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By the end of this section, you will be able to:
  • Explain the nature and causes of unemployment
  • Analyze the natural rate of unemployment and the factors that affect it
  • Identify how undeveloped labor markets can result in the same hardships as unemployment

The causes of unemployment in high-income countries of the world can be categorized in two ways: either cyclical unemployment caused by the economy being in a recession, or the natural rate of unemployment caused by factors in labor markets, such as government regulations regarding hiring and starting businesses.

Unemployment from a recession

For unemployment caused by a recession, the Keynesian economic model points out that both monetary and fiscal policy tools are available. The monetary policy prescription for dealing with recession is straightforward: run an expansionary monetary policy    to increase the quantity of money and loans, drive down interest rates, and increase aggregate demand . In a recession    , there is usually relatively little danger of inflation taking off, and so even a central bank, with fighting inflation as its top priority, can usually justify some reduction in interest rates.

With regard to fiscal policy    , the automatic stabilizers    discussed in Government Budgets and Fiscal Policy should be allowed to work, even if this means larger budget deficits in times of recession. There is less agreement over whether, in addition to automatic stabilizers, governments in a recession should try to adopt discretionary fiscal policy    of additional tax cuts or spending increases. In the case of the Great Recession, the case for this kind of extra-aggressive expansionary fiscal policy is stronger, but for a smaller recession, given the time lags of implementing fiscal policy, discretionary fiscal policy should be used with caution.

However, the aftermath of the Recession emphasizes that expansionary fiscal and monetary policies do not turn off a recession like flipping a switch turns off a lamp. Even after a recession is officially over, and positive growth has returned, it can take some months—or even a couple of years—before private-sector firms believe the economic climate is healthy enough that they can expand their workforce.

The natural rate of unemployment

Unemployment rates in the nations of Europe have typically been higher than in the United States. In 2006, before the start of the Great Recession , the U.S. unemployment rate was 4.6%, compared with 9% in France, 10.4% in Germany, and 7.1% in Sweden. The pattern of generally higher unemployment rates in Europe, which dates back to the 1970s, is typically attributed to the fact that European economies have a higher natural rate of unemployment because they have a greater number of rules and restrictions that discourage firms from hiring and unemployed workers from taking jobs.

Addressing the natural rate of unemployment is straightforward in theory but difficult in practice. Government can play a useful role in providing unemployment and welfare payments, passing rules about where and when businesses can operate, assuring that the workplace is safe, and so on. But these well-intentioned laws can, in some cases, become so intrusive that businesses decide to place limits on their hiring.

For example, a law that imposes large costs on a business that tries to fire or lay off workers will mean that businesses try to avoid hiring in the first place, as is the case in France. According to Business Week , “France has 2.4 times as many companies with 49 employees as with 50 ... according to the French labor code, once a company has at least 50 employees inside France, management must create three worker councils, introduce profit sharing, and submit restructuring plans to the councils if the company decides to fire workers for economic reasons.” This labor law essentially limits employment (or raises the natural rate of unemployment).

Undeveloped labor markets

Low-income and middle-income countries face employment issues that go beyond unemployment as it is understood in the high-income economies. A substantial number of workers in these economies provide many of their own needs by farming, fishing, or hunting. They barter and trade with others and may take a succession of short-term or one-day jobs, sometimes being paid with food or shelter, sometimes with money. They are not “unemployed” in the sense that the term is used in the United States and Europe, but neither are they employed in a regular wage-paying job.

The starting point of economic activity, as discussed in Welcome to Economics! , is the division of labor, in which workers specialize in certain tasks and trade the fruits of their labor with others. Workers who are not connected to a labor market are often unable to specialize very much. Because these workers are not “officially” employed, they are often not eligible for social benefits like unemployment insurance or old-age payments—if such payments are even available in their country. Helping these workers to become more connected to the labor market and the economy is an important policy goal. Indeed, recent research by development economists suggests that one of the key factors in raising people in low-income countries out of the worst kind of poverty is whether they can make a connection to a somewhat regular wage-paying job.

Key concepts and summary

Cyclical unemployment can be addressed by expansionary fiscal and monetary policy. The natural rate of unemployment can be harder to deal with, because it involves thinking carefully about the tradeoffs involved in laws that affect employment and hiring. Unemployment is understood differently in high-income countries compared to low- and middle-income countries. People in these countries are not “unemployed” in the sense that term is used in the United States and Europe, but neither are they employed in a regular wage-paying job. While some may have regular wage-paying jobs, others are part of a barter economy.


Retrieve the unemployment data from The World Bank database (http://databank.worldbank.org/data/home.aspx) for India, Spain, and South Africa for 2008–2012. Prepare a chart that compares India, Spain, and South Africa based on the data. Describe the key differences between the countries. Rank these countries as high-, medium-, and low-income countries. Explain what is surprising or expected about this data. How were these countries impacted by the Great Recession?

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Viscusi, Gregory, and Mark Deen. “Why France Has So Many 49-Employee Companies.” Business Week . Last modified May 3, 2012. http://www.businessweek.com/articles/2012-05-03/why-france-has-so-many-49-employee-companies.

Questions & Answers

what is the real definition of economics
jegede Reply
Economics is the study of the use and allocation of (scarce) resources
Jegede, what is the "non" real definition of economics then?
incidence of production there is a choice do you agree? justify
Oduro Reply
What is incidence of production? do u mean incidence of tax?
I want to know about Richard lipsey and robin as the economist and their definition proposed by them
Musa Reply
what are the causes of scarcity And what are the goal scarcity
scarcity only exist because human wants are unlimited...if human just know how to be contented then scarcity will not exist
what is ment by possibility curve
define accounting?teatly
Ahmed Reply
Is the recording, classifying, interpreting record of all transaction
is still the act of measuring, interpreting and communicating of financial issues
measuring business or individual finance
what are the different between need and wants
Musa Reply
the major difference is necessity
explain any four tool of monetary policy to solve the problem of inflation.
Alicesha Reply
bank rate,open market operation,legal reserve requirement
what's marginal utility?
Abena Reply
the additional utility you get if you can consume one more unit of the good x
Thanks... then what's the law of diminishing marginal utility ?
The utility decreases with every unit you consume (most of the time). The first unit of consumption will therefore give you the highest utility. Sorry about my english
Okay... I understand now
hello room
one of the leading industrial nations of the world ranking second in manufacturing output after the USA is a. Russia b. Germany c. Britain d. Japan
good morning
no other questions?
I am from India
same question are not mentioned
first you give my answer
dipun naik
whats your question
whats your question
I am from India
retype the questions
marginal untility is the last point desire of a consumer that gets benefit from related good/ service.
Why are some countries rich and why are some countries poor? . is poorness a human cause?
well several factors are included...it's not just because of human..
what is a correct reason
countries which are rich they are developed countries they have good resources minerals technology power knowledge to use the resources poor countries are under developing countries they have lack of resources, knowledge and if they have these so they dont know the use of these resources.
so these knowledgeable people move /migrate to the other rich/developed countries
Poverty of a country is also related to cultural, economical, and military domination. Usually, the dominant country imposes all of these powers when diplomatically needed or sometimes by force.
You can also have considerable poverty in a rich country when such poverty is measured within sectors of its population. In other words, economic indicators can sometime mask such poverty.
For example, the U.S.A. has a very high measure of GDP per capital, but millions of Americans ( a considerable amount are children) live in poverty.
So poverty is not an easy social phenomenon to pin down neatly into one social realm or another.
pls what is price ceiling
its the max price a seller can charge for a product, mostly imposed by the government to protect the consumer
its the max price a seller can charge for a product, mostly imposed by the government to protect the consumer plus it must be imposed below the equilibrium price in order to be effective. A shortage will also be created after its imposition.
can happiness be measured?
Happiness is too subjective to be measured as an economic phenomenon or reality. I think that happiness happens at several levels of the human condition: biological, psychological, intellectual and at the level of the soul. How can economic theory be scientific about it?
about I have read of something called gross happiness index.
what's Neo classical definition of economic
economic is a social science studied as a relationship between end and needs scarce which have alternative uses
what's equilibrium
What is economies of scale
Jeremiah Reply
In microeconomics, economies of scale are the sum of total costs saved or that a firm has advantage over its competitors due to its scale of operations. More specifically, it is the firm's cost savings per unit of output that it gains as its production increases in scale.
one of the leading industrial nations of the world ranking second in manufacturing output after the USA is ......... a. Russia b. Germany c. Britain d. Japan
what is supply of demand?
Joseph Reply
supply of demand?
1)importance of internal trade. 2) international trade barriers 3) principles of international trade
umar Reply
how can tell me about the GDP
explain the basic economic concept using ppc ?
Nurul Reply
scarcity can be represented by imagining a country producing only 2 goods and the resources to do so are fixed, hence a choice must be made and how to divide the limited resources between the two goods. you can choose any combination of the two goods that fall directly on the curve which represents
maximum efficiency and the highest possible output at this point in time. if you choose to not utilize all the resources then you will be inefficient (not to your best ability) and produce below the curve. however if you have increases in technology or find new resources you can shift the curve out
Please what is meant by resources allocation
albert Reply
Please I need explanation about resources allocation
what is cost
Mohit Reply
Cost:-is the sacrifice or measured price paid to acquire, produce or maintain a good or service
To what extend is labour, capital, land and entrepreneur considered as free good
#what is public finance
Ryan Reply
public finance is the study of how the government generates and spends to facilitate the day to day operations. simply put its an analysis of the income/expenditure statement of the government and how it affects welfare
#kk fenks
you say it all
what is economic model
chantal Reply
it may differ as different economist model ,but as to me it is a formal presentation of economic theory.
what are the factors affecting utility

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