Unemployment: Causes and Remedial Measures | Daily News

Unemployment: Causes and Remedial Measures

Almost all the countries strive to acquire a rapid economic development. Therefore, we should understand what economic development is, and in this regard, the questions asked by Professor Dudley Seers are important. They are: over a period of time what has been happening to poverty; what has been happening to unemployment; and what has been happening to inequality? If all these issues have declined from a high level, then beyond doubt, he says it has been a period of development for the country concerned. Out of these three issues unemployment is more vital because lessening unemployment automatically reduces other two problems as well. Job aspirants are unemployed for many reasons, and policy makers usually worry more about some types of unemployment over the other types. As such we find frictional unemployment, seasonal unemployment, structural unemployment and demand deficient unemployment.

Different types of unemployment

The labour market is in constant flux or instability. At any point of time, some sectors of the economy are growing, while other sectors are declining. Some workers quit their jobs while other are laid off. Some firms cut employment while other firms expand employment. New persons enter the labour market after completing their education, and some others re-enter after spending some times in the non-market sector. Thus, at any point in time, many workers are in between jobs. This type of unemployment can be identified as frictional unemployment.

Frictional unemployment arises because both workers and firms need time to locate each other to grasp the information about the value of the job. The existence of frictional unemployment does not suggest that there is a fundamental structural problem in the labour market, such as having an imbalance between the number of persons looking for work and the number of jobs available. As such, by its very nature, frictional unemployment leads to appear short unemployment spells. As a result, frictional unemployment is not viewed with alarm by policymakers. Frictional unemployment is also productive to some extent because the search activities of workers and firms improve the allocation of resources. There are also easy policy solutions for reducing frictional unemployment. Different to this, many workers are experiencing seasonal unemployment. Spells of seasonal unemployment are usually very predictable, and it is also not much serious.

Most of the unemployed workers will return to their former employers once the employment season started. Besides those two types of unemployment the policymakers are much serious of structural unemployment that creates a great deal of concern. Suppose the number of persons looking for jobs are equal the number of jobs available, then, there is no imbalance between the number being supplied and demanded. Structural unemployment can still arise if kinds of persons looking for work do not fit the jobs available. If skills are perfectly transferable across sectors, the laid-off workers can quickly move to the growing sectors. Skills however, might be specific to the worker’s job or industry, and laid-off workers lack the qualifications that expanding firms are looking for. As a result, the unemployment spells of the displaced workers might last for a long time because they must retool their skills.

Structural unemployment thus arises because of a mismatch between the skills that job aspirants are supplying and the skills that firms are demanding. Even if skills were perfectly portable/moveable across sectors, structural unemployment still arises if there is an imbalance between the number of workers looking for jobs and the number of jobs available. Although there is an excess supply of job seekers, the market does not clear this because the wage is sticky and cannot be adjusted downward. Union-mandated wage increases and government-imposed minimum wages introduce rigid wages into the labour market and prevent the market from clearing.

Sticky wages can explain the large fluctuations in unemployment rates over the business cycle as well. If the real wage is rigid, firms respond to a decline in demand for their products by cutting employment and generating demand-deficient unemployment. Taking this theoretical background of unemployment into consideration we can consider the Sri Lanka’s current incidence of unemployment.

Current level of unemployment

According to the latest data, the overall unemployment rate or the open unemployment rate has increased to 4.8% in 2019 from 4.4% experienced in 2018. Educated youths’ level of unemployment is as large as twice of the open unemployment rate of the country. Also, female level of unemployment is higher than that of male. When more than 20% of the under or hidden employment is added to the rate of open unemployment, even currently about 25% of the labour force does not have proper and continuous jobs. This rate of unemployment is extremely high compared to that of most of the countries in the Asian region, which have been following open market policies similar to Sri Lanka.

Causes for unemployment

A number of hypotheses have been presented by researchers to explain the Sri Lanka’s high level of unemployment. Rama (1994) says that out of these alternative hypotheses, the ‘skills mismatch’ or ‘structural mismatch’ hypothesis, first articulated by the ILO Mission led by Professor Dudley Seers to Sri Lanka in 1971, is most influential in explaining the issue of high level of unemployment.

The mismatch hypothesis highlights that although the economy has employment opportunities jobs expected by a large amount of job seekers are not adequately found or they do not fit the prevailing jobs. This skills mismatch concept has been further extended to cover vertical mismatch and horizontal mismatch by later researchers. If more qualified persons work in jobs which do not require that much of qualifications is identified as having a vertical mismatch. On the other hand, horizontal mismatches apply if a person qualified in a particular discipline works in a job in some other or unrelated area. As such, if a person with engineering degree works in a job that requires no engineering knowledge at all is a good example for understanding a horizontal mismatch.

In the Sri Lankan labour market, this types of vertical and horizontal mismatches are also common due to insufficient generation of higher value added jobs. In this setting, particularly, the private sector business leaders attribute this mismatch to the weaknesses of the system of higher education, complaining that the quality and the content of education are weak to inculcate the required skills, aptitude, and job orientation in the labour force. As such, many are of the opinion that the education system of the country is mainly responsible for creating such issues of mismatch. Also, at the same time some other researchers such as Patabendige (2006) and Kiribanda (1994) do not highlight this hypothesis as a major reason for appearing a high level of unemployment in the country, and they say that the private sector has failed to generate skill jobs and contribute to acquire a higher economic growth although this sector has been considered as the engine of growth after 1977 economic reforms.

Next, it is appropriate to consider other hypotheses to understand the diverse sources for appearing a high level of unemployment throughout the past years. In this sense, we can identify a number of alternative hypotheses such as: 1) Queuing up for government jobs as explained by Glewwe (1987) and Dickens and Lang (1996). Accordingly, until some job aspirants obtain government jobs they prefer to be unemployed, 2) The model presented by Rama (1994) is another Queuing up model which says due to the wedge between good and bad private sector jobs arising from the job security laws, some job aspirants are queuing up or waiting for more secured jobs; 3) Slow Economic growth Hypothesis highlighted by a number of economists say inadequate economic growth so far experienced is responsible for less job generation; 4) Factor market distortions hypothesis particularly highlighted by the Ten-Year plan (1958-1967) and Five year Plan (1972-76) and subsequent writers. They say due to factor market distortions caused by rigid labour laws, union influence and low labour productivity, labour has become more expensive than machinery (capital) for which various incentives are given to promote industrialization. But, this is true only in case of unskilled labourers since such labour and machinery are substitutable. But it is not true for skilled labour since machineries and skill labour are complementary and as a result, capital intensity increases employment generation for skilled labour, and it seems that these advocators of distortions view have not understood the idea of capital skill complementary hypothesis and 5) lack of innovation and retardation of technology development.

In Sri Lanka, the importance of investment in R & D (Research and Development) and in-house research have not been realized by both public and private sectors. Although the prescribed ratio with regard to R & D for developing country is 1% of country’s GDP Sri Lanka’s ratio is only around 0.1%and this is also mainly related to the public sector. As a result, business expansions are highly limited resulting in less employment generation.

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(The writer is a visiting lecturer and research consultant)

To be continued