• Low government expenditure. The government expenditure is still low despite its arrangements of one cow per family
however the trend is improving and more employment is to be created.
• Contractionary monetary policy. Many banks charge a high interest rate when people borrow loans. This has made
many people shun away from the loan scheme hence little income to create jobs.
• Tight fiscal policy with high taxation. The tax system is a bit tight and some of the small scale businesses have hard to
close down because of little earnings, still the would be small scale investors also fear to open up in fear of the tax system.
• Political insecurity. Rwanda as a nation is politically stable however the surrounding countries mainly in the west such
as Democratic republic of Congo, and Burundi in the south have caused insecurities on the areas that boarder with Rwanda.
People who stay in those areas near the countries mentioned above are not so secure leading to constant movement in
other urban areas.
• Presence of disabled people. These may not be able to take up some jobs that require people who are mentally and physically
well. This type of unemployment is called residual unemployment and it is common in many countries due to disability of
some people.
• Low levels of income. The presence of low incomes sometimes leads people to leave work and secondly it is not able to
help create more employment opportunities.
• Illiteracy among the people. Some people are no educated and may not be employed in formal jobs available. Still they
lack enough skills to compete in the labour market leading to constant unemployment.
• Ignorance of the people about the existing jobs. Because of low levels of advertisements and ignorance, some people may
not be aware of the available jobs in the different areas. This has left employers lacking workers while at the same time
the would be workers lacking jobs.
• Use of capital intensive techniques. Some of the employments generating industries have resorted to use of capital
intensive techniques of production. This is to enable them produce more quality and quantity and the same time solving
the problems associated with labour.
• Desire to live on accumulated capital. Some people desire to live on accumulated capital and hence even if the jobs
are available, there is always voluntary unemployment.
• Large subsistence sector. This is the production for home consumption and the incidental surplus is sold. This means
that there is not enough earnings by the people to help them put up investments that can create employment opportunities.
There are many different possible causes of unemployment, and unfortunately for governments, it is never easy to identify which is the most important and what to do about it. The causes of unemployment can be split into two main types:
The first cause of unemployment (demand-side) is simply a lack of aggregate Demand. When there is not enough demand, employers will not need as many workers, and so demand-deficient unemployment results. Keynesian economists in particular focus on this cause.
Unemployment caused by supply-side factors results from imperfections in the labour market. A perfect labour market will always clear and all those looking for work will be working — supply will equal demand. However, if the market does not clear properly, there may be unemployment. This may happen because wages do not fall properly to clear the market. These two types can further be divided into different categories as shown below;
This is when the members of the labour force are unemployed in the urban areas — both voluntary and involuntary. Open urban unemployment can best be explained by the theory of rural-urban migration. Rural-urban migration is a process whereby individuals move from rural to urban areas. It occurs as a result of a combination of push and pull factors.
The process of rural-urban migration is brought by push (from villages) or pull factors (from towns) and depends on a number of factors, which are both economic and non-economic. Some of them are; unequal distribution of resources and services, social problems and population pressure among others. This can be basically reduced or controlled by developing rural areas such that people are no longer attracted to urban areas since all the services are equally distributed.
Seasonal unemployment is unemployment which is caused by economic slowdowns related to seasonal variations. Certain jobs, like fruit packing, may be seasonal. At the end of the season, the workers may become unemployed. Agricultural workers are employed during clearing, planting, weeding and harvesting periods but are unemployed for the rest of the year. Others are construction workers, people who fish for a living.
• Little can be done to overcome this form of unemployment. However, employers should see to it that employees
are offered yearly contracts.
• The agricultural sector should be diversified so that there is employment throughout the year. This can be done by
introducing various crops with different times of planting, weeding and harvesting.
• Set up a comprehensive industrial program to provide part-time employment.
This type of unemployment does exist mainly in countries which are over-populated. It is the type where labour’s productivity tends to zero. Or the capacity of labour to work is underutilised. E.g. office messengers
The marginal product of labour is either zero or negative. One finds that there are more workers than those that are needed for a particular job.
Less labour could have done the same work and therefore labour is said to be underutilised. In some cases, labour works less time than desired due to poor methods of production and poor capital equipment. Disguised unemployment is common in Rwanda, especially in the agricultural sector, service industry and government.
• Introduction of a comprehensive industrial program to help the redundant people.
• Introduction of better methods of production. More and better tools should be introduced.
• Population control.
• Land which is not used should be made productive.
Frictional unemployment is essentially short-term unemployment. It results when the people are switching from one job to another. This may occur when people constantly change their jobs, some quit or others are fired.
These constant changes result in frictional unemployment. There are always some firms with unfilled vacancies and some people looking for work. The period of unemployment between losing one job and finding another is included under frictional unemployment.
There are a variety of reasons to explain the existence of frictional unemployment but these can be explained
activities — young people are leaving school and joining the labour force and secondly, old people are retiring and leaving
the labour force temporarily for some other reason, and then joining it.
• The fortunes of businesses are constantly changing— some are closing down and laying off their workers; new firms
are starting up and are hiring.
The policies for dealing with frictional unemployment aim at increasing the labour mobility.
• Providing information about job opportunities and available workers. Employers should be fully informed of the potential
labour supply.Unemployed workers should be informed of the availability of employment opportunities. There should be
an efficient system of job notification and placement and there should be job centres in all small townships.
• The remedy of occupational immobility is to provide retraining facilities so that workers learn new skills. However, the
problem could be lessened in the first place if the education system gave the potential workforce more appropriate training.
Considering the changes in technology and the growth in demand
for skilled and professional workers, retraining program
will be of increasing importance in the future.
• Barriers to geographical labour mobility should be reduced. This should be either moving the unemployed to the jobs
or moving the jobs to the unemployed. The government may give moving grants, provide information of jobs in other
areas; and set up houses, schools and hospitals in those areas where employment exists. To move firms into the
depressed regions, the government may attract them there with grants, tax relief, rent-free factories etc.
•Human resource planning. Human resource planning should be undertaken so that workers can be guided as to what skills
are required by the economy.
Umucyo company in Nyamagabe has been specialised in making dresses and it has been employing many workers. However with the change in trend, where ladies have resorted to putting on trousers, the company has lost market hence laying off workers.
1. What do you understand by the term structural unemployment?
2. What are the causes of this type of unemployment mentioned above?
3. What can be done to reduce this type of unemployment?
Structural unemployment represents a mismatch between supply of labour and demand for workers. Because the economy is constantly changing and adapting, at any moment there will always be some mismatch between the characteristics of the labour force and the characteristics of the available jobs.
The mismatch may occur, for example, because labour does not have the skills that are in demand or because labour is not in the part of the country where there is demand. Individuals who fall into this category have trouble finding jobs because of a lack of adequate skills or regional employment problems.
This is because of the immobility of labour. There are three distinct reasons for such immobility; occupational, geographical/regional (within a country), and international competition.
The demand for workers in growing fields such as health care may exceed the supply of available workers, while the
supply of labour in declining areas may be in surplus. As a result, there is high unemployment in stagnant or declining
job areas, while demand is strong for alternative occupations.
as regional unemployment. For many countries, growth is not uniform across the landscape. Some areas may enjoy
rapid growth and thus have a strong demand for labour, while other locations are stagnant and the surplus labour leads
to high local unemployment rates. The unemployed workers will not move to a different area due to social ties, housing
problems and social problems.
skilled workers in developed countries are increasingly being displaced by foreign workers in less-developed
countries (LDCs) who are paid significantly lower wages. In developed countries,the average wage for less-skilled
workers is relatively high compared to that in LDCs due to greater living costs, union power, and tradition.
Structural unemployment is the most difficult for economic policy makers to deal with, and solutions evolve slowly.
• Individuals stuck in occupations that allow for little future growth need to be retrained and educated to gain the skills
necessary to work productively in areas where they are needed. Time, information, and money are required to deal
with structural unemployment.
• The government can take an active role in providing vital information about jobs and help in financing education and
training for displaced workers.
• There should be facilities for the retraining of workers whose skills are no longer in demand.
• It is important to identify in advance where shortages will occur in the future, so that retraining of unemployed workers
can be in the right direction. This will enable workers to move to other expanding industries.
This is the type brought about by machines replacing people because of technological advancement.
As firms introduce new technologies into their production processes,they may replace labour with machines.
This has been occurring with computerisation, automation and robotics in many industries as seen above in
figure 2. For the firm, costs are cut and output and profits raised but for labour the demand is decreased.
• To cure this type of unemployment is not easy. Either he stops the technological developments, which would slow down
economic growth, or find alternative work for those who have
lost their jobs. The main solution would involve retraining.
7. Casual/ Erratic unemployment
This is a form of unemployment that results from expiry of contracts and target workers. It commonly occurs to people like private doctors, lawyers, and car washers, who work if they have clients. The private doctor works when he has a patient to attend to. If he has no patients, he becomes unemployed and hence casual unemployment. This type of unemployment is
hard to cure because it comes at irregular intervals. It cannot be predicted unlike the seasonal unemployment.
8. Residual unemployment
This is a type that occurs to a factor of production especially labour because it is mentally or physically handicapped like the lame, mad people among others. Labour may become unemployed when the work that is available needs someone who is physically and mentally able.
9. Transitional unemployment/ Normal unemployment
This is brought about by production stopping temporarily for sometime. Production may always stop because
of many different reasons like repairing due to breakdown, renovation, and painting the industry among others.
8.4 Theories of unemployment
1. Cyclical / Keynesian / deficiency in demand unemployment
Activity 4
Visit the library or any other source, research about the following and explain;
1. The meaning of Keynesian unemployment.
2. The solutions to unemployment according to Keynes.
3. The relevance and limitations of Keynesian theory in LDCs.
Facts
This is unemployment brought about by reduction in aggregate demand especially during a depression when incomes and output fall which results into employers laying off workers.
This type results from fluctuations in the business cycle. Cyclical unemployment rises significantly during economic downturns (recessions) and falls during growth phases. It is therefore natural to refer to the high unemployment, in these recurring periods of recession as cyclical. The term “cyclical” means that such unemployment occurs periodically.
When there is a fall in aggregate demand, the entrepreneurs will find themselves with unsold goods. They will be forced to reduce investment and consequently lay off workers.Keynes stressed two concepts, the marginal propensity to consume
(MPC) and the investment multiplier. If individuals consume a greater proportion of the additional income, entrepreneurs will
be encouraged to increase their investment and hence more employment opportunities. However, if MPC is low, unemployment is bound to occur since the investment multiplier process will be small.
From Figure 4 above,
is the equilibrium point with employment level
; some of the workers willing to work have not
been absorbed. It means that
(effective demand point) is an under employment equilibrium and
is under employment level of income.
The unemployed workers can be absorbed if the aggregate demand increases from Agg dd1 to Agg dd2 and a new equilibrium point
is established with employment level
which we assume is the full employment level. Hence increase in aggregate demand from Agg dd1 to Agg dd2 leads to increase in employment
Solutions
To eliminate Keynesian unemployment, aggregate demand should be increased in the following ways:
• Government expenditure should be increased, leading to increase in the demand and in the end, incomes
if the firms will increase and finally may need more workers to produce the needed goods.
• Reduce tax on people’s incomes which will lead to more disposable income, and hence an increase in demand that
will stimulate the producers to set up more investments and create more employment in turn.
• Buy securities from the public. This will lead to increased money in the hands of the public and in end their demand
will increase hence the need for increased output will cause the producers to demand for more workers.
• Reduce the bank rate. This will attract people to seek for loans from the financial institutions which will further increase
money in circulation, increase demand and employers will react by increasing the demand for workers.
• Reduce legal reserve requirements. This is the amount that is by law supposed to be kept by commercial banks in the
central bank. Reducing implies that there will be enough money held by commercial banks to lend to the public which
will further increase aggregate demand.
• Encouraging exports. This could be through lowering the tax rates and joining regional cooperation for an extended market.
It will increase incomes and investment and in turn create employment opportunities.
• Improvement in investment climate. This is through encouraging investors to invest in the country through giving
them subsidies like tax holidays, gazetted land in economic zones among others. These investors will in turn
create employment opportunities for the people.
• Increasing wages of the people so as to increase their demand.
Relevance of the Keynesian theory of unemployment to less developed countries
• As suggested by Keynes, in LDCs, demand for labour is derived demand. This implies that a fall in demand for goods
and services will lead to a fall in incomes of the employers because their products have no market and in the end they
will react by laying off workers.
• Through exports, new markets are got for the local goods and this implies that the local investors will earn more income.
They will be able to set up more investments in order to satisfy the market and hence they will need to employ more workers.
• Reduction in tax as suggested by Keynes can lead to increase in household income and expenditure. This will in turn
increase aggregate demand, the investors will react by needing to produce more to satisfy the increased demand and in
the end they will need to hire and employ more workers leading to increased employment opportunities.
• Increasing government expenditure as suggested by Keynes increases
money supply in the economy. This will
further increase aggregate demand provoking producers to increase production which they can only do after
employing more workers.
• A conducive investment climate as suggested by Keynes encourages investment through attracting investors. These will
in turn need to increase production and in the end they will end up employing more workers.
Limitations
• Keynes viewed unemployment from the demand side when he said that unemployment is as a result of reduction in
aggregate demand. This cannot be applicable in LDCs because in these countries unemployment is mostly as a result
of inadequate capital.
• Increasing government expenditure as suggested by Keynes so as to increase aggregate demand will instead worsen
the problem. This is because the increased money in circulation will instead shoot up the prices and it may further be
too high for the people to buy hence the goods will lack market and still the employers may lay off the workers which
will cause inflation.
• Keynes didn’t consider institutional and structural problems in LDCs such as poor road network, poor land tenure system
which affect the level of investment and job creation.
• Increasing government expenditure will not increase employment opportunities especially in the agricultural sector.
This is because people prefer white collar jobs than blue collar jobs so there may not be increase in employment
despite increase in expenditure by the government.
• Assumes a fully monetarised economy. This is because according to him, the aggregate demand can only be increased
when there is increase in money in circulation but he does not consider the fact that in LDCs there is a large subsistence
sector where people survive on the foods that they grow and they don’t take it to the market to earn incomes
• Investments in industries may not absorb all the labour. This is because the need to increase output by these industries
to gain more profits, may force the industries to use capital intensive techniques of production as opposed to labour
intensive techniques and so unemployment may persist.
• LDCs have got inelastic demand for imports. Even if the prices increase, their demand remains almost the same.
Increase in aggregate demand means that the there will be more investments in those countries that supply the
goods and employment will be created there and not in the countries where they export their goods.
Thus unemployment will persist in the countries that receive the goods.
• Increasing
money supply may not increase aggregate demand. This is because people in developing countries prefer
to hold money in form of wealth or cash. Therefore there will still be deficiency in demand and unemployment.
• Keynes didn’t consider the causes and solutions to other types of unemployment. He only considered deficiency
in demand yet we know that unemployment is broad with many causes and needs a variety of solutions if full
employment is to be achieved.
2. Rural-urban migration
Activity 5
Using the photographs in figure 5 below, describe the following:
1. What do you think caused such activities in the photos below?
2. The activity of people moving from a rural area to an urban area to stay is known as..........
3. What do you think are the effects of such an activity in (ii) above?
4. What do you think should be done to limit the movement of people from rural areas to urban areas with an intention of
staying?
Facts
Rural-urban migration is a process whereby individuals move from rural to urban areas with an intention of staying.
It occurs as a result of a combination of push and pull factors. This causes three things to happen;
1. Urban growth - towns and cities are expanding, covering a greater area of land.
2. Urbanisation - an increasing proportion of people living in towns and cities.
3. Depopulation in the rural areas because of people constantly moving to urban areas.
The process of rural-urban migration is brought by push (from villages) or pull factors (from towns) and depends
on a number of factors, which are both economic and non-economic. Some of these are discussed below:
• Unequal distribution of economic activities. Unequal distribution of economic activities with urban areas having more
than the rural areas. The government tends to allocate more development expenditures in the urban areas and forget
the country sides where the majority of the people stay hence individuals have then tended to move to urban areas in
hope of getting highly paid jobs.
• Unequal distribution of social services. Unequal distribution of social services with urban areas having more than the
rural areas. More and better education, medical, cinema halls, night clubs and transport facilities are allocated to urban
areas than in the rural areas. Individuals then move to urban areas to enjoy these facilities.
• Population pressure. Population pressure in the rural areas has also contributed to rural-urban migration. There is
limited fertile land in the rural areas and yet there are increasing numbers of people on land. This causes diminishing
returns. Individuals who have no access to land move to urban areas in search of employment.
• Formal and inappropriate education. Theoretical subjects which lack any practical bias and prepare students for white collar
jobs are being taught in schools. The school-leavers lack any
specific qualifications. They search for jobs appropriate to
their
kinds of formal education received in schools. Therefore, after leaving school, individuals tend to stay in urban areas
unemployed.
• Minimum wage. To a small extent, there can be migration to urban areas arising from the setting up of minimum wages
far above the average wage in the rural areas. Individuals tend to migrate to urban areas whenever they hear of any
increase in the urban minimum wage. Unfortunately, the number of jobs in the urban areas is not increased. In some
cases, the number of jobs is decreased.
• Standard of living. The rural people view the urban standard of living to be better than the rural standard of living and
hence rural-urban migration. The rural people have a belief that the urban standard of living is far much better than the
rural one.
• Social problems. This also plays a minor role towards rural-urban migration and urban unemployment. Fear of
witchcraft, circumcision and others are in most cases associated with rural areas. Individuals then try to escape
to the urban areas where such are least experienced.
Consequences of rural-urban migration
• Open urban unemployment. Because of the constant movement of people from rural areas, there will be an increase
in the number of people in urban areas who will be idle without jobs.
• The problem of dependants. Normally when the people move to urban areas, they tend to stay with their relatives.
Therefore they may cause increased dependency on the side of their hosts which leads to low standards of living.
• Creation of slums. The presence of many people from villages to towns may cause scarcity of housing facilities.
This in conjunction with low incomes, may cause the people to develop shanty housings leading to creation of slums.
• Government expenditure on social services increases. There will be increase in government expenditure on social
services like hospitals and schools among others to cater for the growing population in the urban centers.
• High cost of living in urban areas. The increase in the number of people in urban centers will lead to an increase in
the demand for the goods and services. This may not be accompanied by corresponding increase in the supply of goods.
In the end, the prices will go up.
• The demand for social services exceeds the supply. There will be strain on the social services in the urban centers. This
is because there is increase in the number of users and in the end there will be high costs of maintenance.
• Food prices increase as well as house rents. The prices of food as well as house rent will shoot up due to the increase in
the number of users and in the end problems of poor standards of living and welfare will come up.
• Low agricultural output. Agriculture is mostly carried out in rural areas, therefore the increase in rural-urban migration
means that the number of energetic young men and women who would stay and produce food will be moving to urban
centers. Therefore there will be reduced productivity in rural areas.
• Rural development will be delayed. This is because as more and more people move to urban centers, the government
will concentrate on the urban centers and neglect the rural areas since there are fewer people hence rural under
development.
Measures to control Rural –Urban Migration
1. Rural development policy: This can be through:
• The economic base of the rural areas must be strengthened so that productivity and earnings from agriculture are raised.
A big percentage of the export earnings should be returned to the rural areas in form of farm implements so that
increased capital formation can take place in the rural areas. Agricultural output can be improved by provision of
more and better tools; provision of credit facilities; improvement of transport facilities; higher agricultural prices to
farmers etc.
• A comprehensive industrial program to employ otherwise redundant people should be introduced. Small-scale
labour-intensive industries should be set up.
• Special attention should be paid to building in small-country towns in rural areas, schools, hospitals, cinema halls and
the like since people are more likely to remain in the countryside when amenities are reasonably close to where they live.
In other words, rural areas should be made attractive.
2. Population control: The high population growth rates must be brought to a halt using various policies like use of family planning methods, giving a maximum number of children per family, reducing incentives like free education among others.
3. Education policy: To overcome the problem of school leavers, educationalists should change the educational curriculum
to subjects with a more practical bias like farming, carpentry, simple mechanics and the like, to create more job seekers.
4. Financial infrastructure: The government should create an effective financial infrastructure that can assist people in rural areas with microloans that are to be paid back with a small interest rate. This will help in the mobilisation of savings, which can be loaned to the farmers and they will be able to stay in rural areas.
5. Wage policy: The minimum wage policy should either be abolished or made effective throughout the country such that even in the rural areas, people can earn the same wage as their colleagues in towns. This will reduce their movements to towns.
6. Rural-rural migration: There should be rural-rural migration. For instance, moving from Nyamirama to Ruramira not from Nyamirama to Kayonza town. However, this is difficult to manage.
8.5 General causes of unemployment
Activity 6
Explain the following and present to the class.
1. Causes of unemployment in Rwanda.
2. Possible solutions to unemployment in Rwanda.
Facts
• High population growth rate: The high population growth rate which does not correspond with increase
in job creation has left many unemployed.
• Poverty: Because of poverty, people are not able to have access to business activities and they cannot afford
capital to use in the production process.
• Use of capital intensive technology: The desire to produce high quality out and more in the shortest time possible
has led to the use of machines than people hence people have been left out of jobs.
• Slow growth of economies: These especially LDCs due to low incomes, low savings and low investments which makes
it difficult to generate employment opportunities.
• Existence of a large subsistence sector: Agriculture in LDCs is still backward and still uses primitive methods which leads
to low production, underemployment and unemployment.
• Government policy towards employment: In developing countries there is lack of national policies regarding employment
and because of this, jobs have been advertised to people who already have them leading to unemployment of the newly
qualified.
• Defective education system: This creates more job seekers than creators and it imparts little skills to them thus looking
for jobs instead of creating them.
• Social discrimination: This is done by the employers where they offer jobs basing on race, tribe and religious grounds
leading to discrimination and unemployment.
• Uneven distribution of development: The social and economic infrastructure is lacking in rural areas hence forcing the
people to move to urban centers causing open urban unemployment.
• Seasonal changes: This occurs in the agricultural sector where crops are grown in particular seasons hence
during unproductive seasons, the farmers become unemployed.
• Political instability: This causes uncertainty which discourages production, limits investment and job creation.
Dangers of unemployment/ unemployment problems
• Factors of production are wasted when they are out of production for a long period of time and this leads to loss of skill
and creativity.
• Human suffering because of failure to get jobs meaning that people do not have a source of income leading to low
standards of living.
• Results in income inequality between the employed and the unemployed where by the rich will become richer and the
poor poorer causing social unrest.
• Social and economic dualism among the employed and the unemployed groups which affects the level of development
since some will look at themselves as unprivileged.
• Retards economic growth because it brings about discontent among the citizens and the citizens resort to criminal
activities which will in turn lead to destruction of property and retards development
• High dependence burden which increases the government expenditure in order to support the helpless.
• Low levels of gross national product. This is because the factors of production are not fully utilised and some are
under employed meaning their productivity is low.
• Low revenue to the government because the tax base is reduced since variety are unemployed. This means that
the government may not be able to carry out its activities like infrastructure development i.e. roads, hospitals and
schools among others that are vital for development.
• Brain drain comes up because of the people’s desire to find employment. This denies the country productive labour
which would have been used for development. This labour in turn moves and helps in development of other skills
through providing human capital.
• Rural urban migration will come up. This is because the unemployed people in the rural areas will move to towns with
a hope of finding jobs. These people will in turn become unemployed which will lead to problems like increased crime
rates, slums among others.
8.6 General solutions/cures of unemployment
• Population control policy through family planning and education programmes to match population growth with job creation.
• Rural transformation through extension and improvement of social economic and infrastructure such as roads, power
and establishment of small scale industries in rural areas to reduce rural urban migration.
• Appropriate manpower planning to match labour supply and labour demand.
• Reforming the education system to train job seekers as opposed to job seekers by putting emphasis on practical
and vocational studies.
• Maintaining peaceful politically stable atmosphere which encourage both local and foreign investors and expanded
employment opportunities in various sectors.
• Privatisation of government parastatals to promote efficiencyand increase their productive capacity hence more
employment opportunities.
• Diversification of economic activities such as mining, fishing,agriculture tourism etc. to widen employment opportunities.
• Encouraging the use of appropriate technology to reduce the problem of technological unemployment.
• Modernisation of the agriculture sector to expand employment in the agriculture sector as well as reducing dependence
on nature
• Land reforms to increase people’s access to land and mortgage land for loans from financial institutions to create
self-employment
• Provision of cheap credit facilities for the unemployed school leavers, poverty eradication programs etc. to enable
people create self-employment projects.
• Advertising available jobs through different media and setting up job information centers which reduces
frictional unemployment.
• Improving on social economic infrastructure especially in rural areas to increase geographical mobility of labour.
• Creation of wider market e.g. through economic integration thus increasing production and employment opportunities.
• Liberalisation of the economy thereby attracting both local and foreign investors and expanded employment opportunities.
• Encouraging small scale labour intensive industries especially in rural areas.
• Attracting of investors through provision of incentives like taxi holidays, improve on infrastructure, setting up institutions
that help investors and restoration of peace and stability in all parts of the country.
• Education and training programmes to equip labour with the necessary skills required in the labour market.
8.7 Employment multiplier
When there is a change in development because of increased government expenditure, it generates additional change in employment in related production activities and sectors and as a result, the initial change in employment results in greater in total employment. For example if the government spends on road construction, it directly employs the people.
This is called primary employment. The road works will lead to increased demand for cement, bitumen, stones etc. this will create additional jobs in the cement, bitumen production and stone quarries. This is called secondary employment.
The employment multiplier therefore is the number of times initial employment will multiply itself to give a final change in total employment. If the initial jobs created are 5 and as a result the total employment created is 25, then the multiplier is
Arthur Okun was a Yale professor and an economist born in November 1928. In his law (Okun’s law), he analysed and developed a relationship between unemployment and national output (economic growth). He further said that, because of unemployment, some people are not engaged in production and so do not contribute to national income.
This implies that unemployment reduces the level of national income. If the unemployed people were to be employed,
national income would increase. National planners therefore would want to determine the exact relationship between unemployment and gross national product for proper planning and plan implementation.
Considering figure 7 on page 290, it is seen that an increase in the unemployment rate to 2.0%, the percentage of GDP reduces to even negative. While a reduction in the unemployment rate to -1.0%, there is an increase in the GDP to more than 2%.
One version of Okun’s law has stated very simply that when unemployment falls by 1%, GNP rises by 3%. For example a fall in the rate of unemploymentby 1% from 14% to 13%, causes gross national product to increase by 3% from 100 billion francs to 103 billion francs.
Another version according to Okun’s states that, a percentage increase in unemployment causes a 2% fall in GDP and a percentage fall in unemployment, causes an increase in GDP by 2%.
Unit assessment
1. Examine reasons why some people in Rwanda do not want to work.
2. Why is it difficult to get all people in Rwanda employed?
3. What do you think the Rwandan government should do to reduce the unemployment problem?
4. How has the unemployment problem affected the development process in Rwanda?
8.8 Glossary
- Casual unemployment/ erratic: It’s a form of unemployment that results from expiry of contracts and target workers.
- Disguised unemployment: This is the type of unemployment where labour’s productivity tends to zero. Or the capacity of labour to work is underutilised.
- Full employment: According to Lord Keynes, it is a situation where a person who wants a job gets it. F.W Parish says that full employment is a situation where 3% or less of the people is unemployed.
- Frictional unemployment: This is the type of unemployment that results from labour switching from one job to another
- Involuntary unemployment: A situation where people are willing to work at the ongoing wage rate but fail to get jobs.
- Keynesian unemployment:This is unemployment brought about by reduction in aggregate demand which results into employers laying off workers. It is sometimes called cyclic or mass unemployment.
- Open urban unemployment: This is unemployment caused by labour moving from rural areas to urban centers because of uneven distribution of resources.
- Residual unemployment: This is a type of unemployment that occurs to a factor of production especially labour because it is mentally or physically handicapped e.g. lame, mad etc.
- Structural unemployment: This is unemployment caused by changes in structural set up of an economy such as change in demand. It can also be called secular unemployment.
- Seasonal unemployment: This is unemployment that results from seasonal changes in production especially in the agricultural sector where crops are growing according to particular seasons.
- Technological unemployment: This is the type brought about by machines replacing people because of technological advancement.
- Transitional unemployment: This is the type of unemployment brought about by production stopping temporarily for some time because of renovation/ repairing taking place in the production plants (industry). It is sometimes called normal unemployment.
- Under employment: This is a situation where the marginal productivity of a worker is less than what it should be. OR a situation where the persons capacity to work is underutilised.
- Voluntary unemployment: This refers to a situation where jobs are available but people are not willing to work at the ongoing wage rate.
Unit summary
• Meaning and forms of unemployment
• Measurement of unemployment
• Under and full employment
• Types, causes and policies for unemployment
• Theories of unemployment
• Keynesian theory
•Rural urban migration
• General causes of unemployment
• Effects of unemployment
• Employment multiplier
• Okun’s law
Where NPUE is the number of people unemployed; and NPLF is the number of people in the labour force.
As firms introduce new technologies into their production processes,they may replace labour with machines.This has been occurring with computerisation, automation and robotics in many industries as seen above infigure 2. For the firm, costs are cut and output and profits raised but for labour the demand is decreased.
This is a form of unemployment that results from expiry of contracts and target workers. It commonly occurs to people like private doctors, lawyers, and car washers, who work if they have clients. The private doctor works when he has a patient to attend to. If he has no patients, he becomes unemployed and hence casual unemployment. This type of unemployment ishard to cure because it comes at irregular intervals. It cannot be predicted unlike the seasonal unemployment.
From Figure 4 above,
Arthur Okun was a Yale professor and an economist born in November 1928. In his law (Okun’s law), he analysed and developed a relationship between unemployment and national output (economic growth). He further said that, because of unemployment, some people are not engaged in production and so do not contribute to national income.This implies that unemployment reduces the level of national income. If the unemployed people were to be employed,national income would increase. National planners therefore would want to determine the exact relationship between unemployment and gross national product for proper planning and plan implementation.
Considering figure 7 on page 290, it is seen that an increase in the unemployment rate to 2.0%, the percentage of GDP reduces to even negative. While a reduction in the unemployment rate to -1.0%, there is an increase in the GDP to more than 2%.One version of Okun’s law has stated very simply that when unemployment falls by 1%, GNP rises by 3%. For example a fall in the rate of unemploymentby 1% from 14% to 13%, causes gross national product to increase by 3% from 100 billion francs to 103 billion francs.Another version according to Okun’s states that, a percentage increase in unemployment causes a 2% fall in GDP and a percentage fall in unemployment, causes an increase in GDP by 2%.