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Causes and policy measures of unemployment

Before we can talk about unemployment it is significant to talk about what employment is. Black' Law Dictionary (1979) defines Employment as a contract between two parties, one being the employer and the other being the employee. An employee may be defined as: "A person in the services of another under any contract of hire, express or implied, oral or written, where the employer has the power or right to control and direct the employee in the material details of how the work is to be done.

There are several definitions of unemployment.

International Labor Organization (ILO) defines unemployed as the numbers of the economically active population who are without work but available for and seeking work, including people who have lost their jobs and those who have voluntarily left work.

Kimberly Amadeo, a renowned economist defines unemployment as people who do not have a job, have actively looked for work in the past four weeks, and are currently available for work. Also, people who were temporarily laid off and are waiting to be called back to that job are counted as unemployed.

Nationally, unemployment is caused when the economy slows down, and businesses are forced to cut costs by reducing payroll expenses. Unemployment can also be caused by competition in specific industries. Advanced technology, such as computers or robots, also can cause unemployment by replacing worker tasks with machines.

The prevalence of unemployment is usually measured using the unemployment rate. The unemployment rate is also used in economic studies and economic indices. Though many people care about the number of unemployed, economists typically focus on the unemployment rate, which is defined as the percentage of those in the labor force who are unemployed. The unemployment rate is expressed as a percentage, and is calculated as follows:

There are In these advanced developed countries, the unemployed are paid unemployment benefits from the state or other authorized bodies.

However, unemployment in developing countries is like a virus that seeps through healthy bodies and then ravaging them beyond repairs. Ghana’s unemployment rate currently stands at 20 percent. Below is Ghana’s rate of unemployment and ranking in the world


































Source: CIA World Fact book – Unless otherwise noted information in this page is accurate as of September 17, 2009.

These rates keep going up and unfortunately, there is nothing like unemployment benefits for unemployed people in developing countries as there is in developing countries.

The consequences of unemployment for the economy are numerous. They include less consumer spending, as workers have less money to spend until they find another job. If high national unemployment continues, it can deepen a recession or even cause a depression. That's because less consumer spending from unemployed workers reduces business revenue, which forces them to cut more payroll to reduce their costs.

Other consequences are physical, emotional, psychological, and mental and the likes. If one is out of work you can expect the aforementioned behaviors. For instance an unemployed can take to anti-social activities. The victim may also commit suicide – a farmer may take own his life after realizing how flood or fire has gartered his farm.

One important issue worth of note is that the rate of unemployment changes and it is not constant since a country may be able to deal with the situation when proper measures are putting in place.

B) Explain why TWO sectors of the economy are growing faster than other sectors.

Out of the several factors of the Ghanaian economy, tourism and agriculture are the two fastest growing economy within the periods 1999-2009. Below is an explanation as to why these two sectors of the economy (Agriculture and Tourism) are growing faster than others.


Tourism, which is third to gold and cocoa in terms of foreign exchange earnings, is the fastest growing sector of the Ghanaian economy. It is such development that has informed the Government of Ghana to choose tourism as a priority sector for economic development. According to current statistics, the tourism sector is growing at the rate of about 12.5%, with investments from local and foreign entrepreneurs.

In 2007, Tourism generated more than 260 billion US dollars in foreign exchange earnings for poor countries. For instance, in Ghana an estimated 1.3 billion US dollars was realized from the tourism sector last year, thus making it the fourth highest foreign exchange earner after gold, cocoa and remittances from Ghanaian residents abroad. Also, a total of 232,883 jobs were directly or indirectly created by the sector in the same year which represented 13 per cent growth over 2007’s record. This was made known by Mrs. Juliana Azumah Mensah, then Minister of Tourism at the inauguration of the Inter-Ministerial Committee on Tourism. She also noted that when well planned, tourism could be a possible tool for the conservation of the environment and the preservation of local cultures.

She said that aside the revenue and employment that tourism offers, it has the potential to induce both the central and the local governments to make infrastructure improvements such as better water and sewage systems, roads, electricity and telephone in the host communities.

Mrs. Azuma Mensah again pointed out that for the past six decades; tourism had experienced continuous growth and diversification to become one of the largest and fastest growing economic sectors in the world. She is reported to have said that according to the United Nations Tourism Organization, the sector had shown enormous capacity to contribute to the poverty reduction in the world especially in third world countries.


From time immemorial, Agriculture has undoubtedly been the most important economic sector of Ghana. It employs more than half the population on a formal and informal basis and also it accounts for almost half of Gross Domestic Product (GDP) and export earnings.

Key activities in the sector are food cropping and livestock, cocoa production and marketing; forestry and logging, and fishing. Cocoa is the most important cash crop and it provides a significant proportion of national revenue. Other varieties of crops are grown in various climatic zones which range from dry savanna to wet forest. The agricultural crops, which form the base of Ghana’s economy, include yams, grains, cocoa, oil palms, kola nuts, and timber. Others are maize, cassava, yam, cocoyam, pineapple, banana, plantain, pepper, cotton-seed, cashew nuts, sugar cane, rubber, oil palm, tobacco and coffee.

The agriculture sector alone currently accounts for well over 35 per cent of the Gross Domestic Product (GDP), 33 per cent of Net Foreign Exchange Earnings, and provides a livelihood for close to 60 per cent of the national population. This is undoubtedly a sector of the economy that is growing faster than other sectors, and shall continue to do in the unseable future.


Source: Chris Twum - Ghanaian Chronicle

Task 2 – 19 Marks

Using economic theory:

A. Explain how economists define ‘full employment.’

Economists do not agree among themselves as to the right definition of unemployment. In view of this there are several economists who have tried to define the term unemployment. These definitions have been subjected to various scrutiny and criticisms.

Macroeconomics defines full employment as a condition of the national economy, where all or nearly all persons willing and able to work at the prevailing wages and working conditions are able to do so. It is defined either as 0% unemployment, literally, no unemployment (the rate of unemployment is the fraction of the work force unable to find work),

Neoclassical Economists define mean full employment as a rate somewhat less than 100% employment, considering slightly lower levels desirable. However, James Tobin, an American Neoclassical Economist vehemently disagrees, considering full employment as 0% unemployment. This definition is in line with that of Lord William Beveridge, a renowned British economist has also defined "full employment" as a situation where the number of unemployed workers equaled the number of job vacancies available.

Majority of Mainstream Economists have also view full employment as an acceptable level of natural unemployment above 0%, the discrepancy from 0% being due to non-cyclical types of unemployment.

Some Labor Economists have also maintained that full employment is the attainment of the ideal unemployment rate, where the types of unemployment that reflect labor-market inefficiency do not exist. In this situation only some frictional unemployment might exist. Frictional unemployment means the amount of unemployment that result from workers who are in between jobs, but are still in the labor force. Many economists have estimated the amount of frictional unemployment, with the number ranging from 2-7% of the labor force.

By way of conclusion, it is important to note that Full employment does not necessarily mean that one hundred percent of the workforce is employed. Rather, it is customarily defined as ninety-six percent of the total potential workforce. This is attainable within any economy, but may result in an inflationary period. The inflation would result from workers, as a whole, having more disposable income, which would drive prices upward.

Explain THREE different ways in which full employment can occur and identify any disadvantages of each

Full employment occurs when every possible individual that can work is employed by a company. This excludes elderly, disabled, and children of course.

The following are three ways in which full employment can occur and their disadvantages:

First of all, when the demand for labor is equal the supply, there is bound to be full employment.

According to the Classical economic theory, markets reach equilibrium when supply equals demand. Under this situation everyone who wants to sell at the market price can do so but those who do not want to sell at this price do not sell. In the labor market this is known as classical unemployment. When there is an increase in the demand for labor, it will move the economy along the demand curve, and this too increases 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.

The disadvantage that full employment might bring is that once firms have utilized the required labor force to produce goods and service in a country, the consequence of this is that firms will not be able to expand for lack of labor. This is basically so because there might not be labor again in the market for firms to engage in their intended future expansion. When such a situation is at hand the supposed extra income or benefit the firms might derived in view of the expansion are not attained.

The second way by which full employment can occur is the supply side phenomena. This is when supply of labor is less than demand. When this arises there will be full employment.

This will have serious negative consequences on firms.

This is because when labor supply to firms is less than what they require to be productive, the economy suffers ultimately. This is because there might not be abundant production of goods. When this arises, there will be large sums of money chasing fewer goods. This period can bring about high cost of labor and pushing the final cost of goods and services high hence making variable cost exorbitant thus hiking goods and service within these periods.

The third and final way by which one can determine that there is full employment in an economy is when labor supply is less than or equal to labor demanded. This is represented by the formula LS ≤ LD. When the economy is experiencing full employment the rate of unemployment is zero or negative.

This will subsequently give rise to a labor shortfall, which could be described as a disadvantage of full employment. The consequences this brings to an economy are negative. For example, firms might not be able to attract quality labor force in their operations because there might be none or very limited in the system. This might lead to firms employing and putting round pegs in square holes. This is most likely to cause under production.

In conclusion, it is important to recognize that though every economy aspires to have full employment, there are certain disadvantages that be handled well to ensure that its effects do not bring the economy to a standstill.


http:// employment › Ghana › Economy -

Task 3 – 16 Marks

Write a section in your report explaining the benefits of increasing the rate of unemployment benefit for: a) The unemployed, b) Society. You should also identify any costs that may result from such a policy. (Word count approximately 500 words.)

Benefits of increasing the rate of unemployment benefit a) the unemployed

In advanced economy such as the USA, Canada, Britain, Germany and others, there is a monthly package the state has put in place for people who do not have jobs. This is called Unemployment benefits. These are payments made by the state or other authorized bodies to unemployed people. The main purpose of giving them this benefit is to reduce the impact of being without work in a country.

Earnings or payment paid by the government to the unemployed can include: a payment of a wage accommodation, utility bills or other living expenses. At times the package could come along with paid vacation or holiday by the Government to a particular unemployed or a payment can be made by an employer to a separated worker in lieu of notice of a discharge or layoff.

Unemployment benefits are not known with developing countries. This is partly because the economy cannot support that. However, certain measures are put in place to cushion people. One such package that has been put in place in a country like Ghana is the Livelihood Empowerment against Poverty (LEAP) programme. It has provided 21,000 households US$15 per month. This amount is woefully inadequate. However considering that this US$15 per month is about half an average monthly income for recipient households for seven months, it can help improve their living situation. This is not given to the unemployed as done in developing countries. It is only meant for farmers in northern Ghana, who last year saw severe flooding and drought. The cash is intended to help these families survive until the next harvesting season. Angela Asante Asare, a national coordinator in charge of social protection at the Ministry of Manpower, Youth and Employment, told IRIN this package was given out because an emergency situation occurred and those affected needed assistance to survive.

Benefits of increasing the rate of unemployment benefit b) Society

Undoubtedly, increasing the rate of unemployment benefit to society would help improve the living conditions of the less privileged. For instance the LEAP programme assists targeted groups to become socially empowered. Once individuals are empowered, their access to education, healthcare, and other human services is increased.

Under the LEAP Programme, beneficiaries are supported with a reliable minimum income, intended to help them provide basic livelihood security for themselves and also help increase their ability to plan for the future. When this is provided to the extreme poor, they will be empowered and will subsequently become active participants of their society. They will then be able to engage in productive activities to support themselves and ultimately contribute to national development. This will go a long way reduce extreme domestic poverty and deplorable conditions under which they live.

It is against this background that benefits such as Education Capitation Grant, the NHIS, FCUBE, and School Feeding Programme have been put in place to provide the needed support for the success of the LEAP programme.

Other Public Works Programmes, which are intended to offer further benefits to the beneficiaries of LEAP Programme, include the Agricultural Input Support Programme like the Cocoa Mass Spraying Programme, the Micro Finance Scheme, and the Youth Employment Programme. All these are aimed at assisting beneficiaries of the LEAP Programme to enhance their income generating capacity and self-empowerment.

When these interventions are well administered, there is no doubt that the beneficiaries of LEAP Programme will have their lives transformed and be able to contribute their quota to the development of their families, communities and nation at large.

Identify any costs that may result from such a policy

The Livelihood Empowerment against Poverty (LEAP) programme is a component of the National Social Protection Strategy, which targets orphans and vulnerable children through their caretakers, the aged who are above 65 years and without subsistence or support and persons with severe disabilities without productive capacities. Funds and other social interventions programmes are therefore put in place for their benefit. For instance, LEAP provides cost – effective conditional and unconditional subsistence grants on a graduated payment scale of approximately GH¢8.00 – GH¢15.00 per month to the beneficiaries of the programme. By the end of 2008, it was expected that LEAP had reached out to over 8,000 households across 54 districts on regular LEAP while 15,000 households under the Emergency Programme were also supported.

This year alone, the Livelihood Empowerment against Poverty (LEAP) programme has targeted at least 35,000 extremely poor households with social cash transfers. It will not end there because the Parliamentary Committee Report, based on the 2009 budget estimates of the Ministry of Employment and Social Welfare, said the government's role-out plan is to scale up the programme in the next five years to reach roughly 164,000 households nationwide.

Adopting a policy of this nature will undeniably have huge financial implications on the economy of the country, which already faces serious challenges, The Parliamentary committee says expert's analyses confirm that the LEAP will cost less than one per cent of GDP to implement and is therefore a sustainable pro-poor intervention, which of course is a viable venture if only there is enough commitment on the part of Government and other stake holders.


Source: Samuel Nuamah - The Ghanaian Times

Task 4 – 16 Marks

a) Explain whether the government should tackle the causes or the symptoms of unemployment.

b) Explain the causes of THREE different types of unemployment.

c) Discuss a policy measure for each of these THREE different types of unemployment.

(Word count approximately 500 words)

a) Explain whether the government should tackle the causes or the symptoms of unemployment

There are several types of unemployment. But whatever the unemployment type, its causes are always different from the other as well as their symptoms.

For instance, the minimum wage laws raise the cost of laborers with few skills to clear above the market equilibrium, resulting in people becoming unemployed. This is so because those who wish to work at the going rate cannot as wage enforced is greater than their value as workers.

Cyclical unemployment rises during economic downturns and falls when the economy improves. Structural unemployment occurs when the number of jobs in a labor market is unable to provide substantial jobs for everyone who wants one.

Whatever type of unemployment be it Cyclical, or Structural, the government should tackle the causes instead of the symptoms. The important question to ask is: “Why tackle the symptoms of a phenomenon, if its causes can be nipped in the bud”. I sincerely think the best way to deal with this is to tackle the causes. Tackling the symptoms of unemployment is simply putting the cart before the horse. Once the causes are tackled, you will not have a symptom to show its ugly head. The adage” Prevention is better than cure” reemphasizes my approach.

Therefore, workable measures need to be instituted by governments to curb the causes of unemployment so as to avoid seeing the symptoms. This is because money supposedly to be used to treat the symptoms can be used to tackle the cause.

b) Explain the causes of THREE different types of unemployment

There are multiple facets of unemployment. In the following presentation I will talk about the causes of three different types of unemployment. They are:

Classical unemployment.

The Cyclical or Keynesian unemployment.

The Structural unemployment

Classical unemployment is also known as real-wage unemployment. It occurs when real wages for a job are set above the market-clearing level. The likely consequence is that the number of job-seekers exceeds the number of vacancies available. It has been argued by Libertarian economists like F.A. Haye that when unemployment increases the government intervenes into the economy to try to improve the conditions of those with jobs. This is evidenced in the way minimum wage laws raise the cost of laborers with few skills to above the market equilibrium, resulting in people who wish to work at the going rate but cannot as wage enforced is greater than their value as workers becoming unemployed.

The Cyclical or Keynesian unemployment is also known as demand deficient unemployment. It got its name because it varies with the business cycle, though it can also be persistent, as during the Great Depression of the 1930s. It occurs when there is not enough aggregate demand in the economy. This is caused by a business cycle recession and wages not falling to meet the equilibrium level. Cyclical unemployment rises during economic downturns and falls when the economy improves.

The Structural unemployment is caused when the number of jobs in a labor market is not able to provide significant jobs for everyone who wants one. Structural unemployment is hard to separate empirically from frictional unemployment, except to say that it lasts longer. As with frictional unemployment, simple demand-side stimulus will not work to easily eradicate this type of unemployment


Discuss a policy measure for each of these THREE different types of unemployment.

Below is a policy measure for three types of unemployment: Classical, Cyclical and Structural.

Classical unemployment

The policy measure for this type of unemployment can be implemented by Government increasing the flexibility of wages. This is done by abolishing minimum wages or by ensuring employee protection, to make the labor market more like a financial market. On the other hand, making wages more flexible allows employers who are sufficiently staffed to pay less with no related benefit to job-seekers. If one accepts that people with low incomes spend their money quickly, more flexible wages may increase unemployment in the short term.

Cyclical or Keynesian

According to Keynesian economists, a policy measure that could help government solve the Cyclical unemployment is when government deficit spending are cut or reduced. Another way this type of unemployment could also be solved is when the government adopts a deliberate expansionary monetary policy. All these will aim at increasing non-governmental spending by lowering interest rates, hence eradicating or bringing down to the minimum level the Cyclical unemployment.

Structural unemployment

This type of unemployment could be abolished easily by adopting a simple demand-side stimulus. A simple demand –side stimulus may perhaps sustain high demand of some jobs and hence lower structural unemployment. To achieve this, problems related to the labor market must be tackled. This could be done by initiating and sustaining training programs, mobility subsidies, anti-discrimination policies, a Basic Income Guarantee, and/or a Citizen's Dividend. These measures are required so that they can provide a cushion of income which allows job seekers to avoid taking the first job offered and to find a vacancy which fits the worker's skills and interests.

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