Unemployment and Labor Force - Essay Example

Unemployment and Labor Force Unemployment refers to inability of workers to find work when they are available to work. The prevalence of unemployment in any country is measured using the unemployment rate. Unemployment rate is calculated as the percentage of unemployed people in the labor force. In economics, labor force is defined as all the nonmilitary people who are employed and unemployed (Sheffrin, 2003). Labor force of a country usually includes everyone who is of working age (typically above 14 to 16 years of age) and below the age of retirement. Labor force includes participating workers which includes people who are actively working and those who are seeking work. International Labor Organization (ILO) defines unemployed workers as those who are not working but are willing and able to work for pay and have actively searched for work (International Labor Organization, 2007). Since all unemployment may not be open type of unemployment that can be counted by government agencies, statistics on employment may sometimes be not correct. ILO describes four ways for calculating unemployment rates (ILO, 2007) 1. Labor Force Sample Survey calculates unemployment by group categories such as groups of race and gender. 2. Social Insurance Statistics calculates unemployment by looking at the statistics of unemployment benefits. This method looks into the number of persons who are insured and represent the labor force and the number of persons who are insured and are collecting benefits. 3. Employment Office Statistics includes a tally of unemployed persons who enter employment companies every month. 4. Official Estimates includes combination of information from all the other three methods. Factors That Cause Various Type of Unemployment According to the economist Edmond Malinvaud, the type of unemployment that prevails at a particular time depends on the situation at the goods market. If the goods market is a buyers’ market in which sales are restricted by demand then Keynesian type of unemployment prevails, while if a production capacity is limited classical unemployment prevails. Common types of unemployment are as follows: 1. Frictional Unemployment: This type of unemployment occurs when a person switches from one job to another. While the person looks for another job he experiences frictional unemployment. This unemployment also applies to fresh graduates who look for jobs. It is a productive part of the economy as it increases worker’s economic efficiency and his long term welfare. This type of unemployment usually occurs due to incorrect information in the labor market due to which workers do not know what type of job they are getting hired for and hence they look for getting a new job. 2. Classical Unemployment: This type of unemployment occurs when real wages for available jobs are set above the market clearing level. This usually happens due to government intervention when government sets a minimum wage for a job. Even taboos especially taboos can sometimes cause wages to be set above the market clearing level (America’s Great Depression p45). 3. Structural Unemployment: This type of unemployment occurs due to mismatch between employment offered by employers and those seeking jobs. It may occur due to geographical location or skill of workers or because of many other reasons. If structural unemployment occurs, frictional unemployment becomes significant as well. 4. Keynesian Unemployment: This type of unemployment occurs when there is insufficient demand in the economy. It occurs when there is a business cycle recession in the economy and wages of jobs do not fall to meet the equilibrium rate. An economy with high unemployment rate is an economy which is not using its entire available labor source which reduces its efficiency. If all the frictionally unemployed in this economy accept the first available job to them, then they would be working at below their level of skill, reducing the growth of the economy. Long periods of unemployment cause workers to loose their skill which causes loss of human capital by an economy. What Is CPI And The Problems Associated With It. Consumer Price Index (CPI) is a measure of price of goods and services bought by households. Two types of data, price data and weighting data is needed for constructing CPI. Price data is collected for a sample of goods and services sold at sample sales outlets situated in sample locations for sample number of times. The weighting data used in CPI is estimate of fraction of different types of expenditure to the total expenditure used in the index. The expenditure data obtained for weights are usually based on data obtained from sample of households for sample periods. The CPI is computed quarterly or yearly in different countries, as weighted average of sub indices of items such as housing, food, clothing which in turn are weighted average of sub sub indices of consumer expenditure. The indices compare prices of each month with prices in the price reference month. The weights used in the index are estimated expenditure of the consumers on products within its scope during a whole preceding year. Thus CPI is a fixed weight index and the weight reference period of a year and price reference month used in this index usually do not coincide. The CPI is produced by classifying 207 strata of consumption items in 44 geographical areas, resulting in 9,108 components in the CPI (Saxton, 1996). Apart form the big size, the methodology of CPI can be a problem. This index is a fixed weight market basket of goods and services (Saxton, 1996). When prices of products increase buyers tend to substitute higher priced goods for lower priced goods which creates a substitution effect. Even when prices rise sharply and substitution prevent buyers from buying high priced goods, CPI assumes that the consumer index on each item is an unchanged proportion of index over time, hence price increase tends to be overstated (Saxton, 1996). Similarly when prices of certain goods drop, those goods are purchased more but it is not reflected in the weights of CPI. The problems that substitution effect creates on CPI have been recognized for many years. CPI and Inflation Rates. Inflation is the decrease of value of money or increase of the overall level of prices in an economy. The Department of Labor uses Consumer Price Index as a method to measure inflation rates. The Department of Labor in America has surveyed the purchasing pattern of consumers and has identified four hundred items that consumers normally buy. These four hundred items make the market basket and each month in cities across America surveyors check the prices of these items and compute as to what items in the market basket cost compared what these items cost in a base period. To show a numerical example of how CPI and inflation in an economy is calculated we will assume that a representative market basket of weekly expenditures of a singe adult male includes five hamburgers, eight cold drinks and two gallons of gasoline. The prices of items used by the man for year one has been shown in the table below. The cost of market basket in year one is $5. In year two prices of hamburgers have decreased but the prices of colas and gasoline has increased. There is an overall increase of 10% as the price of market basket has risen to $5.50 from $5 (50/500=10%). In year three the price of market basket has risen to $6 from $5.50 in year two. In year three prices of items are 9.1% higher ([600-550]/550=9.1%) as compared to year two, while as compared to year one price in year three are 20% higher ([600-500]/500=20%). The Price Index of any year can be calculated by dividing price of market basket by price of market basket of base year and multiplied by 100. In this case Price Index of year two can be found out by Price Index= P3/P1*100= 6/5*100=120 The Price Index thus gives an overall picture of what is happening to the prices of items. Although prices of some items are declining in year three, the contribution of those items to the overall prices picture is less than those items whose prices are rising. Hence the Price Index shows that the re is an overall inflation in the economy in year three. References 1. America's Great Depression p. 45 2. Jim Saxton, December 1996 Joint Economic Committee Brief: The Consumer Price Index. 3. International Labour Organization: Resolution concerning statistics of the economically active population, employment, unemployment and underemployment, adopted by the Thirteenth International Conference of Labour Statisticians (October 1982); see page 4; accessed November 26, 2007 4. Sullivan, Arthur Steven M. Sheffrin (2003). Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 211. Read More