Unemployment

Unemployment is one of the most critical issues that our country is facing today. It results in a colossal waste of human resources that slowdown the tempo of economic growth. Unemployment is a situation in which all workers that are mentally and physically capable of working and willing to work do not get employment.

Method of Estimation
1. Usual Principal Status (UPS) A person is counted as being in the labour force on principal usual activity basis, if he was either engaged in economic activity or reported seeking/being available for work for the major part of the preceding 365 days. On this basis, a person is unemployed if he spent majority of the time in the preceding year seeking employment. The usual principal status unemployment rate is the proportion of those classified as unemployed on this basis expressed as a percentage of those classified as being in the labour force. 2. Usual principal and subsidiary status (UPSS) Under this method a person is said to be employed if he is engaged in work for the major part of the preceding year including in his principal occupation and a subsidiary occupation. 3. Current Weekly Status A person is considered to be employed if he or she pursues any one or more of the gainful activities for at least one-hour on any day of the reference week. On the other hand, if a person does not pursue any gainful activity, but has been seeking or available for work, the person is considered as unemployed. 4. Current Daily Status In this approach the unit of classification is half day. Under this concept, a person is considered as employed for the entire day if he had worked four hours or more during the day. If he had worked for one hour or more, but less than four hours, he is considered as working for half day and seeking/available for work or unemployed and not in labour force for other half of the day, depending on whether he was seeking or available for work or not. If a person is not engaged in any work, even for one hour on the day, but was seeking/available for work for four hours or more, he is considered unemployed for the entire day. If he is available for work for less than four hours only, he is considered as unemployed for half day and not in labour force for other half day.

Types of Unemployment
Types of unemployment in developed economies a) Voluntary unemployment In this type of unemployment a person is out of job of his own desire and does not work on the prevalent or prescribed wages. Either he wants higher wages or does not want to work at all. This exists mostly in developed economies.

b) Cyclical unemployment This is the result of the trade cycle which is a part of the capitalist system. In such a system, there is greater unemployment and when there is depression a large number of people are rendered unemployed. Since such an economic crisis is the result of trade cycle, the unemployment is a part of it. This occurs when the economy is below full capacity. E.g. in a recession when AD falls there will be a fall in output, therefore firms will employ less workers because they are producing less goods. c) Frictional Unemployment: It occurs because of imperfect flow of information. It takes time for employers with vacant position to find suitable employees and employees may not know enough about the potential employers. When new entrants enter into the job market every time, it takes time before they get settled in a job. Some of current employees may quit their job in anticipation of finding new and better job. They are unemployed until they find another job. Type of unemployment in developing economies a) Involuntary unemployment In this type of situation the person who is unemployed has no say in the matter. It means that a person is separated from remunerative work and devoid of wages although he is capable of earning his wages and is also anxious to earn them. b) Structural Unemployment This occurs due to extensive change in the structure of the economy. Structural changes could lead to emergence of new forms occupations and disappearance of some of the existing ones. There could also be relocation of some industries. Structural changes could lead to occupational immobility which arises from the difficulty in learning new skills applicable to a new industry. With structural change some skills become obsolete and people with these skills become unemployed. It happens when an old technology is replaced by new technology of production. When the structure of the economy is changing some sectors and regions experience outflow of capital resources and they become less attractive place for investment. These regions may experience less demand for labour causing higher unemployment rate. c) Seasonal unemployment In underdeveloped economies there is seasonality in the nature of employment in the major sector of the economy which is agriculture. Similarly certain industries and trades also experience seasonal variations in their trade and therefore traders and business men engage workers for a particular season. When the season has ended the workers are rendered unemployed. Sugar industry is an example of this type of seasonal unemployment. d) Sector-wise unemployment Sector-wise there are two types of unemployment in developing economies: i) rural unemployment and ii) urban unemployment. i) Rural unemployment: It could arise because of the backward nature of the rural agricultural economy and the seasonal character of the occupations there. There are mainly two types of unemployment in the rural areas, open and disguised unemployment. The open unemployment

is a situation when people are absolutely and involuntarily unemployed. Disguised unemployment is the condition when the labourers are redundant in the place of work and their presence does not add to the total output of the sector. It is defined as a situation when the marginal product of the labourer is zero. ii) Urban unemployment: In the urban sector there are two forms of unemployment, industrial unemployment and educated unemployment. The backwardness of the agrarian sector results in large migration to urban areas but the urban industrial sector fail to expand in proportion to absorb the new entrants in the labour market. Majority of those migrate to urban area may be educated. This causes high levels of educated unemployment in the urban areas. Unemployment in India Year Unemployment rate (%) 2002 8.8 2003 8.8 2004 9.5 2005 9.2 2006 8.9 2007 7.8 2008 7.2

Causes of Unemployment in India

1. Poverty Poverty and unemployment are highly correlated. Various studies indicate that the incidence of unemployment is higher among the poor compared to the relatively better off people. Thus unemployment feeds on poverty and poverty in turn feeds on unemployment. 2. Slow growth of the economy The economy had grown at a moderate rate of 3.5 percentages from 1951 to 1991. The creation of employment opportunities directly depends on the growth of the economy. The slow growth of the economy had been insufficient to keep up with the pace of expansion in the labour force of the country. 3. Capital intensive technology There has been an increased use of capital intensive technology in both the private and public sector enterprises in the country leading to the denial of gainful employment opportunities for large section of the labourers. The policy of rationalization, mechanization, modernization etc in the industrial sector led to the creation of large mass of unemployed in the country. 4. Excessive Population growth The population in India was growing at a staggering rate in the period between 1951 and 1991. This meant that the number of people being added to the labor force each year was substantially high. The failure of economic growth to catch up with that, resulted in creating a huge gap between the employment opportunities required and that were being created. 5. Existence of excess capacity in industries

Majority of industries in India have been operating under excess capacity since 1967. Erratic supply of power, transportation difficulties, shortage of raw material supply, industrial unrest etc, has been responsible for this situation. As a result industries have not been able to absorb the growing number of labourers in the economy. 7. Backward agriculture Close to 70 percent of Indias labourers are engaged in agriculture which is mainly seasonal in nature in terms of occupation. This would render a large section of rural labourers unemployed during major period of the year. The relative absence of supplementary occupations adds to the problem. 8. Government policy towards private enterprise The liberal approach of the government in dealing with the functioning of the private sector in the economy has not helped the situation of unemployment in the country. Absence of proper mechanism to regulate the private sector and the incidence high inflation has discouraged this sector in generating employment opportunities. 9. Defective educational system Continuation of the British legacy in our educational system suits only to create a set of clerks in the country. The failure to restructure the educational system in accordance with the requirement of the economy has stood in the way of reducing unemployment in India.

Patterns of Rural-Urban Migration

The theory of rural-urban migration is explained on the basis of the Harrris-Todao model. The main idea of the Harris-Todaro model is that the formal urban sector pays a high wage to workers and it is this high wage that creates urban unemployment. The high wage in the urban sector could be because, i) there is unionization of labour that helps in bargaining for better wages, ii) the urban sector may be the showcase of government policy so that minimum wages, pension schemes, unemployment benefits etc may be required to be provided that may raise the real wages, if not the money wages, iii) higher wages are paid to attract the best quality labour, iv) to maintain high efficiency of the labourers, v) it could be used to threaten the labourers to get the best out of them, and vi) it may be to induce the labourers to contribute the maximum to the firms. On the other side, in the informal urban sector and in the rural sector the wages rates are too low for the reasons, i) there is no unionization of labourers, ii) it is difficult to implement the minimum wage policies, iii) bulk of the labour may be family labour working on family farms and businesses, and iv) the employers lack the incentives to high wages because the labour in these sectors is difficult to monitor. Thus migration in this context is seen as a response to the significant wage gap that exists between the two sectors. Everyone that migrates to the urban area may not get absorbed in the formal sector. Those who do not get the opportunity will settle for the informal sector job or even remain unemployed.

The basic model The basic model is the one where we assume only two sectors to exist and wages are fully flexible. In the given diagram the entire labour force is represented on the horizontal axis. The labour force is divided between agricultural sector, which we denote by A, and the formal urban sector which we denote by F. The formal sector wages are given on the left vertical axis and agricultural wages are given on the right vertical axis. AB is the demand or absorption curve of labour in the urban sector. Its downward slope indicates that more labourers can be employed only when the wages fall. Similarly CD is the labour demand or absorption curve for the agricultural sector.

WF

WA

W*

W*

e g W l a m r o F

Market equilibrium with flexible wages

To avoid migration between the two sectors of the economy, the wages in the two sectors must be equalized. This occurs at the intersection of the curves AB and CD. The equilibrium wage for the economy is and at this wage, L Flabourers are employed in urban formal sector L Aand labourers are employed in the agrarian sector. Harris-Todaro Equilibrium The preceding case is less likely to happen in a developing economys context. The wage in the formal sector tends to be too high and inflexible. In the following diagram this situation is being depicted. The minimum wage that exists in the formal sector is W , at which the formal sector _ cannot employ more than
_
* *

L labourers.
F

e W a t l u c i r g A

WF

A U

WA

e g a m W r o F l

A Floor on the Formal Wage

The remaining labourers will be employed in agricultural sector and it will force the wage rate to fall to W. Now the illustration reveals that there is full employment in the economy. Those who look for jobs in either sector will easily find it. But this cannot be an equilibrium state, because with full employment in both the sectors, workers would want to migrate to the sector with higher wages. On the other hand, if in both the sectors wages were_equal as in a free model, only L F labourers may have been employed in urban sector and in agriculture. This would have caused A unemployment of the size of U as given in the diagram. Thus this situation cannot also be equilibrium. The unemployed workers are not going to remain in the agricultural sector as it only would have driven the wages down there. Therefore they migrate to the urban sector even if the wage in the urban sector is same as that in agricultural sector and there is high risk of unemployment. This by no possibility is equilibrium. The problem here is that of the labourers having to choose between a safe option of staying back in agriculture or moving to the urban sector where a high paying formal job may not be attainable. The probability of getting the formal job is determined by the ratio of available formal jobs to formal job seekers. Those who do not get the job may have been unemployed, but they enter the informal sector in the urban area with much lower payment. This is illustrated in the following diagram.
_

The single box on the left side represents agriculture sector with wage. The right set of boxes show the options available in the_urban sector with their probabilities of access. First there is the formal sector with high wage, . This probability depends on the ratio of available formal

e W a t l u c i r g A

jobs to formal job seekers. Those who do not get the job in the formal sector will enter the informal sector with the wage W1, which is fixed regardless of the number of job seekers there.

Formal Urban

1-p Agriculture

Informal Urban

1-q

Unemployment

Option open to a potential migrant

The decision of the labourers to migrate depends on their calculation of the expected values of the two options, which is being done by weighing each outcome by its probability of occurrence and adds up overall outcomes. Thus the expected wage in the urban sector is neither _nor W 1, but a combination p w+ (1 p ) w1 . It is this expected wage that is compared with the agricultural wage. However, it is to be noted that the urban sector may have even more number of subsectors than the two mentioned. In case all those left out from formal sector are not able to find a job in the informal sector, they would remain openly unemployed. This possibility is included in the above illustration. Hence, the calculation of the expected value will have to change. We denote those who are turned away from the formal sector as q. Thus after being turned away from the formal sector, the migrant manages to join the informal sector with probability q and remains openly unemployed with probability 1-q. The expected value of this new set of possibilities is
qw1 + (1 q ) 0 = qw1 . Thus the overall expected wage is now, p w+ (1 p ) qw . 1

Now, the probability of getting the employment in the formal sector is given by where,

L is the number of informal employment, L is the number of jobs in the formal sector and L + L is the total number of job seekers. The ratio of the two gives the chance of
1 F F 1

L +L
F

F 1

an urban dweller getting a job in the formal or informal sector. Thus the equation shows LF L1 w+ w1 expected income from migration i.e., the probabilities of getting the formal L F + L1 L F + L1 or informal jobs in the urban sector with their respective wages. The migrant compares this expected wage with the actual income received in agriculture which is

. Thus if,

LF L1 w+ w1 = wA' , we have the Harris-Todaro equilibrium condition in which no L F + L1 L F + L1 person wishes to migrate from one sector to the other. This depicted in the following diagram. It could be seen that would have been too high a wage and W, too low a wage for equilibrium to have happened at those levels. Therefore the equilibrium agricultural wage would be between these two levels. In the diagram it is given as

w L
. A
1

labourers are employed in agriculture, A

1

LF

in the formal sector and the remaining

L in the informal sector with a wage of w .

WF

W
A

WA

e g W l a m r o F

Harris-Todaro Equilibrium

e W a t l u c i r g A