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Labour Force

According to Europeon Commission

The labour force or workforce or economically active population, also shortened to
active population, includes both employed and unemployed people, but not the
economically inactive, such as pre-school children, school children, students and
The World Bank describes
Total labor force comprises people ages 15 and older who meet the International
Labour Organization definition of the economically active population: all people
who supply labor for the production of goods and services during a specified period.
It includes both the employed and the unemployed. While national practices vary in
the treatment of such groups as the armed forces and seasonal or part-time
workers, in general the labor force includes the armed forces, the unemployed, and
first-time job-seekers, but excludes homemakers and other unpaid caregivers and
workers in the informal sector.

Labour Productivity
It is defined at the quantity of goods and services that a worker is able to produce in
a particular period of time.

Factors affecting Labour Productivity
Skills and qualifications of workers
Morale of workers. In a period of industrial unrest and low worker morale,
productivity is likely to fall.
Use of technology- Firms which use more of technology will experience higher
labour productivity.
Use of labour intensive methods will result in lower productivity
Rules and Regulations: Absence of labour market regulations could lead to high
turnover and poor worker morale, which could also diminish labour productivity.
Countries with strong labour productivity growth tend to benefit from high rates of
growth, strong export demand and low inflation. Increased labour productivity can
enable a higher long run trend rate of growth.

Unemployment Basic terms
Unemployment refers to the number of unemployed people, defined as all people
above a particular age, who are not working and who are actively looking for a job.
Underemployment refers to all people above a particular age who have part time
jobs when they would prefer to have full time jobs or have jobs that do not make full
use of their skills and education.
Unemployment rate= unemployed workers/total labour force

Difficulties involved in measuring unemployment
Measuring unemployment accurately is made difficult because of imperfect
knowledge. Not all instances of unemployment are recorded, and some records of
unemployment may not be accurate. For example
Discouraged workers are people who are willing and able to work, and would
gladly accept work, but because they have had no success finding a job they
have given up actively seeking employment they are placed in the "not in labor
force" category.
Part-time workers are people who are willing and able to work full-time (35 to 40
hours per week), but are forced to work less because employers do not need
their productive efforts. While they have jobs, and are officially included in the
"employed" category
Some people collect these transfer payments by fraudulently "neglecting" to
inform government officials of their actual employment.
The underground economy is comprised of illegal productive activities, such as
gambling, the sale of controlled substances, and prostitution. These people
might not tell the officials about their profession and may not be included in the
employment statistics.

Types and causes of Unemployment
Disequilibrium Unemployment
Cyclical or Demand Deficient unemployment
Cyclical unemployment exists when individuals lose their jobs as a result of a fall in
aggregate demand (AD). The fall in AD, in the economy, results in the fall in real
output and thus unemployment. It is called also known as demand
deficientor Keynesian unemployment.
Cyclical unemployment through a diagram
As we can see in the AD/AS diagram, the fall in AD to AD1 will result in a fall in
the Real output (Y1).
This will force the firms to reduce their output and hence reduce their workforce
from ADL to ADL1. However, due to wage stickiness it is less likely that real
wages will fall (as seen in the labour diagram). Therefore, the wages instead of
coming down to W1 will remain at We. This will create a surplus situation where
the aggregate demand for labour will be at a and the aggregate supply of
labour will be b.

Wage stickiness: The firms may not be able to reduce the wages may be as a result
of the following reasons:
They dont want to create discontent among the workers by reducing their wages
Trade unions may not allow the wages to go down.
Labour contract may deter the firms to reduce the wages.
Equilibrium Unemployment
Structural unemployment
Structural unemployment occurs when certain industries decline because of long
term changes in market conditions. These structural changes in the economy
might lead to fall in demand for certain sectors of the economy.

This is usually common in developing countries where primary sector generally
reduces in size and secondary sector and tertiary sector might gain more
importance. Change in technology is also one of the major reasons for structural
unemployment, whereby certain kind of jobs become obsolete. Changes in
consumer taste or preference may also be a cause of structural unemployment
Structural unemployment may worsen if there is
Occupational immobility occurs when there are barriers to the mobility of labour
between different industries and occupations.
Geographical immobility exists when there are barriers to people moving from one
area to another to find work.
Frictional Unemployment
Frictional unemployment occurs when people leave their jobs and are unemployed
while they are looking for a new job, or just having a break from working.
Seasonal Unemployment
Unemployment attributable to relatively regular and predictable declines in
particular industries or occupations over the course of a year, often corresponding
with the climatic seasons.
Equilibrium unemployment through a diagram
Here, we can see what is called equilibrium unemployment represented by the
arrows between point a and point b. Equilibrium unemployment is the term which
means the situation is that the labor market is in equilibrium but there are still
people who are not at work (represented by the arrows between points a and b.)
This is what would realistically be considered as full employment, since there will
always be people who are unwilling or unable to take available jobs, causing the
official rate of unemployment (calclated by) to be above zero, which is not a realistic
reachable goal.

Cost of unemployment
Costs to the economy
Unemployed labour means utilised factors of production. This will result in lower
output for the economy.
Long periods of unemployment would lead to deskilling of labour which will in
return reduce potential output.
Unemployment leads to greater disparities in the distribution of income.
Costs to the government
Unemployed people will not pay taxes as they dont have any running income. This
will be a loss of tax revenue to the government.
Unemployment benefits given out by the government to support the unemployed
will result in extra burden on the government exchequer moreover, there is an
opportunity cost involved as these funds could have been utilised for other
development purposes.
Costs to society
Higher unemployment leads to increased crime and vandalism. Moreover, there is a
cost to the government of dealing with social problems resulting due to
Costs to individuals
There are personal costs for the unemployed in terms of stress-related illness and
family problems (family breakdown) caused by the strain of being unemployed.
In order to meet daily expenses, an unemployed person may result in increased

Measures to reduce unemployment
Cyclical unemployment
Use expansionary demand side policies to increase AD in the economy i.e. fiscal and
monetary policy
Structural unemployment
Market Oriented measures such as letting the wages fall in depressed areas,
lowering unemployment benefits, reducing workers job security, lowering
income tax.
Interventionist measures include setting up training facilities for workers to
upgrade their skills, encourage geographical mobility, providing job
information, offering incentives to firms that hire in depressed areas.
Frictional & Seasonal unemployment
Measures include reducing the time that a worker spends in between jobs
and improving information flows between workers.
Market Oriented measures such as lowering unemployment benefits,
lowering income tax.
Interventionist measures include setting up jobs centres, employment
Which are the most effective policies?
It depends upon the type of unemployment involved.
However, the types of equilibrium unemployment (frictional, structural and
seasonal) may ONLY be cured by supply-side policies.
Demand-deficient unemployment may be cured by expansionary demand-side
The use of demand-side policies may have bad effects elsewhere in the economy.
For example, if interest rates are lowered, this may lead to inflation and a fall in the
external value of the currency (the exchange rate). Furthermore, there is no
guarantee that expansionary monetary policy will be effective in raising AD. If
consumer and business expectations about the future are pessimistic, then lower
interest rates may not necessarily lead to increased AD.

Natural rate of unemployment
The natural rate of unemployment is the unemployment rate that occurs in even a
healthy economy. That's because workers are always coming and going, looking for
a better job, and often they are unemployed until they find that better job.
The Natural Rate of Unemployment is the rate of Unemployment when the labour
market is in equilibrium. The natural rate of unemployment is caused by a
combination of frictional unemployment and structural unemployment.
The reason why the natural rate can change over time (or differ across countries) is
because of changes or differences in economic policies that impact frictional
unemployment (the ease with which firms can layoff workers, the ability and
incentive for laid-of workers to find jobs, the adequacy of job retraining programs,
the ease with which unemployed workers can link up with firms that have job
vacancies) or structural unemployment (technological changes that impact
industries, the education and retraining programs available to support workers in
obsolete industries, the level of inter-generational mobility (how does the layoff
affect the education and income prospects of the laid-of worker's children).
Policies to Lower the Natural Rate
Lower minimum wages: Helps reduce the job losing rate. If we think about it from
the firm's point of view. During times of hardship, a firm may not have to let workers
go if they can pay them a little bit less. This does not mean that the minimum wage
is bad. As a society, we may be entitled to set a wage that is adequate for taking
care of basic needs and set up a safety net for those who are unable to find jobs at
that wage.
Better information: Set up job finding centers that allow workers to find potential
matches, quickly and efficiently. Helps increase the job-finding rate.
Better training of workers: This can help in both reducing the job losing rate and in
increasing the job finding rate.
Remove disincentives to work: Excessive unemployment benefits, strong labor
market regulations, although improving the quality of life of the employed can bring
about high unemployment through reductions in the job finding rate because of
shortfalls in both labor supply and labor demand. Once again this does not mean
that unemployment benefits or regulations that enhance worker's bargaining power
with the employers are a bad thing - it is important to find the tradeoff between
providing enough unemployment benefits to provide a safety net and providing so
much that you are effectively providing a disincentive to gain employment.
Reductions in payroll taxes: Social Security is paid partly by the employer and
partly by the employee. Lower payroll taxes may help reduce unemployment by
reducing the cost of hiring workers and by increasing incentives for people to return
to work.