Do changes in Aggregate Demand effect unemployment?

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Brian Moser
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This is probably and excessively stupid question... but is it only a change in aggregate supply that influences the level of unemployment, or would a change in aggregate demand also effect it?

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gr8wizard10
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Changes in aggregate demand would effect unemployment.
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Swaany
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(Original post by Brian Moser)
This is probably and excessively stupid question... but is it only a change in aggregate supply that influences the level of unemployment, or would a change in aggregate demand also effect it?

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The aggregate demand will definitely affect employment. For example, if AD curve shifts to the right (increases) then employment increases because the economy is growing, and there is more output, therefore firms will want to employ more workers to meet the demand.

Whereas if aggregate demand shifts to the left (decreases) then unemployment increases, because the economy's growth is shrinking, thus less output, therefore firms will need to make people redundant to reduce costs, because there is low demand for their goods and services if the economy is shrinking.


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furquan
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Think of the components C + I + G (X-M) an increase in investment would create more employment
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MidnightDream
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Yes it would affect unemployment if AD increases employment increases whilst if AD decreases employment decreases
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Qtj987
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YEP!
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Brian Moser
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(Original post by Swaany)
The aggregate demand will definitely affect employment. For example, if AD curve shifts to the right (increases) then employment increases because the economy is growing, and there is more output, therefore firms will want to employ more workers to meet the demand.

Whereas if aggregate demand shifts to the left (decreases) then unemployment increases, because the economy's growth is shrinking, thus less output, therefore firms will need to make people redundant to reduce costs, because there is low demand for their goods and services if the economy is shrinking.


Hope this helps
So unemployment would fall, unconditionally? I mean, what if the increased demand was serviced through capital intensive production methods - rather than labour intensive production methods?
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Swaany
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(Original post by Brian Moser)
So unemployment would fall, unconditionally? I mean, what if the increased demand was serviced through capital intensive production methods - rather than labour intensive production methods?
I think I get what you're trying to say but you're probably getting confused.

Unemployment will fall if any of the components of aggregate demand e.g. consumption, investment, government expenditure, and the difference between exports and imports, fall (assuming ceteris paribus). These components make up all of the demand in an economy, and since labour is a type of derived demand (when demand decreases, employment level decreases and vice versa), it means that changes in aggregate demand will affect employment levels - either increase or decrease.

Since you're talking about aggregate demand, capital intensive and labour intensive production methods have nothing to do with aggregate demand, because they're not a component of it, therefore they won't affect unemployment.

But of course, if you were not talking about aggregate demand and just demand alone, then no unemployment will rise if the increased demand (I believe you're talking about a firm demanding workers) was serviced through capital intensive production methods, rather than labour intensive production methods. Why? Because the demand is serviced through capital (machinery) rather than labour (workers), therefore unemployment would rise because the firm is not employing labour workers, they are utilising capital!

When it comes to aggregate demand, you talk about the components of it, not other factors like capital and labour intensive production methods.

So just remember that changes in aggregate demand will affect employment levels, because labour is a type of derived demand. And bear in mind the components of it.

Hope this clears things up a bit, if not please let me know
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RowanL
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When we talk about AD we are talking about the whole economy, and therefore the kind of thing you're suggesting doesn't really apply. What it is important to recognise is the extent to which a rise (or fall) in AD affects unemployment is variable and depends on the level of spare capacity in the economy - after the 2008/9 recession purely from the fall in AD you would have expected UK unemployment to be signifiantly higher than it actually was because instead of making workers unemployed companies cut their hours increasing the slack in the economy. When the economy picked up again this meant AD could initially increase with little increase in employment - because there was plenty of spare capacity in the people that were already employed. Obviously if the increase in AD is mainly down to growth in industries which are not very labour intensive then you will see a smaller rise in employment than you would otherwise, but either way aggregate demand and unemployment rates are negatively correlated.

I do see what you're getting at but consider it this way say one sector of the economy lowers prices because of an investment in capitol which lowers its unit costs some of the money that people save will go on to be spent in other areas of the economy which are labour intensive like service industries which will have to employ more people to cope with the increased demand. Because the whole of the economy is linked you couldn't have an increase in AD solely caused by capitol intensive production methods being used.
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RVNmax
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http://positivefuturist.com/archive/381.html
http://pando.com/2014/03/12/good-new...m-is-possible/
http://www.fastcolabs.com/3013063/wh...e-all-our-jobs

I'm not sure I get you guys. Taking it to the extreme here:
From these links, it implies that unemployment will rise if jobs are done mainly by robots (capital intensive?). Then they say that the only way it won't rise is if the job creation is greater then the jobs lost. But they don't think that would be possible. I mean how can it be? Obviously, some of those unemployed can do something else, but there can't be that many jobs created for people to feed themselves.
What will all those people do? I don't quite understand, won't the unemployment be way too high in this case. (I do notice the link to communism in the second one, but just don't quite understand how wealth will be distributed and how that affects unemployment)

(Original post by RowanL)
say one sector of the economy lowers prices because of an investment in capitol which lowers its unit costs some of the money that people save will go on to be spent in other areas of the economy which are labour intensive like service industries which will have to employ more people to cope with the increased demand. Because the whole of the economy is linked you couldn't have an increase in AD solely caused by capitol intensive production methods being used.
I'm kind of understanding this, but how can you guarantee that the labour intensive industries will be able to hire the amount of people who become unemployed from capital industries.
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RowanL
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(Original post by RVNmax)
I'm kind of understanding this, but how can you guarantee that the labour intensive industries will be able to hire the amount of people who become unemployed from capital industries.
Firstly, if industries are already highly capitol intensive then an increase in the productivity of capitol or an increase in capitol investment will not lead to significant unemployment but the idea on an industry level is as follows. An increase in the Marginal Product of Labour because of better capitol makes each until of labour more efficient will shift the supply curve outwards increasing supply of the product and prices, so the increased level of capitol wouldn't increase unemployment in this situation. If each unit of labour is more efficient - say because each lumberjack now has a chainsaw rather than an axe then that doesn't mean we fire all the lumberjacks until we are producing the same amount of product that we were before, it means that we can produce more logs i.e. supply of logs expands and the price of log falls so the demand for logs will be bigger.

This is a good article to explain what I'm talking about http://http://www.economicshelp.org/...ddite-fallacy/
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RVNmax
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(Original post by RowanL)
Firstly, if industries are already highly capitol intensive then an increase in the productivity of capitol or an increase in capitol investment will not lead to significant unemployment but the idea on an industry level is as follows. An increase in the Marginal Product of Labour because of better capitol makes each until of labour more efficient will shift the supply curve outwards increasing supply of the product and prices, so the increased level of capitol wouldn't increase unemployment in this situation. If each unit of labour is more efficient - say because each lumberjack now has a chainsaw rather than an axe then that doesn't mean we fire all the lumberjacks until we are producing the same amount of product that we were before, it means that we can produce more logs i.e. supply of logs expands and the price of log falls so the demand for logs will be bigger.

This is a good article to explain what I'm talking about http://http://www.economicshelp.org/...ddite-fallacy/
you accidentally put a double 'http' at the front, but thanks for that, it was quite interesting.

At the bottom of that link, it did say that the government should have done more to address the sudden unemployment of the workers who lost their jobs. You could say that at the moment the government is also struggling to get people in jobs. If industries are further capitalised, won't we see the government struggling even more and there being an even greater time period of restructuring to get those who become unemployed into a job. To me that would be as good as saying that the capital investment will at a certain point cause unemployment.

Another way of putting what I'm saying: If what you're saying is true (that workers who lose jobs can do something else), why is there even unemployment at the moment.
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RowanL
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(Original post by RVNmax)
At the bottom of that link, it did say that the government should have done more to address the sudden unemployment of the workers who lost their jobs. You could say that at the moment the government is also struggling to get people in jobs. If industries are further capitalised, won't we see the government struggling even more and there being an even greater time period of restructuring to get those who become unemployed into a job. To me that would be as good as saying that the capital investment will at a certain point cause unemployment.

Another way of putting what I'm saying: If what you're saying is true (that workers who lose jobs can do something else), why is there even unemployment at the moment.
What the article is suggesting at the bottom is that the government should have done more to address the temporary unemployment of the workers who lost their jobs i.e. they should have intervened to speed up the process of retraining to move into different areas. Yes, further capitalisation will create more of this temporary unemployment but what is being suggested is that it isn't permanent. There will always be labour intensive jobs that machines can't do in whole industries that we may not currently envisage (before flight was possible who would have imagined the huge airline industries that we have now). Workers who lose their jobs will move into other industries but it takes time and that is why there is unemployment while this restructuring occurs. I am not saying there is not some component of unemployment which is permanent, but that is not as a result of technology as there are other factors at play like unemployment benefits and lack of access to education and training schemes.
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