COVID-19 Pandemic: UNEMPLOYMENT

One insightful thing to note is that the definition of unemployment will play a big role in this analysis. All macroeconomics high school students will be aware of that definition: Unemployment is the amount/number of people who are 'actively looking for a job' but not employed. Those who are 'actively looking for a job' encompass the overall labour force of the nation. Unemployment tends to peak during times of economic recession and contraction, albeit the period of time has not been long enough to determine whether we are undergoing a recession (6 months minimum, for a recession). However, people are predicting similar behaviour on economic indicators to the financial crisis that took place earlier this century. Nevertheless, at the same time, there will also be a reduction in the people who are 'actively looking for a job'. This means as well as the reduction in the employed workers' size, there will be a decrease in the labour force size also. However, as elaborated in the next paragraph, unemployment will still be present and at great amounts also. Which form of unemployment will be present post-lockdown? The greatest form will be cyclical (demand-deficient) unemployment, as all macroeconomic students know; this is the type of unemployment caused by a decrease in Aggregate Demand. Since we know that consumption is a key factor of AD, and there has been a high decrease in consumption, it is evident that the aggregate demand has decreased. How does a decrease in AD cause a decrease in employment? Demand for labour is known as derived-demand since it is based on the demand for the product that the labour produces. Therefore, since aggregate demand (especially consumption) has decreased, and demand for the product follows suit, so does the demand for labour. Nonetheless, the supply of labour is still constant, so there will be a surplus in the labour market implying unemployment. Interestingly enough, there are ways to tackle cyclical unemployment, any demand-side policy. Usually, the government increases its government expenditure, and that is what happened: an extensive level of fiscal stimuli published by governments all around the world. Moreover, this decrease in demand for the products will only prevail during the lockdown. Once the lockdown finishes, there will be a surge in demand for labour. This is why many employers are giving their employees a furlough (temporary) instead of a lay-off (permanent). An interesting model that can be used in this situation is the Shapiro-Stiglitz Efficiency Model (see the Advanced Reading section for an explanation of this model).