Unemployment in Developing Countries

Let us make in-depth study of the meaning, types and nature of unemployment in developing countries.

Meaning of Unemployment:

Technically speaking, unemployment is defined as a state of affairs when in a country there are a large number of able-bodied persons of working age who are willing to work but cannot find work at the current wage levels.

People who are either unfit for work for physical or mental reasons, or don’t want to work, e.g., sadhus, are excluded from the category of the unemployed.

Mere engagement in some productive occupation does not necessarily mean absence of unemployment. People, who are only partially employed or are engaged in inferior jobs, though they can do better jobs, are not adequately employed. It is called a state of underemployment which is equally bad for the prosperity of a country. Under capitalism, it seems some amount of unemployment is inevitable. The best that can be done is to keep the number of the unemployed as low as possible.

Types of Unemployment:

There are three main types of unemployment:

(1) Frictional unemployment,

(2) Structural unemployment, and

(3) Cyclical unemployment.

In order to understand the concept of full employment the difference between these types of unemployment needs to be grasped.

1. Frictional Unemployment:

There is always some minimum amount of unemployment that prevails in the economy among workers who have voluntarily quit their previous jobs and are searching for new better jobs or looking for employment for the first time. They are said to be between jobs. They are not able to get jobs immediately because of frictions such as lack of market information about availability of jobs and lack of perfect mobility on the part of workers.

The distinguishing feature of frictionally unemployed persons is that the number of job vacancies equal to them are available in the economy. They remain unemployed for a relatively short period of time before they are able to get new jobs. This is because some time is required for job searchers to have information about the availability of jobs.

When presently fractionally unemployed persons get jobs, the new frictionally unemployed persons come into existence and thus there is always some frictional unemployment prevailing in the economy due to imperfections or lack of market information about the availability of jobs.

Since frictionally unemployed are those who have either quit their old jobs voluntarily and are looking for better jobs or those who have entered into the labour force for the first time and searching for jobs according to their acquired skills or those who had re-entered the labour force for some time, for example, after having children, the frictional unemployment is considered as voluntary unemployment.

2. Structural Unemployment:

Structural unemployment is another type of unemployment which always exists to some extent in a growing economy. Structural unemployment which refers to the mismatch between the unemployed persons and the demand for specific types of workers for employment occurs because whereas demand for one kind of labour is expanding, the demand for another kind of labour is declining either due to the changes in the structure (i.e., composition) of demand for the industrial products or due to the changes in technology that take place in an economy.

The distinguishing feature of structural unemployment is that the unemployed workers lack skills required by the expanding industries. Structural unemployment also occurs because of the mismatch between the location of job vacancies of the expanding industries and the present location of the unemployed workers.

Let us give an example of structural unemployment. In a growing economy techniques of production are constantly changing with the result that people are likely to lose their jobs when these are replaced by newer and more efficient techniques. The unemployment created in this way is structural unemployment and is inevitable consequence of technological progress.

These structurally unemployed persons will need to acquire new skills and training before they will be absorbed in the new technologically superior jobs. Take another example, when computerization of banks, offices occurred in India recently some workers were rendered unemployed. But computerization created new job opportunities.

On being given training in computer operations some of them again got jobs. But for some time they remain unemployed. Further, due to changes in demand for some goods, the output of industries producing them declines rendering some people unemployed.

On the other hand, in those industries the demand for whose products are increasing, new jobs are created and unemployed workers are absorbed in them but before getting jobs in the expanding industries they remain unemployed.

Structural unemployment tends to last much longer than frictional unemployment because more time is required for people to get new training or acquire new skills or to move to new locations of expanding industries. Structural unemployment is more serious than frictional unemployment. This is because frictionally unemployed are likely to get jobs in a relatively short period of time as job vacancies exist for them.

On the other hand, structurally unemployed have no immediate job prospects as they have to get training or acquire new skills required for the jobs available. The structurally unemployed persons can be expected to get only low paying unskilled types of jobs in the immediate future. Some accept such jobs while others prefer to remain unemployed and go on searching for better jobs which match their skills.

Natural Rate of Unemployment:

It may be noted that frictional and structural types of unemployment together constitute what is called natural rate of unemployment which may be of the order of 4 to 5 per cent of labour force in free market economies. Thus, natural rate of unemployment arises due to labour market frictions and structural changes in a free market economy.

Note that even when there is natural rate of unemployment, labour market is in equilibrium. In the late nineties, natural rate of unemployment was estimated to be 5.2 per cent of labour force in the United States. In 2003 actual unemployment rate rose to 6.2 per cent in the United States.

This higher than natural rate of unemployment is due to recessionary conditions prevailing in the American economy. Full employment is said to prevail despite the existence of natural rate of unemployment which is unavoidable in a changing economy.

3. Cyclical Unemployment:

It is unemployment due to deficiency of effective demand. It is also called cyclical ‘Keynesian unemployment’. Advanced capitalist countries have been suffering from time to time from this type of unemployment. This type of unemployment greatly increases during periods of recession or depression.

Since recession or depression is one phase of the business cycles that generally occur in the industrialised developed economies, this type of unemployment is called cyclical unemployment. This type of unemployment is due to the fact that the total effective demand of the community is not sufficient to absorb the entire production of goods that can be produced with the available stock of capital.

In a private enterprise economy, production takes place in response to the profit motive. When businessmen cannot sell their entire output, their profit expectations are not fulfilled so that their reaction in the next period is to reduce their output.

The factors of production earn their incomes because of their participation in the process of production and when entrepreneurs decide to reduce their production, some factors of production become unemployed. Since employment is the major source of income for a great majority of the people, a fall in employment signifies a fall in their incomes also.

The deficiency of aggregate demand as an explanation of involuntary unemployment in the industrially advanced countries is associated with the name of J.M. Keynes. Classical and neo classical economists often denied the very existence of the problem. In the view of classical economists, a freely competitive capitalist economy could never suffer from a deficiency of aggregate effective demand.

This belief of Classical economists was based on Say’s Law of Markets according to which ‘supply creates its own demand’. This law advanced by J.B. Say (a French economist) and accepted by many other Classical economists in support of their contention was that there could never be a problem of general over-production and that if there was any unemployment it was because of hindrances placed in the working of the freely competitive price system by artificial monopolistic action on the part of trade unions, employers or the government.

The Concept of Full Employment:

The above analysis of the types of unemployment requires us to make the concept of full employment clear. Full employment may be defined as the situation wherein all those who are willing and able to work at prevailing wage rates are in fact employed for the work in which they are trained.

Two things must be noted in regard to this definition. First, full employment does not mean that everyone is employed. Some people like children, old men and physically or mentally handicapped people are not able to work. There can be no question of their being employed. In fact these people are not included in the labour force of the country.

Full employment will exist in spite of their not working. Secondly, some people called ‘idle rich’ though able to work are not willing to work because they get enough unearned incomes to live on. These people are also not included in the labour force of the country.

From above it follows that the unemployed people are those who are involuntarily idle. They are able and willing to work but the economy does not provide them jobs.

Another important qualification to the above definition is worth noting. It is that, at any given time, there is bound to be some frictional and structural unemployment owing to labour-saving technological improvements or a change in consumer tastes for the product of some individual industries, some workers are in the process of voluntarily changing jobs.

Some time may elapse before they get a new job after leaving the old one and, therefore, they remain temporarily unemployed. Similarly, some amount of seasonal unemployment is also inevitable. Experience indicates that the total amount of frictional and structural unemployment may amount to 4 to 5 per cent of the labour force.

Thus, full employment is said to exist in the economy even if there is prevailing some amount of frictional and structural unemployment in the economy. If the number of unemployed is greater than frictional and structural unemployment, only then we shall say that full employment does not prevail.

Keynesian full employment is, by definition, the maximum level of employment that private enterprise countries can attain without experiencing strong inflationary pressure. But for purposes of practical policy it is-necessary to reduce the concept to quantitative terms. It should be possible to say when employment is less than full so that remedial action is called for.

The concept, as defined above, raises two quantitative problems, namely, how to determine:

(1) The number of workers who at the ruling wage rates wish to be employed, and

(2) The inevitable minimum amount of frictional and structural unemployment.

The first, in turn, depends upon:

(a) The number of people able and willing to work for wages and

(b) The average number of hours of work which each of them wants to be employed.

The number of wage-employment seekers depends upon the following: the size of the population of working age, the persons who, having sufficient unearned incomes, choose to remain idle; the number of persons who, being in command of the requisite means of production, are self-employed; and the prevailing wage rates and other incentives provided.

Normally, apart from the size of the population of working age, these factors are likely to be more or less stable over short periods. For instance, the span of life which comes within the working age, while subject to variation as a result of changes in the period of schooling or in the normal age for retirement consequent on changes in health standards and longevity, is likely to remain unchanged in the short period.

Again, since most workers have no large unearned incomes or accumulated savings, they are compelled to try to remain continuously in employment. They cannot, therefore, throw their labour power in the market or withhold it there from in some unpredictable manner. Accordingly, the number who chooses to remain idle is unlikely to vary much in any short period. And so on.

Moreover, even when some of these factors change somewhat, the net quantitative effect may not be important. Higher wages, for instance, may induce some of the older workers to postpone their retirement while these may impel some of the married women workers, now that their husbands are better off, to relinquish their jobs.

The net effect of a rise in wages will not, therefore, be quantitatively important. The same applies to other actors. The size of the population of working age too, though not invariant, is measurable as it changes according to definite trends. It follows that the number of wage-seeking population can be determined with a great measure of accuracy.

And since the average number of hours of work which each wage-employment seeker wants to put in is likely to be more or less stable in any short period, the total amount of wage-employment sought is quite precisely measurable.

Similar observations may be made regarding the permissible allowance for structural and frictional unemployment. It varies from year to year in accordance with the magnitude of the structural shifts in demand and production that together with immobility of labour and lack of adequate information about the availability and locations of new jobs cause structural and frictional unemployment.

It may, therefore, be better defined as a range rather than as a precise figure. Since normally structural shifts in demand and production are unlikely to be violent or spasmodic and since in industrialised countries the incidence of frictional unemployment is bound to be quite low, the allowance for frictional and structural unemployment needs to be very small. A US study has suggested that this allowance need not be beyond a range of 4 to 5 per cent of the available labour force.

The possibility of measuring the size of the available labour force and the inevitable minimum of frictional and structural unemployment makes full employment a determinate quantity. For effective implementation of full-employment policy many countries fix a full-employment target expressed in terms of the permissible range of frictional and structural unemployment. Unemployment in excess of the fixed target would indicate a lapse from full employment calling for a remedial action.

Nature of Unemployment in Developing Countries:

Basic Explanation: Lack of Capital and other Productive Assets:

As stated above, Keynesian theory is mainly concerned with cyclical unemployment which emerges in the developed capitalist countries, specially in times of depression due to the fall in aggregate demand. During the period 1929-33, the developed capitalist economies suffered from severe depression which caused huge magnitude of unemployment.

Keynes analyzed this cyclical type of unemployment and asserted that it was caused by deficiency of aggregate demand. The nature of unemployment in developing countries is quite different; rather than being cyclical it is of chronic and long-term nature.

It is now almost universally recognized that the chronic unemployment and underemployment in less developed countries are not due to the lack of aggregate effective demand which, according to J.M. Keynes, was responsible for unemployment in developed countries in times of depression. Rather it is stated to be due to the lack of land, capital and other complementary resources in relation to the total population and labour force.

In the phenomenon examined by Keynes, not only labour force but also capital equipment were unemployed due to the deficiency of aggregate effective demand. In other words, in the Keynesian scheme, both the labour force and capital equipment were crying out for full employment which could be achieved by raising the level of aggregate monetary expenditure.

Thus, according to Joan Robinson:

“Keynes’ theory has little to say, directly, to the underdeveloped countries, for it was framed entirely in the context of an advanced industrial economy, with highly developed financial institutions and a sophisticated business class. The unemployment that concerned Keynes was accompanied by under utilisation of capacity already in existence. It had resulted from a fall in effective demand. The unemployment of underdeveloped economies arises because capacity and effective demand never have been great enough”.

The existence of unemployment due to lack of capital or other cooperating factors was an important question which was discussed by Marx in the context of advanced industrialized countries. Therefore such unemployment has often been called Marxian unemployment as distinguished from Keynesian unemployment which is caused by the deficiency of aggregate demand.

According to Marx, the number of workers employed by the capitalists depends upon the amount of capital in existence, and there is, what he called, “reserve army of unemployed labour” because there is inadequate capital to employ all the available labour.

If A stands for the total amount of available labour, N for the amount of labour-employment which is necessary to work with the existing stock of capital at its normal capacity, then A-N is the reserve army of unemployed labour.

Thus, the standard explanation for the existence of labour surplus or unemployment and under­employment in less developing countries like India is that as compared with the magnitude of population and labour force there is limited availability of capital or complementary resources which include land, factories, machines, tools and implements-the means with which labour produces.

Now, if the population grows faster than the stock of capital of a country, the entire addition to the labour force cannot be absorbed in productive employment because not enough instruments of production would be there to employ them. Since in less developed countries, the stock of capital has not been growing at a rate fast enough to keep pace with the growth of population, the ability to offer productive employment is very limited.

This has resulted in surplus labour which is manifested in the existence of huge magnitude of underemployment or disguised unemployment and open unemployment in both the rural and urban areas.

Capital as the major bottleneck to growth of employment was made popular by Harrod-Domar model of economic growth in which capital accumulation plays a pivotal role and according to which rate of growth of output depends upon the proportion of national income saved, divided by the capital-output ratio (g = s/v, where g stands for growth rate, s for the proportion of income saved and v for the capital-output ratio).

This model assumes capital coefficients (i.e., capital-output ratio and capital-labour ratio) to remain constant. With constant capital-output and capital-labour ratios, the more the capital, the more will be both output and employment. Therefore, when adapted to the less developed countries, this model suggests that the rate of growth of output and therefore of employment is determined by the growth of capital stock.

Wage Goods Constraint and Unemployment in Developing Countries:

It is worth mentioning a dissenting view regarding the cause of unemployment and under­employment in developing countries. This dissenting view had been put forward by Prof. PR. Brahmananda and C.N. Vakil of Bombay University. According to them, the basic cause of unemployment in developing countries is the deficiency of the availability of essential consumer goods, often called wage goods.

They point out that when the unemployed people or disguisedly unemployed people who are withdrawn from agriculture are engaged in some public works, they will have to be supplied with wage-goods so that employed labourers can subsist. If the wage-goods are not sufficiently available, their employment in capital-creation works cannot be sustained.

Given the real wage rate, a particular number of people can be employed in the economy, depending upon the supply of wage-goods in the economy. Now, the total quantity of wage-goods required to employ all the disguised unemployed workers in agriculture, according to them, would exceed the actual available supply of wage-goods even when the release of wage-goods by the withdrawal of disguised unemployed is taken into account.

Thus, according to Prof. Brahmananda and Vakil, there exists a wage-goods gap which is the fundamental cause of unemployment in labour-surplus developing countries.

A prominent Indian economist, Prof. A.K. Sen, has also emphasised the supply of wage-goods in determining employment in developing countries. According to Prof. Sen, the quantum of wage employment in the economy depends on the total supply of wage-goods on the one hand and the real wage-rate on the other.

If E represents the quantum of employment, M represents the supply of wage-goods and W, the real wage-rate, then the employment which can be provided will be given by the following equation.

E = M/W

It is thus evident from Sen’s above equation that if the supply of wage-goods (M) is less than the required supply to provide all labour force, then all workers cannot be fully employed, which will result in the emergence of unemployment. Thus, to generate enough employment and solve the problem of unemployment and underemployment, the wage-goods industries, especially agriculture, must be accorded a high priority in the strategy of economic development.

Most of the unemployment in underdeveloped countries is of a different nature from that in advanced and developed countries. A major part of unemployment in present-day developed countries is of cyclical nature which is due to deficiency of aggregate effective demand. But most of the unemployment in developing countries is not cyclical. Thus, in developing countries, there is not much Keynesian type short-term unemployment. Instead, it is a chronic problem.