Unemployment Definition By Imf

Published Date: 02 Nov 2017

CHAPTER 2

2.0 Introduction

Unemployment is one among many issues that people face in the labor market (ILO, 2006). Nowadays unemployment rate is higher among young people and people tend to ask if one is bound to be unemployed, why the need of undertaking further studies? In practice, this definition may vary according to the cultural and social characteristics of the context. However, in industrialized countries, the lower limit is usually the statutory minimum school leaving age. There are greater differences across countries in the definition of the upper limit; for example, in Britain youth employment policy covers those aged 16 to18, while in Southern Italy youth employment policy is targeted at people between the ages of 14 and 32 (O’Higgins, 2001).

2.1 Definitions

2.11 Unemployment definition by ILO

Unemployed people are "those who are currently not working but are willing and able to work for pay, currently available to work, and have actively searched for work".

2.12 Unemployment definition by IMF

Under the Labour Force Survey (LFS) methodology, unemployed persons are defined as those aged 15 years and over, who fulfill the following three conditions:

did not have any work during the reference week;

had been actively seeking a job during the last four weeks or who found a job to start within a period of at most three months;

was able to start to work in the next two weeks.

2.13 Unemployment definition by World Bank

Unemployment refers to the share of the labor force that is without work but available for and seeking employment. 

2.14 Unemployment rate

The unemployment rate can be mathematically defined as the total unemployed divided by the labour force which is the sum total of employed and the unemployed. The unemployed persons are individuals who are without a job and actively seeking to work. Changes in unemployment depend mostly on inflows made up of non-employed people starting to look for jobs, of employed people who lose their jobs and look for new ones and of people who stop looking for employment. According to the resolution adopted by the 13th International Conference of Labour Statistician (ICLS), unemployed people are defined as those individuals without work, seeking work in a recent past period, and currently available for work.

Additionally, underemployment refers to those who work less when they prefer to work on a full time basis. It is categorized in two different groups. The visible underemployments are persons who work short hours because of slack work, no work or the job is part-time. Invisible underemployment refers to individuals who are working in jobs where their skills are not adequately utilized. (ICLS, 1982)

Labour underutilization by Edgar O. Edwards (1974)

Disguised unemployment- people seeking work in firms and government sectors on a full time basis but the serevice they render may require much less than full time. Thus ,labour could be withdrawn without having a significant impact on goods and services.

Hidden unemployment-those who are engaged in non-employment activities for instance, education and household chores, as a ‘second choice’ , primarily because of job opportunities are not available at the level of education or not open to women due to discrimination.

The prematurely retired which is a phenomenon mostly apparent in the civil service sector. In many places, retirement age is falling as longevity rises mainly as a means of creating job opportunities for younger people.

2.2 Types of unemployment

Unemployment can be voluntary or involuntary. Voluntary unemployment is a situation where a worker does not participate in the labour market at the going wage rate. The reasons behind it can be welfare benefits and high income tax rate. On the other hand, involuntary unemployment is when sufficient vacancies are not available in the market.

Unemployment can be classified into different categories namely, frictional, structural, cyclical, regional and seasonal.

2.21 Frictional

Frictional unemployment is also known as search unemployment. It is when workers lose their current job and are in the process of finding another one. It is when people move from one job to another. This can occur due to asymmetric and however, to reduce this type of unemployment, not much can be done, other than providing better information. This suggests that full employment is impossible at any one time because some workers will always be in the process of changing jobs.

2.22 Structural

Structural unemployment occurs because of a mismatch of the requirements of a new job and the skills of a worker. In many countries, this type of unemployment is due to globalization. Labour immobility may give a rise in structural unemployment. The growing industries that need labour may not employ the same workers who have been displaced in the declining industries. When structural unemployment affects local areas of an economy, it is called ‘regional’ unemployment. For example, unemployed coal miners in South Wales and ship workers in the North East add to regional unemployment in these areas.

2.23 Cyclical

Cyclical unemployment is also known as Keynesian unemployment or demand deficient unemployment. It is an involuntary unemployment. This is when aggregate demand is below the full employment level. For instance, unemployment levels of 3 million were reached in the UK in the last two recessions, between 1980 and 1982, and between 1990 and 1992. In the most recent recession of 2008-2010, unemployment levels rose to 2.4m in the last quarter of 2009, and are likely to peak at over 2.5m during 2010. (ONS)

2.24 Classical

Classical unemployment is caused when wages are ‘too’ high. This explanation of unemployment dominated economic theory before the 1930s, when workers themselves were blamed for not accepting lower wages, or for asking for too high wages. Classical unemployment is also called real wage unemployment.

2.25 Seasonal

Seasonal unemployment exists because certain industries only produce or distribute their products at certain times of the year. Industries where seasonal unemployment is common include farming, tourism, and construction.

2.3 The full-employment aim

Full employment, or the natural rate of unemployment refers to 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.

The definition of full employment is critical, because as unemployment rates reach and fall below this level, inflationary pressures arise. The higher the extent the unemployment rate falls below the natural rate, the higher the pressure on inflation. Even in a capital-favoring production country like the United States, worker wages represent over 70% of all production costs. Rising wages increase costs, which are usually passed on to consumers as price increases, leading to a rise in inflation.

To understand the relationship between full employment and wage increases, let us assume that the agreed upon natural unemployment rate is 5%. If the unemployment rate is 8%, then there are workers who desire jobs but cannot obtain one (known as involuntary unemployment). With high unemployment rates, the existing labor surplus implies that employers have little trouble finding people to work at the prevailing wage. But as economic growth accelerates, the labor surplus diminishes as more workers are hired, and the unemployment rate falls. Finally, due to strong economic growth, the unemployment rate falls to a level consistent with full employment.

Keynesian prose that full employment can be achieved by increasing government expenditure which via the multiplier effect will raise aggregate demand.

2.4 Causes of unemployment in developing countries

Africa is the main country which is facing the problem of unemployment. It is especially the young people and women that are being targeted and are mostly unemployed in that country. Even the university graduates have no job and the number of people in this group is increasing. The causes of this situation are numerous. One of the causes can be societal goals and aspirations. Also changes in government policy such as free laudable programmes, universal primary schooling leads to a rise in secondary school enrolments and consequently there is an increase in education. However, this will contribute to a proliferation of universities. The objective is to accommodate as many qualified students as possible; but there is often inadequate planning for the future employment of graduates.

The worldwide recession in Africa has led to a decrease in demand for raw materials, cash crops and, to some extent, manufactured goods which have in turn increased unemployment. This has resulted in less production and unavoidable lay-offs. Furthermore, as a result of modern technology, labour-intensive work, such as agricultural employment, has been drastically reduced as fewer people are needed to perform certain jobs.

Another factor of unemployment is the increasing population that has caused loss of jobs among job seekers. Urban migration is yet another cause of unemployment in Africa, with people moving from rural areas to urban centres in search of greater opportunities.. In industrial nations, most unemployment is the result of economic recessions and depressions In the Great Depression of the 1930s unemployment rose to 25% of the workforce in Germany, Great Britain, and the United States.

Unemployment has also been caused by the negligence of the leaders and their corrupt attitude, they imbibe the culture of power retention and money embezzlement, the funds needed for the development of a sector would be diverted for personal use, with this trend there is no way forward and we remain undeveloped.

Technology is another factor contributing to an increase in unemployment. If every year we produce the same amount of goods with fewer people , in a few years far less working hours are needed to produce all the goods that are required. The historical trend has been to use less and less working hours per week. If we do not continue this trend, the supply of working hours is greater than the demand. An oversupply of working hours means they are worth less, wages and salaries get reduced. Also many persons are out of work; their working hours are no longer needed. Those that are out of work have no income and therefore the demand for goods goes down. With fewer sales, less gets produced, more persons are laid off. This will result in unemployment and will produce crime. The way to stop this and have everybody working is to continue the historical trend; is to distribute the available work between all persons that want to work (Joseph Ekwu, 2008).

According to a UN study, the fallout from the financial crisis in Asia that began in mid-1997 has caused massive unemployment throughout the region. Also, the poverty rate increased to 13.1% in 1999 from 9.3% in 1997.The report said that the economic turmoil in Southeast and East Asia ''underscored the vulnerability of these once high growth and full employment economies, where unemployment rates have doubled and even tripled in the space of a few months,''. The study also says that the international community committed itself to promote the goal of full employment as a basic priority of economic and social policies. But four years after the Copenhagen summit, full employment is still a distant goal - and not only in Asia. A study , by the UN's International Labor Organization (ILO) warns that the world unemployment situation ''remains grim."

ILO statistics showed that more than 150 million workers are currently without a job out of a world labor force of about three billion people. Moreover, about 25% to 30% of the employed workers are underemployed.

The economic crisis in Asia is blamed for much of the setback to the world employment situation. (Kerstin Marx).

In the U.S, there are millions of Americans that have not been able to find a full-time job even after searching hard for an entire year despite the fall in unemployment rate from 9.4% to 9% in the U.S(BLS, 2011). It now takes the average unemployed worker about 33 weeks to find a job. The economy is dying and its' not just creating enough jobs for the people. (Michael, 2011)

Snyder has listed some of the reasons of high unemployment in the U.S

Fewer new openings:Post-crisis, the number of new job openings in the country crashed to below 3 million jobs whereas there used to be 4.5 million new openings before it.

Lack of real growth: The economy is gripped by chronic lack of real growth. A measly 36,000 jobs were added in January whereas economists have concluded that at least 150,000 new jobs are needed to keep up with the rise in population.

Government sector layoffs: Government sector jobs, which are considered the safest, are becoming a dangerous option as state and local governments are continually cutting jobs.

Chinese job grab: China is taking away U.S. jobs in hordes. Unbelievable cost advantages in China, thanks to its ultra low labor costs, are moving thousands of jobs into China and away from the U.S. each year. Plus, the bulging trade deficit is slowly eating up the U.S. economy as hundred s of billions of dollars are going to the rest of the world.

High taxes. Snyder says businesses pay more taxes in the United States than just about anywhere else in the world. This means many businesses are literally pushed out of the country, and with that, jobs too vanish.

Unemployment in Bulgaria is high and of long duration. Increase in unemployment has been caused by relatively high inflows into unemployment coupled with limited outflows. Rutkowski focuses on determinants of and constraints to job creation. He used data on job creation and job destruction from a survey of employment in all registered firms. He finds that the source of large inflows into unemployment is intensive enterprise restructuring associated with a high pace of job reallocation. However, job creation falls short of job destruction. According to him, three main factors account for the limited job creation and hiring, and thus for low outflows from unemployment.

The unfriendly business environment, reflected by a low rate of new firm formation, and a relatively small small and medium enterprise sector.

Labor market rigidities, including excessive hiring and firing costs.

Skill and spatial mismatches brought about by enterprise restructuring, as well as low skills and marginalization of the long-term unemployed who cannot successfully compete for new jobs.The author recommends a three pronged strategy to improve labor market performance: (1) removing bureaucratic constraints to entry and expansion of firms; (2) enhancing labor market flexibility through lowering hiring and firing costs; and (3) improving the educational system so as to equip workers with broad and portable skills.

2.5 The cost of unemployment

Unemployment does not only affect the economy or the level of economic activities but it also leads to some damaging social effects.

Research has shown that unemployment imposes significant economic, personal and social costs that includeloss of current output,social exclusion and the loss of freedom, skill loss, psychological harm, including increased suicide rate, ill health and reduced life expectancy, loss of motivation, the undermining of human relations and family life, racial and gender inequality and loss of social values and responsibility (Bill Mitchell, 2012).

Unemployment causes a waste of scarce economic resources that cannot be recovered.

An economy that does not make full use of its labor force, will make fiscal losses as well. Following are the fiscal costs to the government that is caused by high unemployment.

When individuals are unemployed, they receive unemployment benefits. Moreover, they also do not pay any income tax. This results in a negative overall balance.

As unemployed people spend less, they also contribute less to the government in the indirect taxes. This, in turn, becomes a serious fiscal cost to the government.

The rise in the government spending along with the fall in tax revenues may result in a higher government borrowing, which is seriously detrimental for any economy.

2.6 Unemployment Trends

Despite the rapid recovery in the global economy that took place in 2010, following two years of severely adverse labour market conditions, global unemployment remained elevated in 2010. The number of unemployed stood at 205 million in 2010, essentially unchanged from the year earlier and 27.6 million higher than in 2007. Given that the number of unemployed increased by more than 22 million in 2009 alone, 2010 brought about a halt to the surge in unemployment in the world as a whole, but conditions in labour markets did not improve enough. The global unemployment rate stood at 6.2% in 2010, versus 6.3% in 2009 and 5.6% in 2007. (ILO, 2012)

2.61 Africa

Unemployment is on a rise in different parts of Africa. Although the South African economy grew by an estimate of 3.1 % in 2011, unemployment rate remained constant. In Egypt, the highest populated country, there has been a rise in unemployment from 1,480,500 in 1999 to 2,143,000 in 2008 (ILO, 2010). In Morocco, unemployment rate was reported at 9.6%. In other countries like in Tunisia unemployment rate was 10.9%; 11.3% in Algeria; 1.7% in Kuwait. South Africa unemployment rate averaged 25.49% reaching 31.20% in March 2003 and a record low of 21.90% in December 2008.

However, MENA has to meet its ability to suppress high unemployment. With except to Sub-Saharan Africa, unemployment in MENA is the highest in the world at 20% (De Silva & Silva-Jauregui 2004). Even excluding Iraq from the region, which has gone through extreme socio-economic and political change, unemployment was 17.5%. High unemployment in MENA has led to increasing outward migration, many of whom are unemployed and looking for better opportunities abroad (De Silva & Silva-Jauregui 2004). MENA’s employment challenge is to double its current level of employment by 2020 or fall behind the supply of new entrants entering the labour market (Nabli, 2004).

The growth in the population aged between 15-24 in the region has fallen from 2005-2011 and is expected to continue to fall in the future (UN, 2011). However youth unemployment is significantly higher in MENA countries than overall unemployment. According to (Salehi-Isfahani, 2010), youth unemployment (ages 15-29) in MENA is 25.9% compared to overall unemployment of 11.14%.Iranian youth aged 15-29 are 35 % of the total population, which is the highest in any country in 2010. One factor influencing the pressures coming from youth unemployment is the increasing inclusion of young female works into the labour market (World Bank 2004).

2.62 Asia

Prior to mid-1997, labour market developments in Asia had ranged from encouraging to spectacular. The Asian crisis by late 1997 caused a cessation to the positive trends in unemployment. Today, despite of the progress that Asia has achieved in terms of reduction in poverty and economic growth, it is still a region with 670 milion of people being poor. The region has had the highest average annual rate of growth of 5.7% over the last 15 years against the world average of 3.4%. As a result, the rate of unemployment has increased sparking fears of jobless-growth in many parts of the region. For example, $2 a day working poverty share in total employment was as high as 88% in South Asia, 59% South-East Asia and 49% in East Asia in 2003 although there has been significant improvement over the years.

The Asian financial crisis started in Thailand which was started due to problems such as external imbalances, financial fragilities and exchange rate overvaluation. The rate of unemployment increased about 16% from 2010 to 2011. GDP declined by 4.25% in the same time period. The region is also confronted with high levels of youth unemployment and educated unemployment. For example, youth unemployment in the Asian region stood at 38million in 2003, almost half of the world’s total. This was an increase of 36% over the level prevailed a decade ago when the global increase was only 26% (Bangkok, ILO, 2005).

Strong demand from China has supported exports in other countries in the region, as itseconomy is estimated to have grown by 10.5 % in 2010, following a 9.1 % expansionin 2009. In China, the unemployment rate in September 2010, at 4.6 %,was modestly higher than the corresponding month in 2007 (4.3 %) and substantially higher than therate in the corresponding month in 2008 (3.7 %).In the Republic of Korea, the unemployment rate in thethird quarter of 2010 was 3.5 %, higher than the corresponding quarters in either 2007 or2008.

The labour force participation rate in East Asia has been on a declining trend since the late1990s and it continued to fall further to 73.2 % in 2009. Despite the downward trend, EastAsia still has the highest labour force participation rate of any of the world’sregions. One uniquefeature of East Asia compared with other global regions is that the youth labour force participation rate forfemales is higher than that for males. This is reflective of East Asia’s success at creatingopportunities for women in the workforce, but it may also reflect reliance on low-wage female labour in export-oriented industries.

Labour productivity rose by 8.5 % in2010 in EastAsia, the highest growth rate across the regions. Continued strong labour productivity growth in past decades has helped increase living standards in East Asia, although it is importantto bear in mind that pay and the quality of work remain low for many of the region’s workers.Around 50.8 % of the region’s workers are in vulnerable employment while 25.1 %(204.2 million) are living with their families on lessthan US$ 2 a day, and 9.0 % of workers(73.0 million) are living on less than US$ 1.25 a day.

The South-East Asia and the Pacific region, being highly dependent on foreign trade andinvestment, was heavily affected by the global economic crisis and the region grew by a mere1.5 % in 2009. Since then, the region rebounded strongly and economic growth in2010 is estimated to have reached 7.2 %, the highest rate since 1996. Growth has beensupported by significant stimulus packages undertaken in many countries in the region and a pick up in private consumption and investment, as well asfrom rebounding demand in the widerAsia and the Pacific region: China and India in particular.

The larger economies in the region where GDP contracted in 2009 experienced a strong rebound. Malaysia’s economy grew by 6.7 % in 2010 compared to –1.7 % in 2009 .The region’s largest economy, Indonesia, which fared the crisis comparatively better in termsof output growth, grew by 6.0 % in 2010 after growing by 4.5 % in 2009.Despite the strong recovery in economic output in South-East Asia and the Pacific, the region’s unemployment rate is estimated to have edged down only slightly, from 5.2 % in 2009to 5.1 % in 2010, though in some countries in the region, such as Thailand, unemploymentrates are at or below pre-crisislevels.Rapid economic growth hasresumed, but an expansion ofwage employment and socialsafety netsis needed to reduce the region’s large decent work deficitsWhile clearly impacted by the global economic crisis, the economies ofthe SouthAsia region havelargely held up well due to less reliance on exports than the highly export-dependent East andSouth-East Asia regions, and the region hasresumed rapid economic growth in 2010.

Economicgrowth in the region as a whole declined from 9.1 % in 2007 to 5.9 % in 2008 and to5.5 % in 2009. It is estimated that the region’s economy grew by 8.9 % in 2010, ledby India,which registered rapid growth of 9.7 % in 2010.

2.63 Latin America and Europe

Following the sharp contraction in GDP growth by -1.7 % in 2009, economic growth inLatin America and the Caribbean (LAC) strongly expanded by 5.7 % in 2010, which isthe highest regional growth rate outside the three Asian regions (see table A1). Four of the region’sfive largest economies, namelyArgentina,Brazil,Colombia andMexico,registered growth rates in a range between 4.5 and 7.5 %

In accordance with favourable growth rates, short-term labour market indicators, such asmonthly and quarterly unemploymentrates,show a downward trend in many countriesin LAC.the unemployment rate measured in Brazil’smonthly survey ofsix metropolitan areasreached itslowest level in the series at 6.2 % inSeptember 2010, thus suggesting an improvement on pre-crisis levels of unemployment.

However, short-term indicators also show that in several countries, including Colombia and Mexico, labour markets in terms of unemployment rates have not yet recovered from the crisis.Turning to longer term annual trends for the region as a whole, the unemployment rate inLACdecreased by 0.9 percentage points from 8.5% in 2000 to 7.7% 2010Nevertheless, there hasbeen clear progress in LAC in creating employment opportunities since 2000. The employmentto-population ratio increased by 2.6 percentage points during the current decade (compared with1.7 points during the 1990s), despite the slowdown in employment growth in 2009.

The increase in the employment-to-population rate is mostly due to increasing employment opportunities for women. The still considerable gap between male and femaleemployment-to-population ratesin the region, just above 27 percentage pointsin 2010, closed byaround 5 percentage points since the beginning of the decade.

Most new employment in LAC is created in the servicessector. Between 2000 and 2009, theshare ofservicesin total employment increased by 3.4 percentage pointsto 61.6 % in 2009.For women, thisshare is considerably higher as more than three out of four women work in services. This mirrorsthe share ofindustrial employment among males, which at 27.8 % is morethan twice the share ofindustrial employment among females.Contrary to the 1990s, employmentin industry increased during 2000 to 2009, despite a decrease from 2008 to 2009 which was dueto the global economic crisis.The crisis also resulted in a slowdown in the ongoing decline inagricultural employment. Nevertheless, employment in agriculture declined not only in relative butalso in absolute terms during the past decade. In 2009, agricultural employment accounted forroughly one out of six workers in the region, which is the lowest share outside the DevelopedEconomies and European Union region.