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Revision:UnemploymentUnemployment • Low levels of unemployment is one of the main macroeconomic goals of every government. • Unemployment is defined as ‘people of a working age who are without work, available to work and actively seeking employment’ (international labour organisation) • The unemployment rate is expressed as a percentage of the total labour force, not the whole population. The labour force is the ‘economically active population.’ people who are not part of the labour force are those out of the age range, students, parents who stay at home, retired people, and people who choose not to work. They are therefore not considered to be unemployed. • Each country has its own national system for measuring the amount of people unemployed. Information is gathered from censuses and surveys, as well as administrative records such as unemployment insurance records and social security information. There may well be inaccuracies and inconsistency in definitions across countries. Distribution of unemployment (the rate doesn’t account for these) • Geographical • Age • Ethnic • Gender
• Costs of unemployment to the unemployed people themselves (lower standard of living because of less income, high levels of stress, depression, mental health problems, break-downs, suicide levels increase) • Costs to society – can be seen in the form of poverty, higher crime rates, vandalism, increases gang activities. While it would be a simplification to blame these problems entirely on unemployment, they are not unconnected. • Costs of unemployment to the economy as a whole – a PPF can be used to illustrate the key problem facing an economy with unemployment – if actual output is less than potential output due to unemployment of the factor of production, labour, then the economy is forgoing possible output and would be operating at a point within its production possibility curve. This loss of output, and income to the unemployed, has other implications for the economy as a whole. There is an opportunity cost for the government’s spending on unemployment benefits. Also if unemployed people who have lower incomes pay less direct tax and spend less money, so the government earns less in indirect tax as well. The government may have to spend more money to solve the social problems created by unemployment. • The costs above are really those associated with long term unemployment. The costs increase the longer a person is unemployed.
Types of unemployment • Real-wage unemployment. Same as minimum price. Where the wage rate is above the equilibrium price, meaning there is excess supply. Solutions-reduce the power of trade unions, reduce minimum wage. Evaluate-hard to negotiate, and explain that those affected by minimum wage are the poorest and therefore you are taking money away from those who really need it. Worsening distribution of income. • Demand-deficient. As an economy experiences slower growth (or negative growth in the case of a recession) aggregate demand falls. Leads to a fall in demand for labour, as firms cut back on production. Wages are sticky downwards-people don’t want their wages to fall and firms don’t like to lower them because it will lead to decreased productivity. So unemployment is created. Solutions-demand side policies. • Equilibrium unemployment. Jobs exist, but people are unwilling or unable to take the jobs that are available. • At any given wage rate there will be more people looking for jobs than those who are actually willing/able to take jobs. (remember the ASl curve shows those who are willing and able to take a job at a given wage rate) • The fact that there is no disequilibrium unemployment in the economy means there are jobs availible, but people just can’t or are unwilling to take them. E.g. perhaps there are vacancies in the financial services industry, but but unemployed assembly line workers are unable to take these jobs because they lack the appropriate education and skills. Or perhaps there are jobs for computer programmers, yet unemployed computer programmers don’t know the jobs are availible. • Gap between supply of labour and labour force curve is smaller at higher wages because at a higher wage more people will be wiling to work/likely to correct the reason they can’t work. • An economy is at the full employment level when the unemployment that exists is only the natural unemployment. • There are a few types. • Frictional unemployment-short term unemployment that occurs when people are in between jobs, or have left education and are ready to take up their first job. Not considered to be negative-if they have left a job it assumes they are able to work, and if they are looking for a better one, they will be more productive. Solutions-reduce the unemployment benefits that are availible whilst looking for a job. Increase information availible about jobs-better advertisment through the internet, newspapers etc… • Seasonal unemployment-sometimes in an economy people are employed on a seasonal basis. Tourism industry. Ski instructors only work in the winter. Encourage people to take different jobs in their ‘off season.’ • Structural unemployment-the worst type of equilibrium unemployment. Occurs as the result of the changing structure of an economy. Occurs when there is a permanent fall in demand for a particular type of labour. Natural in a growing economy. As some jobs disappear (mining) new ones appear (computers.) Often results in long term unemployment as people who lose jobs in one area lack the appropriate skills to take on the newly created jobs. We say that they lack the occupational mobility to change jobs. Could be geographical immobility too. Causes of structural unemployment-technologies make certain types of labour unnecessary, lower cost labour in foreign countries, changes in consumer taste. Solutions-education system that trains people to be educationally flexible. Long term solution. Spending on adult retraining programmes. Give subsidies to firms to train workers, provide subsidies for firms who want to move to a place where jobs exist. Apprentice programmes. However they have a high opportunity cost, and policies are only effective in the long term. Or reduce unemployment benefits, and deregulation. BUT evaluate. Market regulations protect workers. So if they were removed, workers would have a worse time. So although unemployment may fall, there would be a high cost for the workers themselves. Contributes to inequality in an economy where the benefits are not shared by all. • General points-in order to run an expansionary fiscal policy, a government may have to run a budget deficit and spend more than it takes in revenues. Only a problem in the long term. If governments reduce taxes, there is no guarantee people will spend the extra disposable income, especially if consumer confidence is low. Same with interest rates on spending and investment. Time lag before they come into effect, and by that time the economy could have recovered, making the extra pressures purely inflationary. • Using demand management at the full employment level will only be inflationary because there will always be a natural rate. • Could be difficult to distinguish between the different types of unemployment. Or an economy could be suffering from different types of unemployment. Best to use a mix of policies. Demand side to narrow business cycle fluctuations and reduce output gaps. Supply side to ensure the labour force is suitably skilled and flexible to adapt to changing conditions. • Crowding out-if a government runs a budget deficit, borrows money. These are sold as bonds to financial institutions who sell them to people who want to save money. This is increasing demand for loanable funds in the economy. This results in an increased interest rate, and a disincentive for businesses to invest as they see less return on their investment. This reduces AD. |
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