In the last two posts we covered the 4 phases of business life cycles and the indicators of the various phases of business life cycles. Today we will cover one aspects that undergoes changes throughout the different phases of the business life cycle – unemployment.
Types and measures of Unemployment
A person is termed as unemployed if he has been actively searching for work although unsuccessfully. Unemployment can be categorized into three types;
1. Frictional Unemployment:
Frictional unemployment occurs during the time it takes to match a prospective employee to an employer. Frictional employment every time a person changes jobs or gets fired.
2. Structural unemployment:
Structural unemployment is caused by long run structural changes in an economy which eliminates certain jobs and creates new ones or sometimes doesn’t. For example changes caused by technological development. Like when computers replaced typewriters. Another example could be introduction of anonymous trading platforms which put the phone brokers out of job. The unemployed in this case do not currently possess the skills required for the available jobs.
3. Cyclical unemployment:
Cyclical unemployment is caused due to changes in the level of economic activity. When the economy is expanding more people are employed and when the economy is contracting people are laid off.
Unemployment rate is the percentage of people in the labor force who are unemployed.
All people who are either employed or are actively searching for work (unemployed) constitute the labor force.
People who choose not to be in the labor force are said to be voluntarily unemployed and are not counted in the unemployment statistics.
When a person who wants to work full time is employed part time or when a person qualified for a higher paying job is employed in a low paying job, he is said to be underemployed.
Participation ratio or activity ratio or labor force participation rate
It is the percentage of the working age population who are either employed or actively seeking employment.
Discouraged workers are those who are of the working age but are neither employed nor actively seeking employment. They cause short term fluctuations in the participation ratio.
The number of discouraged workers tends to increase during recession when they stop looking for jobs and falls during expansion when they actively start searching for jobs. This movement of discouraged workers in and out of the labor force causes the unemployment rate to be a lagging indicator of the business cycle. When an expansion is beginning to take hold the number of discouraged workers entering the labor force is higher than those that are being hired. This causes the unemployment rate to be high even though employment is increasing.
We have learnt in the last post that employers arenot quick to either employ or lay off workers at turning points of the business life cycle. This also causes the unemployment rate to be a lag indicator. The effect of this can also be seen in productivity figures. Productivity declines early in contractions as the firms decrease the output while retaining the employees. This results in low productivity figures per employee. In the beginning of an expansion the firms will increase output while not hiring additional workers thus increasing the productivity figure per employee.
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In the next two posts we will cover the other aspect that undergoes changes through the different phases of business life cycles i.e. inflation. We will also look more closely at cost push and demand pull inflation and how they are caused to occur due to the various stages of business life cycles.
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