Unemployment Essay Example

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Literature Review: Unemployment

Community refers to the idea of people living together in the sane locality bound together by some things in common that result in giving them a sense of belonging (Day 2006). The rate of unemployment in a community significantly impacts it because it bears indirectly the stresses and strains produced by high unemployment. On the other hand, it benefits the advantages of low unemployment in terms of a robust economy and peace and order. This review is being considered from an economic perspective.


According to the OECD, the term ‘employment’ means that a person is “working for pay, profit or family gain for at least one hour per week, even if temporarily absent from work because of illness, holidays or industrial disputes” (OECD 2014). On the basis of this, the ILO defined unemployment as a situation where a person has not worked for at least one hour during the week of the survey although he/she is available and has actively searched for a job for the four previous weeks prior to the survey (OECD 2014). The term, thus, does not embrace those who are unemployed due to physical impairment, or those who are not actively looking for any job.

The term ‘unemployment’ is also defined as the difference between full employment and actual employment. The UN defined ‘full employment’ as a situation where it is not possible to raise employment even by effective demand and to raise unemployment above the “minimum allowance that must be made for effects of frictional and seasonal and seasonal factors” (cited Dwivedi 2005). Any situation that falls below such definition is considered a situation of unemployment. This is represented by the following:

U = TLF – E,

where U stands for unemployed, TLF for total labour force, and E for employed

Also, states have their respective definition of labour force. In the US, for example, 16 years old and above are considered part of labour force whilst ILO’s conception of it embraces those within the ages of 15 to 65 (Dwivedi 2005). In Australia, labour force includes all persons 15 years and above with the following exceptions: permanent defence forces members, diplomatic personnel of foreign governments, overseas residents in Australia and non-Australian defence forces stationed in Australia (ABS 2011). Unemployment rate is computed, thus,

Unemployment rate = total number of unemployed x 100

labour force

Causes of Unemployment

There are many theories of unemployment, but often, causes are broadly categorised as supply-side and demand-side. Nonetheless, economists sometimes tend to lean on one or some causes than on the others.

A. Supply-side Causes: Voluntary, Frictional and Structural

Supply-side causes stem from problems in the labour force itself. They are in turn classified into voluntary, frictional and structural. Voluntary unemployment occurs when workers intentionally decide not to work because the going wage rate is not acceptable to them. On the other hand, frictional unemployment happens when workers are temporarily out of work by reason of the nature of their work, such as those who work on a seasonal and casual basis. This also applies to instances when workers take some time in choosing employment to seek jobs considered ‘friendlier’ and well-paid (Grant and Vidler 2003).

Structural causes of unemployment refer to changes in industry structures that can lead to immobility of labour. They can be regional, technological or international unemployment. In regional unemployment, some industries may decline in some parts of the country whilst expanding in some. The decline leads to labour unemployment in those parts. In technological unemployment, the advances or emergence of a new technology may cause an industry to redcue its workers. The advent of electronic banking, for example, has reduced the need for bank tellers. International unemployment, on the other hand, is similar to regional unemployment except that it occurs on the international level. An example of this is the decline in the demand for British steel in the last two decades and the growing demand for Brazil steel (Grant and Vidler 2003).

B. Demand-side Causes

The demand-side causes of unemployment are underpinned by the lack of aggregate demand for labour. They are often equated to a downturn in business activities, especially during recession. The unemployment ensuing from such a situation is called cyclical or disequilibrium unemployment – due to the inequality between aggregate supply of labour and aggregate demand for it. This is illustrated in Fig. 1, where the aggregate supply of labour or ASL wanting to work for wage rarte x is Q1, but the aggregate demand of labour or ADL can only accommodate Q, resulting in Q-Q1 as the actual number of workers employed.

C. Supply-side versus Demand-side

According to the OECD, most OECD economies have been experiencing high unemployment rates for the past two decades. It has been observed that these economies are characterised by slow GDP growth – too slow that it is unable to absorb the growth in labour force. On the premise that the constancy of unemployment rate is dependent on the equality of real GDP growth on one hand, and the sum of labour force and labour productivity growth, on the other, unemployment inevitably results (Bell 2000). Labour productivity is the efficiency with which labour and capital are used to produce goods and services. In Australia, this is computed using a multifactor productivity (MFP), whose average annual average rate is calculated between cyclical peaks (ABS 2012).

From the point-of-view of orthodox neo-classical economists, unemployment is caused primarily by the supply-side causes, particularly structural changes. This view is underpinned by the theory of non-accelerating inflationary rate of unemployment (NAIRU), also called equilibrium

unemploymentunemployment 1

Wage Rate

unemployment 2unemployment 3unemployment 4

No. of workers

unemployment 5

Fig. 1 Disequilibrium (Grant & Vidler 2003)

unemployment because unemployment is at a level when the ADL is equal to ASL at a certain going wage rate. If ADL increases above this level, unemployment decreases, but inflation increases. On the other hand, if unemployment rises above this level to reduce inflation, wage plunges and inflation decreases (Grant and Vidler 2003). Used interchangeably with natural rate of unemployment (NRU), unemployment is caused by reasons other than ADL.

The weaknesses of NAIRU and NRU are pointed out by economists mostly aligned to the economic principles of Keynes and Marx (Mitchell 2000). Harvey (2013) pointed out that this theory is not reflective of reality as lower unemployment can actually lead to lower inflation because of the corresponding increase in productivity, which in turn can ease price increases. In addition, it points to incomes and related demand pressure for full employment, and not unemployment itself, as its underpinning causalities, which Harvey found unsound. This is because it assumes the following: incomes will rise as unemployment falls and such rise can lead to inflation, and; the expansion of supply cannot ease such an effect.

The Mt. Druitt Unemployment Condition

Mt. Druitt — the community in issue in this paper – is primarily a residential area, but has other components that make it a self-contained community. These components include an industrial area in the north-west, institutional areas in the north-east and a commercial area in the centre. As of the 2011 census, its population is 15,808 with an average of 3.18 persons per household in a total of 5,183 dwellings. It has a total labour force of 6,390 of which 5,610 persons are employed – 68% fulltime, 28% part time, and the rest uncertain. Only 780 persons are unemployed or 12%, which is quite high (Profile.id 2014).

Community and Economic Policies to Reduce Unemployment

Unemployment significantly impacts the community, such as Mt. Druitt, as its strains and consequences. This is because the commonality of life within such bounded territory results in “shared emotional stakes and strong emotional attachments towards those who share one’s life space” (Keller 2003, p. 6). To better community life, unemployment must be solved and this review points to an approach requiring the adoption of economic policies that will reduce NAIRU. Accepting a persistent level of unemployment rate as something natural to ward off inflation is counterproductive. The government, federal, state or local, must adopt economic policies that embrace, to an extent, governmental intervention. Regional unemployment, for example, can be mitigated by moving work to workers because social ties can preclude a worker from moving to other regions to find work (Grant and Vidler 2003). In addition, the government must increase productivity by enhancing and improving education, cut taxes for low-salaried employees to free more of their disposable income and enhance the gap between them and the unemployed to make employment more attractive to the latter.

Above all, there is a need to include the community in solving problems that significantly impact it, such as unemployment. Community consultation, participation, and engagement in the unemployment issue do not only ensure that whatever solutions the government has reached will be supported by it because it was part of the solution process. It has been said that local consultation has the effect of reviving local democracy because the needs of the community finds a closer match to the services offered to them when the members of the community are first consulted about issues plaguing the community and the best approach at solving them (Brackertz et al 1999). In this sense, the local government achieves several ends at once: it provides a solution to the problem that meets the approval of the community, and; it enhances its relationship as well as garners the trust of the community.


ABS 2011, Labour force, Australian Bureau of Statistics, http://www.abs.gov.au/AUSSTATS/[email protected]/DSSbyCollectionid/139689E1A84FE4F0CA256BD00028B0E5?opendocument

  • Measures of Australia’s Progress: Summary Indicators, 2012, Australian Bureau of Statistics, http://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/1370.0.55.001~2012~Main%20Features~Productivity~20

Brackertz, N, Zwart, I, Meredyth, D, & Ralston, L (2005, Community consultation and the ‘hard to reach’: Concepts and practices in Victorian local government, Hawthorn, Australia: Institute for Social Research, Swinburne University of Technology

Day, G (2006, The idea of community. In Community and everyday life (pp. 1-25). New York, NY: Routledge

Dwivedi, D 2005, Macroeconomics: Theory and policy, Tata McGraw-Hill Education

Harvey, A 2013, Productivity, unemployment and the Rule of Eight,
Real-World Economics Review, Issue no. 63

Keller, S 2003, Community: Pursuing the dream, living the reality, Princeton, NJ: Princeton University Press

Grant, S. and Vidler, C 2003, Heinemann Economics for Edexcel, Heinemann

Mitchell, W 2000, ‘The Causes of Unemployment’, in Bell, S (ed.) The Unemployment Crisis in Australia: Which Way Out? Cambridge University Press

OECD 2014, Society at a glance 2014: OECD social indicators, OECD Publishing, http://dx.doi.org/10.1787/soc_glance-2014-en

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