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Unemployment
Unemployment is the state in which a person is without work,
available to work, and is currently seeking work.
As defined by the International Labor Organization, "unemployed
workers" are those who are currently not working but are willing
and able to work for pay, currently available to work, and have
actively searched for work.
Unemployment is a central problem because when unemployment is
high, resources are wasted and people's incomes are depressed;
during such periods, economic distress also spills over to affect
people's emotions and family lives.

Types of Unemployment:

A common typology of unemployment is the following:

Frictional unemployment

Frictional unemployment occurs when a worker moves from one job


to another. While he searches for a job he is experiencing frictional
unemployment. This is a productive part of the economy, increasing
both the worker's long term welfare and economic efficiency.

Classical unemployment

Classical or real-wage unemployment occurs when real wages for a


job are set above the market-clearing level. This is often ascribed to
government intervention, as with the minimum wage, or labor
unions.

Structural unemployment

Structural unemployment is caused by a mismatch between jobs


offered by employers and potential workers. This may pertain to
geographical location, skills, and many other factors.

If such a mismatch exists, frictional unemployment is likely to be


more significant as well.

1. Seasonal unemployment

Seasonal unemployment occurs when an occupation is not in


demand at certain seasons.
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Keynesian unemployment

Cyclical or Keynesian unemployment, also known as demand


deficient unemployment, occurs when there is not enough
aggregate demand for the labor. This is caused by a business cycle
recession and wages not falling to meet the equilibrium rate.

2. Underemployed

refers to people who are working less than full-time hours but would
like to work longer

3. Long-term unemployed

are people who have been unemployed for longer than 12 months.

4. Hard core unemployment

are people who are unemployed due to their personal, mental or


physical characteristics.

Relation to the goods market

According to economist Edmond Malinvaud, the type of


unemployment that occurs depends on the situation at the goods
market, rather than that they belong to opposing economic
theories. If the market for goods is a buyers' market, i.e. sales are
restricted by demand, Keynesian unemployment may ensue, while a
limiting production capacity is more consistent with classical
unemployment.

Unemployment in Pakistan:
Now we see that in Pakistan what is the situation of unemployment
and what are its economic and social impacts.
In Pakistan labor force include all persons who are of ten years and
above, and during the period are without work, currently available
for work and seeking for work.
In Pakistan unemployment is of structural and cyclical nature.
According to Labor Force Survey 1996-97, the rate of open
unemployment was 6.1 percent and 5.4 percent as per Labor Force
Survey of 1994-95. This indicates that rate of unemployment has
increased between these two surveys by 0.7 percent officially but
unofficially unemployment is much larger than this rate.
Unemployment rate in rural areas is greater as compared to urban
areas. Because of industries there are more chances of employment
in urban areas. In Rural areas businessmen are setting up industries
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due to which now rural people seek Manufacturing sector for


employment. As in rural areas there is no proper source of earnings
due to which unemployment rate is increasing. As agriculture sector
is not absorbing them due to adaptation of mechanical instruments
and bad conditions. Small scale industries are not working efficiently
due to worse economic conditions. So rural people are not finding
proper source of earning.

Unemployment rate (2001-2006):

Source: CIA World Fact book as of January 1, 2007.

If we observe the unemployment rate form 2001 to 2006, it will


come to know that unemployment rate was 6.3 percent in 2001 and
it went to 7.8 percent in the next year. From 2001 to 2006, the
unemployment rate was at its peak in 2004 as it was 8.3 percent
and gradually it came down to 6.5 percent in 2006.
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Unemployment by selected age group:

Source: Federal Bureau of Statistics, Pakistan labor Force survey

If we analyze the unemployment rate from 1991 to 2006 by age


groups, it is clear from the graph that unemployment rate of people
aged 15-19 is high every year. It is so because the children are
usually not much skilled and they don’t have much experience as
compared to the elder age groups.

Country Comparison:
Here is the comparison of Pakistan with its neighbor countries and
some of the developed countries.
Country Unemployment rate (%) Rank
Pakistan 6.5 113
Japan 4.1 133
UK 2.9 154
USA 4.8 126
India 7.8 94
Germany 7.1 105
Russia 6.6 111
China 4.2 131
Afghanistan 40 13
Iran 15 49

Source: CIA World Fact book


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Causes of Unemployment in Pakistan:


Unemployment is one of the major problems of Pakistan. The level
of unemployment is moving up. Here are some of the causes that
increase the unemployment rate in Pakistan.
• The rate of expansion in industrial sector is very slow so the
increasing labor force is not fully absorbed.
• Increasing output of general education institutions is the
major cause of educated young men’s unemployment.
• Technical, professional and vocational institutions are limited
in number.
• Privatization of industrial units very badly affected the
investment industrial sector. The private investors shift their
capital to other/there countries. Hence employment in the
private sector absolutely stopped for many years.
• The higher growth rate of population is the major causes of
unemployment. The population has exceeded the optimum
level. The resources of the country are limited.
• People of higher age, after getting retirement are ready to
provide their services at some other places at lower wages
which blocks the employment of educated young men.
• Reemployment of civil and military high ranking offices in
government corporations and agencies deprives the qualified
men from employment.
• Bad law and order situation has slowed down the tempo of
economic activity. Investors are reluctant to make big
investments because of continuous unrest and violence in the
country.
• The attitude of youth towards the choice of a career is also
unrealistic and unproductive. They want to get only some
white-collar jobs.
• Whenever there is a boom for a particular field, huge number
of people start studying about that and in the end we see
thousands of candidates against 5 to 10 job vacancies.

Costs of unemployment:
Unemployment undermines the economic and social stability of any
society. Societies which fail to provide gainful and secure
employment to their people invite political instability, social unrest
and economic insecurity. The link between unemployment and
crime has also been well established.
The socio-economic fall out of the high unemployment rate in
Pakistan is evident from the drastic increase in the crime wave.
Today robberies, dacoities and kidnapping for ransom have become
a fearsome fixture of life in the country. The resultant lack of civil
peace and the rule of the law undermine the very basis of all
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industrial, economic and trade activities in the country. The case for
sustainable development for employment can hardly be argued
more forcefully.
Economic impact
From Okun's law we know that for every 2% fall in GNP relative to
potential GNP, the unemployment rate rises by 1% point. High
unemployment is a symptom of waste — for during recessions,
when unemployment is high, the economy is not producing up to
high level. When economy is not producing sufficiently, we can say
that we are unable to use our full resources for production
purposes. Economy will not grow as fast as it can if become able to
produce at high level.

Solution to Unemployment:
Suggestions
1) Govt. should make efforts to push economic growth process.
For this purpose Economic Revival Package should announce for the
revival of industries sector, to stimulate production and investment.
2) Govt. should seriously try to boost exports through broadening
the tax base and lowering tariffs.
3) Govt. should announce a package for the development of
agriculture sector.
4) Beside this a number of fiscal and monetary measures should
take to attract industrialists and particularly foreign investment.
5) More Technical and Vocational training facilities should be
provided. In this way unemployed people will get the chance to
enhance their skills and become able to earn reasonable income.
6) With a view to reduce unemployment; self-employment scheme
should be encouraged in true manners.
At an individual level, the solution to unemployment may be as
simple as getting a job, or getting more training.
Societies try a number of different measures to get as many people
as possible into work. However, attempts to reduce the level of
unemployment beyond the Natural rate of unemployment generally
fail, resulting only in less output and more inflation.
There are some theories as well which help the unemployment
remove or reduce, such as:
Philips Curve
It used to be largely believed that unemployment could be solved
using the Philips curve. This involves increasing inflation to reduce
unemployment by fooling workers into accepting jobs at a lower
rate than they would otherwise have done, due to the declining
value of money. But Philips curve only help to reduce
unemployment in short term.
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Demand side
Normal markets reach equilibrium, where supply equals demand;
everyone who wants to sell at the market price can. Those who do
not want to sell at this price do not; in the labor market this is
classical unemployment. Increases in the demand for labor will
move the economy along the supply curve, increasing wages and
employment. The demand for labor in an economy is derived from
the demand for goods and services. As such, if the demand for
goods and services in the economy increases, the demand for labor
will increase, increasing employment and wages.
Monetary policy and fiscal policy can both be used to increase short-
term growth in the economy, increasing the demand for labor and
decreasing unemployment.
Supply side
However, the labor market is not efficient: it doesn't clear. Minimum
wages and union activity keep wages from falling, which means too
many people want to sell their labor at the going price but cannot.
Supply-side policies can solve this by making the labor market more
flexible. These include removing the minimum wage and reducing
the power of unions, which act as a labor cartel. Other supply side
policies include education to make workers more attractive to
employers.
Supply side reforms also increase long-term growth. This increased
supply of goods and services requires more workers, increasing
employment. Supply side policies, which include cutting taxes on
businesses and reducing regulation, 'create Jobs and reduce
unemployment' according to the 2005 Budget report.

Tax-related

One structural solution to unemployment proposes a graduated


retail tax, or "jobs levy", to firms where labor is more expensive
than capital. This method will shift tax burden to capital intensive
firms and away from labor intensive firms. In theory this will make
firms shift operations to a "golden mean" between labor intensive
and capital intensive production. The excess tax revenue from the
jobs levy would finance labor intensive public projects. However, by
raising the value of labor artificially above capital, this would not
encourage capital investment, the source of economic growth. With
less growth, long-run employment would fall

Role of Government:
The government is trying to reduce the unemployment rate. Under
Prime Minister's Self Employment Scheme, different Banks and
Small Business Finance Corporations are extending loans to
unemployed youths and skilled professionals having diploma/degree
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and business experience. Loans ranging from Rs.10,000 to be


Rs.500,000 for small business and from Rs.500,000 to
Rs.5,000,000 for small industries etc. Small Business Finance
Corporation is playing role in reducing unemployment. Up to March
1999, the Small Business Finance Corporation has sanctioned
Rs.2,208.4 million, against amounting to Rs.1,551.95 million have
been disbursed to 9,383 persons.
The SBFC has generated employment for 28,149 persons under the
Prime Minister's Self-Employment Scheme up to March 31, 1999. A
Small and Medium Enterprises Development (SMEDA) has been
setup for growth and development of self-employment schemes in
Pakistan.
During the year 1998 about 104,000 persons have been sent
abroad for employment under Govt. overseas employment
schemes.
The liberal economic and fiscal policies of the government may
reduce unemployment rate because they can create new job
opportunities and business in the country. There is a need to
announce an economic revival package to stimulate investment and
industrial production, boost exports, broaden the tax bases and
lower tariffs.
In addition, construction of additional motorways and setting up of
industrial zones throughout the country would also generate new
opportunities for employment in the country.

Measurement of Unemployment:
Though many people care about the number of unemployed,
economists typically focus on the unemployment rate. This corrects
for the normal increase in the number of people employed due to
increases in population and increases in the labor force relative to
the population. The unemployment rate is expressed as a percent,
and calculated as follows:
As defined by the International Labor Organization, "unemployed
workers" are those who are currently not working but are willing
and able to work for pay, currently available to work, and have
actively searched for work.
Since not all unemployment may be "open" and counted by
government agencies, official statistics on unemployment may not
be accurate.
The ILO describes 4 different methods to calculate the
unemployment rate:
• Labor Force Sample Surveys are the most preferred method
of unemployment rate calculation since they give the most
comprehensive results and enables calculation of
unemployment by different group categories such as race and
gender. This method is the most internationally comparable.
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• Official Estimates are determined by a combination of


information from one or more of the other three methods. The
use of this method has been declining in favor of Labor
Surveys.
• Social Insurance Statistics such as unemployment benefits,
are computed base on the number of persons insured
representing the total labor force and the number of persons
who are insured that are collecting benefits. This method has
been heavily criticized due to the expiration of benefits before
the person finds work.
• Employment Office Statistics are the least effective being that
they only include a monthly tally of unemployed persons who
enter employment offices. This method also includes
unemployed who are not unemployed per the ILO definition.

Aiding the unemployed:


The most developed countries have aids for the unemployed as part
of the welfare state. These unemployment benefits include
unemployment insurance, welfare, unemployment compensation
and subsidies to aid in retraining. The main goal of these programs
is to alleviate short-term hardships and, more importantly, to allow
workers more time to search for a good job.

Benefits of Unemployment:
Unemployment may have advantages as well as disadvantages for
the overall economy. Notably, it may help avert runaway inflation,
which negatively affects almost everyone in the affected economy
and has serious long-term economic costs. However the historic
assumption that full local employment must lead directly to local
inflation has been attenuated, as recently expanded international
trade has shown itself able to continue to supply low-priced goods
even as local employment rates rise closer to full employment.
The inflation-fighting benefits to the entire economy arising from a
presumed optimum level of unemployment has been studied
extensively. Before current levels of world trade were developed,
unemployment was demonstrated to reduce inflation, following the
Phillips curve, or to decelerate inflation, following the NAIRU/natural
rate of unemployment theory.
Beyond the benefits of controlled inflation, frictional unemployment
provides employers a larger applicant pool from which to select
employees better suited to the available jobs. The unemployment
needed for this purpose may be very small, however, since it is
relatively easy to seek a new job without losing one's current one.
And when more jobs are available for fewer workers (lower
unemployment), it may allow workers to find the jobs that better fit
their tastes, talents, and needs.
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As in the Marxian theory of unemployment, special interests may


also benefit: some employers may expect that employees with no
fear of losing their jobs will not work as hard, or will demand
increased wages and benefit. According to this theory,
unemployment may promote general labor productivity and
profitability by increasing employers' monopsony-like power (and
profits).
Optimal unemployment has also been defended as an
environmental tool to break the constantly accelerated growth of
the GDP to maintain levels sustainable in the context of resource
constraints and environmental impacts. However the tool of denying
jobs to willing workers seems a blunt instrument for conserving
resources and the environment -- it reduces the consumption of the
unemployed across the board, and only in the short-term. Full
employment of the unemployed workforce, all focused toward the
goal of developing more environmentally efficient methods for
production and consumption might provide a more significant and
lasting cumulative environmental benefit and reduced resource
consumption. If so the future economy and workforce would benefit
from the resultant structural increases in the sustainable level of
GDP growth.
Some critics of the "culture of work" such as anarchist Bob Black
see employment as overemphasized culturally in modern countries.
Such critics often propose quitting jobs when possible, working less,
reassessing the cost of living to this end, creation of jobs which are
"fun" as opposed to "work," and creating cultural norms where work
is seen as unhealthy. These people advocate an "anti-work" ethic
for life.

Conclusion:
By curing unemployment, there would be prosperity as well as
peace in the country. Because if the people are employed, they are
better-off. Although Pakistan has succeeded to decrease the
unemployment rate as compared to the 80s and 90s but still the
unemployment rate in the country can be curtailed by taking
necessary steps mentioned earlier as suggestions.

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