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Effects of Unemployment on Economy


Unemployment is defined as a situation where someone of working age is not able to get a job but would like to be in full time employment. Unemployment is often used as a measure of the health of the economy. The most frequently cited measure of unemployment is the unemployment rate. This is the number of unemployed persons divided by the number of people in the labor force.

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The unemployment rate in Pakistan and other countries is defined as the number of unemployed people as percent of the labor force. The labor force includes the people who are either employed or unemployed, i.e. who don’t have a job but are actively looking for one. The labor force does not include people who are not looking for work, children, and the retired.

If you’re unemployed it simply means you currently don’t have a job. It DOESN’T mean you’re worthless, not a good worker or likely to have a miserable future. Far from it, in fact!

When the Government talks about ‘unemployment’ and ‘the unemployed’, it’s easy to think of people of everyone in this situation being in the same boat… Nothing could be further from the truth!


In economics, unemployment occurs when people are without work while actively searching for employment. The unemployment rate is a percentage, and calculated by dividing the number of unemployed individuals by the number of all currently employed individuals in the labor force. The causes, consequences, and solutions vary based on the specific type of unemployment that is present within a country.

Types of unemployment

  • Structural Unemployment

Structural unemployment is one of the main types of unemployment within an economic system. It focuses on the structural problems within an economy and inefficiencies in labor markets. Structural unemployment occurs when a labor market is not able to provide jobs for everyone who is seeking employment. There is a mismatch between the skills of the unemployed workers and the skills needed for the jobs that are available.

  • Frictional Unemployment

It is the time period between jobs when a worker is searching for or transitioning from one job to another. Frictional unemployment is always present to some degree in an economy. It occurs when there is a mismatch between the workers and jobs.

  • Cyclical Unemployment

Cyclical unemployment is a type of unemployment that occurs when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. In an economy, demand for most goods falls, less production is needed, and less workers are needed. With cyclical unemployment the number of unemployed workers is greater that the number of job vacancies.

Source: Boundless. “Types of Unemployment: Frictional, Structural, Cyclical.” Boundless Economics. Boundless, 27 Jun. 2014.

The Natural Unemployment Rate

The natural rate of unemployment is a combination of structural and frictional unemployment. It is present in an efficient and expanding economy when labor and resource markets are at equilibrium. The natural unemployment rate occurs within an economy when disturbances are not present.

How Unemployment is Measured

Unemployment is measured by the Bureau of Labor Statistic (BLU). The Bureau of Labor Statistics (BLS) regularly gathers data from 60,000 households to compute a number of macroeconomic figures. One of these figures is the unemployment rate.

To compute the unemployment rate, the first step is to place people into one of three categories:

  1. Employed: People are counted as employed if they have full-time jobs. That said, people are also counted as employed if they have part-time jobs, are self-employed, or work for a family business (even if they don’t explicitly get paid for doing so). In addition, people are counted as employed if they are on vacation, maternity leave, etc.
  2. Unemployed: Unemployed workers are people who are able to work, have actively looked for work in the past four weeks, but have not found or taken a job or been recalled to a previous job.
  3. Labor force: The labor force includes the total number of people who are working or unemployed. It’s an important measurement of who is willing and able to work.

Once people have been placed into the appropriate categories, the total labor force can be calculated as the total number of workers who are either employed or unemployed. The unemployment rate is the ratio of the number of people unemployed over the total number of people in the labor force.

For example, let’s say that a survey by the BLS reveals 20 people employed 5 people unemployed, and 40 people out of the labor force. Then the labor force would be the sum of the employed plus the unemployed or 20 + 5 = 25 people. The unemployment rate is the ratio of the unemployed to the total labor force or (5 / 25) = 20%

Situation of Unemployment in Pakistan

Unemployment Rate in Pakistan is expected to increase to 6.20 percent in the fourth quarter of 2014 from 6.00 percent in the second quarter of 2013. In 2015, Unemployment Rate is expected to increase to 6.10 percent. In the long-term, Unemployment Rate in Pakistan is projected to trend around 6.10, 6.17 and 6.17 percent in the years of 2020, 2030 and 2050 respectively. Unemployment Rate in Pakistan is reported by the Pakistan Bureau of Statistics.

Situation of Unemployment in Neighboring Countries


Unemployment Rate in China remained unchanged at 4.10 percent in the third quarter of 2014 from 4.10 percent in the third quarter of 2014. Unemployment Rate in China averaged 4.14 percent from 2002 until 2014, reaching an all-time high of 4.30 percent in the fourth quarter of 2003 and a record low of 3.90 percent in the third quarter of 2002. Unemployment Rate in China is reported by the Ministry of Human Resources and Social Security of the PRC.


Unemployment Rate in India decreased to 5.20 percent in 2012 from 6.30 percent in 2011. Unemployment Rate in India averaged 7.58 Percent from 1983 until 2012, reaching an all-time high of 9.40 Percent in 2009 and a record low of 5.20 Percent in 2012. Unemployment Rate in India is reported by the Ministry of Labour and Employment, India.


Unemployment Rate in Iran remained unchanged at 9.50 percent in the third quarter of 2014 from 9.50 percent in the third quarter of 2014. Unemployment Rate in Iran averaged 11.69 Percent from 2001 until 2014, reaching an all-time high of 14.70 Percent in the first quarter of 2002 and a record low of 9.50 Percent in the fourth quarter of 2008. Unemployment Rate in Iran is reported by the Central Bank of Iran.

Causes and Solution of Unemployment

The major problem being faced in the world today is unemployment. Pakistan is facing many socioeconomic problems and unemployment is one of them. As we have seen the ratio of unemployment is increasing rapidly day by day because of lack of resources, this result in decrease in people’s income and also causing many problems for its people like:

  • Poverty rate is also on a rise due to which many unskilled and uneducated people can be found easily in our country.
  • Labour class is affected by unemployment.

Causes of Unemployment in Pakistan:

Now we’ll look on some of the major causes of unemployment in Pakistan. They are as follows:

1. Growth of Population:

In Pakistan one of the main problems regarding unemployment is uncontrolled growth of population. At this time in our country the population is increasing at very high rate. According to an estimate the population of Pakistan is increasing at the rate of 2.2%.As we all know that the EDUCATION SYSTEM OF PAKISTAN is not much good therefore increasing population means to bring more unskilled and uneducated person into the labour field. Government or any other companies at a time cannot provide jobs or work places to such huge number of uneducated people.

2. Poor Education System:

Secondly our education sector is also one of the main cause of unemployment. Unfortunately there are many technical colleges and institutions which are only selling degrees because technical education which is being given in these institutions has no value, they are not giving them proper skills and training therefore due to lack of experience and skills people are wondering about for jobs.

3. Violence and Terrorist Activities:

As we all know very well that the Karachi is centre of trade and business in Pakistan but there are no rules and regulations in Karachi as everyone is violating law in the biggest city of Pakistan. Another cause of unemployment is terrorism. Terrorist activities in Pakistan are on peak at this time especially in Karachi, therefore situation in Karachi is really threatening, and due to this the nationals and as well as foreigners are frightened to invest in Pakistan. So when investors will not invest so how can job or earning opportunities are being created? Then how can unemployment can be reduced?

4. Energy Crisis:

Our homeland Pakistan has so many natural resources and also an atomic power but suffering from energy crisis. Can anyone believe that? No doubt there are many sources of producing energy in Pakistan but due to lack of proper planning and efforts Pakistan is having problem of energy crisis. Due to this issue the government of Pakistan is unable to provide electricity to residential areas in Pakistan than how can energy or electricity can be provided to factories and industries. Therefore factories and industries that are required energy, due to shortage of electricity are transferring their business in other Asian countries like Bangladesh, India and as well as Sri Lanka. As a result a large number of labours are becoming the victims of unemployment.

Because of an unfortunate current situation of Pakistan, a number of industries are limited and at the same time number of graduates keep increasing which causes a growth in unemployment level.

5. High Age of Retirement:

As 60 years is the age of retirement in Pakistan and it is really high age of retirement. Many educated people are in wait of jobs but high age of retirement is making young one unemployed and frustrated.

6. Afghan Refugees:

The additional problem of unemployment in Pakistan are the Afghan refugees. When American army attacked Afghanistan in 2001, plenty of Afghans migrated to Pakistan to save their lives until the situation in their country improves but the situation in Afghanistan is still critical. The migrated people caused a decrease in wages of the labour markets as they are ready to work for fewer wages.

7. Less Number of Vacancies:

One of the biggest issue of Pakistani students is that whenever there comes a new trend or a new technology, then everyone follows to study that specific subject only rather than diversifying themselves they all follow the same pattern. Later, when there are only 5-10 vacancies of that specific field the number of graduates of that field are in thousands. This is the reason why not everyone gets the appointment letter. The numbers of vacancies are only few in number but the job seekers are countless.

Solution of Unemployment in Pakistan:

It will be a tough task for government to solve this major problem of Pakistan due to the huge population but still there are various solutions to solve this problem.

  • Firstly to reduce unemployment in Pakistan, the very first thing to do is the proper planning by the government of Pakistan.
  • The education system of Pakistan should be equal and well managed. Education sector should be improved.
  • Well recognized training and technical institutions are need to be established where skills programs are offered.
  • The age of retirement should be at least 55 years.
  • For increasing employment ratio and investments, we have to solve energy crisis so that investor comes to Pakistan thus job placement will automatically be created. The government need to make such policies and plans that attracts foreign investments in our country which will lead to more job opportunities.
  • Acts like terrorism should be condemned and stopped. There should be peace across the country, so that foreigners will not hesitate to invest in Pakistan.
  • The agriculture sector should be developed. The government need to officially announce different multiple packages for the betterment and development of the agricultural sector of Pakistan-to create more job opportunities.
  • Jobs should be given purely on merits.
  • Encourage multinational companies to business in Pakistan.
  • Family planning centers should be opened to control the flow of over population.
  • To resolve this major issue of Pakistan, it not only requires planning by the government but there should be proper implementation of plans to make sure that the crisis of unemployment in Pakistan can be solved at the earliest.

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