate for 2017 was 5.6%, the country with maximum unemployment rate in 2017

was Burkina Faso with 77% and with minimum unemployment rate was Cocos (Keeling) Islands

with 0.1%. (CIA, 2017)

Causes of unemployment in developed economies-

Structural unemployment- It is the type of employment which is caused due to the

technological innovation, industrial revolution or disparity between industrial composition and

its demography. For example, the unemployment faced by the editors, journalists etc. due to the

inclusion of AI technology in media companies; unemployment faced by the traditional farmers

in agriculture due to the rapid modification of farming techniques. (Krulick, 2019)

Frictional unemployment- This type of unemployment is caused when labor keeps on

changing their job from industry or sector to other. It exists mainly in gig economies where the

workers are employed for a specific period of time. This type of unemployment is natural and is

always not necessarily harmful for the economy as it can also state workers moving in search of

better qualified and dignified jobs.

Cause of unemployment in emerging economies-

 Lack of education and research- Since education is the base for quality human resource,

poor education quality fails to train people for currently required jobs in economic
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environment. Lack of quality education restricts the chances required for exploiting job

opportunities. Inadequate technical assistance, skill development, invention and

innovation incentives, and knowledge development leads to lagging behind of the youth

and they cannot find different ways to tackle the available opportunities. Furthermore,

more focus on getting employed instead of creating employment, reduces the incentive

for entrepreneurship which creates thousands of jobs.

 Prioritizing capital-intensive project- Since emerging economies covers 70-80% of global

population and are characterized with industrial and technological shift, more capital-

intensive technologies can lead to excess of labor supply and may not be very justified

for the economy’s existing workforce leading to large scale unemployment.

Notwithstanding better technologies, focusing more on low skilled jobs in comparison to

high skilled jobs and lack of skill development training is causing involuntary

unemployment.

 Frequent economic slowdown- According to Okun’s law, there is an inverse relation

between growth rate and unemployment rate. So more economic slowdown leads to shut

down of production activities which in turn leads to lower employment of factors of

production. This is very relevant from the economic slowdown of India in its Q3 2019-

20, which lead to hike in unemployment rate to 8.20%, an all-time high rate.

Causes of unemployment in developing economies-

 Disguised unemployment- In developing countries like African countries, the rate of

capital formation is less than the population growth and hence industrialization cannot

occur at a large scale. Hence large population concentrated in few sectors are not

employed at full capacity which lowers productivity and leads to lower economic growth.
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People in agriculture, which is the main source of income here are facing this type of

unemployment. Northern Africa reported highest level of unemployment rate in 2012

with 23.8%.

 Improper infrastructure- Lack of basic infrastructure like health, transportation, water,

electricity and education limits the choice and capabilities of the worker and does not

provide him/her with the opportunities and platform for productive employment.

Improper infrastructure reduces access to markets and resources.

Since developing countries have more untapped and less exploited resources, proper

employment has to be ensured so that efficient exploitation of resources can happen to boost the

growth potential economic growth of that country. Following are the policies which can be

undertaken by these economies-

 Employment exchanges- More and better employment exchange which aims to focus on

vocational guidance and career counselling to job seeker should be established.

Employment exchange which was established in the then developing India in 1960, has

provided jobs to 1.6 million job seekers in 2019 and more enrollment of agricultural jobs

can be seen in these 978 employment exchanges throughout the country. Hence,

developing African nations should create employment exchange for providing

opportunities to its youth.

 Employment creation- Main objective in a developing economy should be job creation

i.e., entrepreneurial development rather than getting employment. This entrepreneurship

in turn will provide job to many people which will thus multiply the number of people

employed. Skill development, labor market training, vocational educational and

UNEMPLOYMENT AND SUGGESTED POLICIES 7

establishment of technical institutes should be of utmost importance to enhance the

quality of labor force. (Trotsenburg, 2018)

 Higher education- In the case of South Africa, it is seen that most of the youth that remain

unemployed are those with the qualification of only secondary education. The EWAP of

Africa, which provides more employment to poorly educated youth, should instead shift

its objective towards strengthening the unrefined education system and incorporation of

more and more communication, numeracy, literacy, problem-solving skills of youth to

meet the present changes in economic and technical environment. (Brynard, P.A., 2011)

Major organization like BRICS and MINT with emerging economies as its member

which contribute 40% of the world’s GDP will become rich dominant economy by 2050, and are

on the verge of digitalizing and industrializing the sectors of the economy. To become such

supreme power, these countries have to strengthen and standardize its workforce which is the

pillar of their economy.

 Skill creation programs- Technical and vocational education and training generally

lasting from six months to three years can provide youth with skills to compete for better

jobs. Nonetheless, many sets of training programs exist, but more needs to be added to

ensure a relevant curriculum. Public Private Partnership (PPP) and workplace training

play an important role in eradicating unemployment as PPP helps in designing of

programs that match the needs of labor supply with labor demand. For the same, NSDC

(National Skill Development Corporation) was incorporated in India in 2008 which has

successfully trained 39.81 lakh people in the country. (NSDC, 2017-18)

 More labor-intensive industries- Since emerging economies are industrialized economies,

mainly dependent on machines for production, so in this modern technological era, they
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should try to shift their focus in the field of service procurement towards labor intensive

sectors such as consultancy firms, IT, financial services, hospitality services etc. tertiary

(service) sector alone contributes to 53.71% of total GDP in India.

Policies for the developed economies are as follows-

 Monetary policy- Central bank of a country can eradicate unemployment by lowering the

level of interest rate and increase money supply so that business expansion takes place.

Thus, hiring capacity of firms will increase and more and more people will be employed.

 Fiscal policy- Ultimately, the government can implement fiscal policy to labor supply

such as reduction in tax rates, increase in its expenditure, providing temporary

employment through schemes.

Serious abnormality like unemployment which results from several factors causing

instability, can be cured easily if above mentioned policies are framed and effectively

implemented in different sets of economies.

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References-

o Froyen, R.T. (2013). Macroeconomic Theories and Policies, Tenth Edition

o CIA, 2017. Retrieved from https://www.cia.gov/library/publications/the-world-

factbook/rankorder/2129rank.html

o Krulick, A (2019). U.S. Unemployment. Retrieved from

https://www.debt.org/jobs/unemployment/united-states/

o Trotsenburg, V.A. (2018). More and Better Jobs for Developing Nations.

Retrieved fromhttps://www.worldbank.org/en/news/opinion/2018/05/11/more-

and-better-jobs-for-developing-nations

o Brynard, A.P. (2011). The Implementation of Unemployment Policies in South

Africa. Retrieved from

https://repository.up.ac.za/bitstream/handle/2263/17716/Brynard_Implementation

%282011%29.pdf?sequence=1&isAllowed=y

o NSDC, 2017-18. Skilling today for a brighter tomorrow. Retrieved from

https://www.nsdcindia.org/sites/default/files/files/Annual-Report-NSDC-2017-

18.pdf