2.1.3 + 2.1.4

Question 1

Labour force survey (LFS)

Answer 1

The official measure of unemployment in the uk is based on the LFS, which is basked on approach recognised by the ILO

Question 2

What is the LFS

Answer 2

• asks 60-70k households to self classify as employed, unemployed or economically inactive

Question 3

To be classed as unemployment, a person must be:

Answer 3

• of working age (16-64)
• without a job, wanting a job, have actively sought work in the last four weeks, and are able to start work within the next two weeks; or are of work, have found a job and are waiting to start it in the next two weeks.

Question 4

Advantages of LFS

Answer 4

• Because the same methodology is used in many countries, it allows for inter-country comparisons.
• The criteria for assessing unemployment has changed little, so it allows quality time-series comparisons.
• provides a data set on many aspects of the labour marker

Question 5

Disadvantages of LFS

Answer 5

• because it is a survey of 60k, there will be some sampling errors, so data will always have a % margin of error
• costly and time consuming to carry out
• only conducted quarterly, so may not pick up changes in labour market quickly

Question 6

Claimant count measure

Answer 6

An alternative measure of unemployment
- simply counts the total no. Of recipients of job seekers allowance added to those who must be looking for work in order to claim universal credit

Question 7

Advantages of claimant count measure

Answer 7

• Accurate exact number of people who claim unemployment benefit can be calculated - makes it an inexpensive measure.
  • It is easy to classify whether someone is actively seeking work or not.
  • The data is produced monthly and therefore provides a timely indicator of economic activity.

Question 8

Disadvantages of claimant count measure

Answer 8

• There are a lot of unemployed people who do not meet the criteria for collecting unemployment benefits (i.e. have savings, or a partner who is in work, or are under 18)
  • People might be to too proud to claim
  • claimant count measure tends to be weak at picking up the level of underemployment

Question 9

Claimant count below or above LFS?

Answer 9

claimant count always below that of the labour force survey.
We normally use the unemployment rate measured as a percentage of the labour force The unemployment rate is a relative indicator, independent of country size and thus helps make cross-country comparisons.

Question 10

Employment rate definition

Answer 10

percentage of the population of working age in full-time or part-time paid work

Question 11

Full employment definition

Answer 11

When there enough unfilled job vacancies for all the unemployed to take work

Question 12

Labour force definition

Answer 12

The number of people of working age who are able, available and willing to work

Question 13

Long term unemployed

Answer 13

People unemployed for at least one year

Question 14

Unemployment rate definition

Answer 14

Percentage of the economically active population who are unemployed

Question 15

Under-employment occurs when people are counted within the Labour Force Survey as:

Answer 15

• Looking for an extra job or actively searching for a new job with longer hours to replace their current job.
  • Preferring to work longer hours in their current job.
• people overqualified for a particular job

Question 16

Underemployment means:

Answer 16

workers are under-utilized in terms of their abilities, qualifications and experience:
• Under-employment can be rising even though the rate of unemployment is declining.
• Under-employment tends to make the official unemployment figure look better than it is.

Question 17

Cyclical (demand-deficient) unemployment

Answer 17

• Cyclical or demand-deficient or Keynesian unemployment is caused by low levels of AD reducing the demand for labour across many industries.
  • AD falls = contraction in real national output and some businesses make workers redundant
  • The demand for labour is derived from demand for and spending on goods and services.
  • Cyclical unemployment can rise quickly in a recession, but it can increase in a period of slow growth

Question 18

Frictional unemployment

Answer 18

• Frictional unemployment is caused by workers seeking a better job or who are in-between jobs.
  • It affects those people who are new entrants to the labour market such as school and college leavers.
  • It affects people who rely on short-term contracts and move between employers more frequently
  • There is always some frictional unemployment in the labour market regardless of the economic cycle.

Question 19

How can frictional unemployment be reduced?

Answer 19

Frictional unemployment can be reduced by making information on jobs more widely available and making job search and applications more affordable e.g. with cheaper, more accessible transport

Question 20

Structural unemployment

Answer 20

• Structural unemployment is mainly caused by lack of suitable skills for the jobs available
  • Often people remain unemployed because of disincentive effects including the unemployment trap.
  • Structural unemployment can happen because of other barriers to people finding work including unaffordable
  housing, the high cost of childcare and expensive transport services.

Question 21

What is the unemployment trap?

Answer 21

• situation in which there is little financial incentive for someone who is unemployed to start working because the combined loss of welfare benefits and a need to pay income tax and other direct taxes might result in them being worse off.
  • high childcare costs can be a barrier to people finding work.

Question 22

What does neoclassical economics assume about prices and wages, and when would this assumption not be the case?

Answer 22

assumes that all prices and wages can easily adjust up or down to reach a new equilibrium, if demand and/or supply changes in product markets and labour markets.
- will not be the case if there is government intervention in the labour market, or the market has other imperfections – this is sometimes known as classical unemployment

Question 23

Imperfections in the market could include:

Answer 23

a. impact of trade unions, with their collective bargaining power pushing up wages above the free market equilibrium; this causes the supply of labour to be greater than the demand for labour i.e. unemployment.
b. The existence of minimum wages (such as the National Minimum Wage in the UK), which are in theory set above the free market equilibrium again causing supply of labour to be greater than demand for labour.

Question 24

Keynesian view of wages

Answer 24

Wages are sticky downwards, meaning they don’t fall

- also due to employers knowing that pay cuts can be damaging for worker morale and therefore productivity

Question 25

Mass unemployment

Answer 25

mass unemployment exists when officially 1 in 10 in labour force are counted as out of work

Question 26

Reasons for economic inactivity

Answer 26

• Student remaining in full-time education / training
  • Looking after family or home
  • Long-term sick
  • Retired people including those who have retired early
  • Discouraged workers who have given up active search for work

Question 27

Long term unemployment definition + causes

Answer 27

• people who have been out of work for a year +
• longer out = harder to find because skills drop, motivation drops = intensity of job search drops
• employers favour other oreille with history of consistent work

Question 28

negative economic and social impacts of unemployment

Answer 28

• Slower long-run trend rate of GDP growth
  • Risks of a period of price deflation because of falling aggregate demand
  • Rising income inequality
  • Erosion of people’s skills
  • Fiscal (budget) costs to the government as tax revenues shrink and state welfare spending increases.
  • Externalities from social problems such as increasing stress, worsening diet and family separation.

Question 29

Policies to reduce unemployment

Answer 29

• Macro stimulus policies (+ possible positive multiplier effects):
• Cutting the cost of employing extra workers
• Competitiveness Policies
• Reducing occupational mobility
• Improving geographical mobility
• Stimulate stronger work incentives

Question 30

Macro stimulus policies

Answer 30

• Low interest rates + improving credit supply to businesses.
• Depreciation in the exchange rate (to help exporters).
• Infrastructure (capital) investment projects (a supply-side fiscal policy) such as an increase in spending on new roads, schools and hospital buildings + environmental infrastructure.

Question 31

Competitive policies:

Answer 31

• Reductions in corporation tax (to increase business investment and attract FDI).
  o Tax incentives for research / innovation spending.
  o Enterprise policies to encourage new business start-ups.

Question 32

Reducing occupational mobility

Answer 32

• Better funding for and more effective work training.
• Teaching new skills e.g. Coding for gaming, languages.
• An expansion of apprenticeship / internship programmes.

Question 33

Improving geographical mobility

Answer 33

• rise in housebuilding to keep property prices lower and encourage more affordable housing rents.
• Active regional policy to improve transport infrastructure.

Question 34

Stimulate stronger work incentives:

Answer 34

• Higher minimum wage (now rebranded as a national living wage).
• Increased tax-free allowance of £12,500 from 2019.
• Welfare reforms to help reduce the risk of the poverty trap.

Question 35

Economic and social benefits of falling unemployment

Answer 35

1. Increased employment – which then increases real GDP and helps to lift living standards and demand.
2. More people in work – extra tax revenues for the government
3. Social costs of high unemployment are severe – therefore progress in cutting it has important economic + social benefits.

Question 36

Potential disadvantages of falling unemployment

Answer 36

1. Extra spending from expanding labour market might worsen the current account.
2. Risk of an acceleration in demand-pull and cost-push inflationary pressures if unemployment falls rapidly.
3. Fewer spare labour will mean a rise in unfilled vacancies; labour shortages might put off some inward investment.

Question 37

What is the balance of payments? (BOP)

Answer 37

• The balance of payments (BOP) records all financial transactions made between consumers, businesses and the
  government in one country with other nations
• The current account of the balance of payments is the main measure of a country’s external trade performance

Question 38

What are the positive and negative entries?

Answer 38

Positive - inflows of foreign currency (exports sold overseas)
Negative - outflows of foreign currency, imported goods cause money to leave circular flow of income

Question 39

Trade Balance in Goods

Answer 39

• Manufactured goods, components, raw materials, energy such as oil and gas
• Capital technology / machinery

Question 40

Trade Balance in Services

Answer 40

• Banking, Insurance, Consultancy
• Tourism, Transport, Logistics
• Shipping, Education, Health,
• Research, Cultural Arts

Question 41

Net Primary Income from Overseas

Assets

Answer 41

•Flow of profits, interest and dividends from investments in other
countries
•Net remittance flows from migrant workers

Question 42

Net Secondary Income

Answer 42

• Overseas aid / debt relief

•UK Payments to the European Union

Question 43

Current account deficit

Answer 43

• This is when a country is running an external deficit.
  o There is a net outflow of income from the economy’s circular flow.
  o Current account deficit nations are debtor countries.
  o Examples - USA + UK.

Question 44

Exam hints:

Questions usually focus on one of three areas:

Answer 44

1- The extent to which a current account deficit (or surplus!) is a problem for an economy
2- Possible causes of a current account deficit (or surplus)
3- Possible policies for correcting a current account deficit (or surplus)

Question 45

Exam grade-boosting ideas to bear in mind:

Answer 45

The current account is more than the trade balance, so students should consider net primary and net secondary income.
The policies for correcting a current account deficit depend on what has caused it
- deficits can be caused by a booming economy in which producers need to purchase more raw materials from abroad to keep up with domestic demand
- or they could be caused by major structural problems in the economy which make exports undesirable.

Question 46

Does a current account deficit matter?

Answer 46

1. Can lead to a loss of AD which then causes a slower rate of real GDP growth and thereby reduced living standards.
2. Might bring about a loss of jobs in home-based industries, this may lead to regional decline and structural unemployment problems.
3. Can lead to currency weakness and higher inflation and a then country may run short of vital foreign currency reserves.
4. A trade deficit might actually be a reflection/symptom of a lack of competitiveness / supply-side weaknesses.

Question 47

Causes of current account deficit:

Answer 47

• Poor price and non price competitiveness
• strong exchange rate affecting exports and imports
• recession in one or more major trade partner countries
• volatile global prices
• booming domestic economy

Question 48

Poor price and non price competitiveness

Answer 48

• Higher relative inflation than a nation’s trading partners i.e. one country’s inflation is higher than another
  • Low levels of capital investment and research and development spending.
  • Weaknesses in design, branding and other non-price factors

Question 49

Strong exchange rates affecting imports and exports

Answer 49

• High currency value increases the prices of exports perhaps causing falling sales.
  • Appreciating currency makes imports cheaper, a substitute for home output.

Question 50

Recession in one or more major trade partner countries

Answer 50

• Recession in a trade partner cuts the value of exported goods and services to these countries.
  • Businesses may find barriers/delays to switching towards markets of faster-growth nations.

Question 51

Volatile global prices

Answer 51

• Exporters of primary commodities might be hit by a fall in global prices.
  • Commodity-importing nations could be hit by higher world prices for oil and gas.

Question 52

Booming domestic economy

Answer 52

• Domestic producers need to import more raw materials from abroad
  • Households, especially with a high propensity to import, buying more imports due to having more income.

Question 53

key features of global trade patterns

Answer 53

• Around a quarter of all output produced globally is exported.
  • Production chains are becoming more complex , a final good might have been made in many stages across many countries; 30% of global exports have been made from imported goods.
  • Bilateral trade is becoming increasingly more important
  • China, US, Germany, France and Japan are 40% of all international trade.