macro hot topics 2

Question 1

unemployment

Answer 1

• cyclical unemployment rate of 4.2%
• comes from a dodgy LFS survey with only 15000 participants, usually 100000 people take part so not reliable measuremtn, thought to be higher
• economic inactivity 22.2% much higher after covid due to rise in long term sickness and people havent returned to Lf after covid if in 50/60. potentail growth reduces and labour shortages
• youth unemployment: (16-24) 11% and very weak consumer confidence
• firms struggling to get workers so workers have bargained and now 5.6% in wage growth
• in real terms, wage growth has gone up as inflation is 3.2%

Question 2

costs of unemployment

Answer 2

• lost output (operating inside PPF curve) due to unemployed labour in the economy. Consumers get fewer goods and services so LS lower and growth is limied
• Less incomes tax rev, less VAT tax revenue due to less spending and less corp tax and biz profits fall. Gov spending rises due to automatic stabiliser so budget deficit and national debt rises and finances rise
• so maybe future cuts to spending/contractionary policies recover this, or borrowing? opp cost of debt interest
• poverty, crime, protests, mental health issues that burdens gov finance
• other contunries suffer as demand fro their exports fall
• incomes lost as they fall in to relative poverty, cuasing more social costs. More borrowing to cover costsfuelling bankruptcy
• HYSTERESIS - WHEN UNEMPLOYEMNT BECOMES LONG TERM CAUSING DECLINE IN THEIR SKILLS AND THEIR SKILLS BECOME OUTDATED, POSSIBLY OUTCOMPETED BY NEW ENTRANTS. This means they must rely on benefits so limited spending constraining aggregate demand so growth limited
• hysteresis - eventually become discouraged inactivity workers. Reduces size of Labour force so LRAS and long term growth rates decline

Question 3

Pros of unemployment

Answer 3

• greater pool of workers for firms to choose from, choose most productivr workers so lowest unit costs
• low inflation as huge excess supply of labour reduces workers wage bargaining power so costs of production remain low as wage growth is limited and consumer prices remain lwo, inflation controlled
• ## improved Current account position as imports fall due to reduced icnomes and reduce spending power so deficit reduced

Question 4

evaluate the consequences of unemployment

Answer 4

are costs bigger than benefits or vice versa
- unemployment at the natural rate is fine and benefits bigger here
- duration; long term rates of une,lpyment (year or more) is bad as hysteresis is highly likelu
- type is crucial; structrual is deadly, caused by occupational immobility which is so hard to fix only with SSPs but big time lag. But cyclical isn’t bad as recession dont last forever same for frictional
- distribution of unemployment; youth unemployment is very bad bc they are more liable to suffer long term unemlpoymet so easy for them to be outcompeted and lose skills as they dont have any skills to start with, hysteresis

Question 5

What is natural unemlpoyment

Answer 5

unemlpoyment which occurs when labour market is at equilibrium, consisting of structual, frictional and seasonal unemployment

Question 6

outline a few policies to reduce unemployment

Answer 6

• Fiscal stimulus, such as tax cuts or increased government spending, to boost demand and create jobs.
• Monetary policy, such as lowering interest rates, to encourage businesses to invest and create jobs.
• Education and training programs to improve the skills of the workforce and make them more employable.
• labour market reforms to make it easier for businesses to hire and fire employees and to encourage flexibility in the labor market.

Question 7

Pros and cons of policy to reduce cyclical unemployment

Answer 7

-

Question 8

Distinction between unemployment and under-employment

Answer 8

• Unemployment refers to individuals who are not currently employed but are actively seeking and available for work.
• under-employment occurs when individuals are employed but their job does not fully utilize their skills and qualifications. This can result in part-time work, low wages, or jobs below their skill level.

Question 9

What is frictional unemployment

Answer 9

Frictional unemployment: This is short-term unemployment caused by people transitioning between jobs, moving to a new location, or re-entering the workforce after a break

Question 10

How many more economically inactive due to long term sickness compared to before the pandemic

Answer 10

700 000
- rise in long term sickness among younger people as well, adding to youth unemployment
- most prevalent health condition among those econ inactive due to LT sickness was depression, bad nerves or anxiety
- gov using immigration to fill some shortages

Question 11

What measures did the government announce to reduce inactivity rates

Answer 11

• sanctions used to ensure get people to work if they can. Aimed to help 1.1mn people w long term health conditons, disabilities or unemployment to stay in work
• Benefit claimants who fail to find work for more than 18 months will have to undertake work experience placements. Benefits removed if you refuse to take part
• the number “inactive” due to long-term sickness or disability had risen by almost half a million since the pandemic to a record 2.6 million
• Digital tools will also be used to “track” attendance at job fairs and interviews under the tougher sanctions regime.
• returnerships: 3 programmes aimed at getting older people back to work e.g apprenticeships, skills bootcamps and sector based work academy programmes
• Introducing a claimant review point – Universal Credit claimants who are still unemployed after the 12-month Restart programme will take part in a claimant review point: a new process whereby a work coach will decide what further work search conditions or employment pathways would best support a claimant into work

eval: these sanctions will only worsen mental health amd issue deepens;

Question 12

How to reduce cyclical unemployment

Answer 12

• expansionary fiscal/monetary policy (increase spending, reduce taxes, lower IR)
• eval: conflict of objectives (inflation), gov finances, consumer/business confidence, time lags (lras diagram)

Question 13

How to reduce real wage unemployment

Answer 13

• reduce min wage
• reduce the strength of trade unions
• eval: impact on workers, income inequality

Question 14

How to reduce frictional unemployment

Answer 14

• interventionist SSPs: better of more resources for job centres, subsidies to private job agencies, G on infrastructure
• market based SSPs: reduce benefits
  eval: no guarantee, cost, time lags, stakeholder impact

Question 15

How to reduce structural unemployment

Answer 15

Interventionist
- g on education/training (occ imm)
- subsidies for in work training (occ imm)
- Go on infrastructure (geo imm)
- grants or low cost housing (geo imm)

Markey based SSPs
- reduce benefits (occ and geo imm)
- deregulate hiring/firing laws (occ imm)

Question 16

Fiscal policy key facts

Answer 16

• 98% national debt to gdp ratio
• rising demand on public services from ageing population cannot be helped
• budget deficit is 4.4% with aims to esnure the annual budget deficit doesnt exceed 3% of gdp in the final year of a five year forecast

Question 17

Essay plan: macro impacts of tax increases on uk economy point 2

Answer 17

2nd impact of a rise in taxes is a slowdown in consumer spending leading to a rise in unemployment. T

• that freezing of income tax thresholds will raise £33.5 billion a year in 2028/29 and this will then reduce the real disposable income of millions of households which is the main determinant of their spending power.
• Freezing tax allowances creates something called “fiscal drag” which is a rise in tax as people get wage increases.
• The jump in national insurance contributions is another direct tax on incomes and it is also paid by employers, which means that many businesses will experience an increase in the costs of employing extra workers.
• Some may look to control costs by reducing employment and hours for existing workers which will reduce economic growth.

eval:
- national debt is 98%; gov spending on debt interest is now 4% of spending, large opportuntiy cost
- A high budget deficit and rising national debt can lead to rising bond yields and higher taxes in the future which could damage prospects for investment and the UK’s international competitiveness.
- higher tax burden is needed now to helpimprove government finances to ensure that the fiscal deficit has come down before the next recession

Question 18

Conclusion

Answer 18

• Overall, the UK government’s decision to raise the tax burden seems to a calculated risk that the economy will be sufficiently strong as the UK emerges from the pandemic and that households and businesses can cope with rising taxes.
• clear that a rising tax burden is needed to pay for growing NHS and social care spending in the post-covid pandemic period. (aeging pop)
• but that there are alternative ways of raising taxes including a windfall tax on the supernormal profits of energy companies and tougher measures to address corporate tax avoidance which is estimated to cost the UK government billions of pounds of lost tax revenue each year.
• this is better than icnreasing corp or income tax which can harm incentives

Question 19

Macro impacts of an increase in taxes

Answer 19

• rise in corporation tax from 19% to 25% could reduce the level of capital spending by domestic firms and also make the UK economy a less attractive venue for inward FDI
• higher corporation tax reduces the post-tax return on investments such as new plant and machinery and factories.
• Assuming businesses will only go ahead with a project if the expected real return is high enough, a fall in investment would lead to a lower level of aggregate demand (C+I+G+X-M) which in turn will cause weaker economic growth
  + perhaps also hit productivity since the economy might have a smaller and older capital stock which breaks down more frequently.
  .

Question 20

evaluate the idea that increase corp tax will reduce inward uk investment

Answer 20

• many factors influence planned investment spending. These factors include interest rates on corporate loans, the pace of technological change and other tax decisions by the government including the full expensing scheme
• Full Expensing is a new capital allowance which enables companies to claim 100% corporation tax relief in the year of expenditure on new qualifying ‘plant and machinery’.
• If the economy is still growing and unit labour costs and the exchange rate remain competitive, then a steady rise in corporation tax back towards 25% might have only a limited impact on domestic investment and FDI. For example, corporation tax in Germany is 30 per cent – higher than the UK.

Answer 21

• ## inflation reached 10.1% in march 2023 and interest rates were 4.25% at the time

Question 22

cons of increasing interest rates

Answer 22

• slow down in the housing market which we have seen in house prices dropping and contraction in construction output and jobs. Higher mortgage interest rates also raise costs for landlords who pass these on to tenant (relative poverty)
• rise in corporate debt repayments - many biz in Uk borrowed heavily during pandemic, there is the risk of a jump in biz failures with consequences for unemployment - higher interest rates might tip the Uk economy into recession
• ncrease in borrowing costs might cause a fall in capital investment which redcues LRAS. If investment is weak, productive capacity of eocnomy suffers so higher inflation is likely in future due to structrual issue
• what is the cause of inflation; lots of external shocks that uk BOE cannot tackle. structual issues need SSPs, there is chronic underinvestment in uk.
• time lags for higher interest rates to affect inflation
• depends on consumer confidence
• rising cost of debt servicing for biz may cause biz with cashflow problems to cut output causing shortages and rising prices

Question 23

Benefits of inflation

Answer 23

• workers with higher wages
• consumption is natural; sign of healthy gorwing economy
• firms encouraged to increase output
• can keep unemployment low in a recession
• reduce real value of deficit
• improvement of gov finances as inflation creates winfall tax revenue (increased rev from fiscal drag and vat rev) and real value of debt fall

Question 24

Costs of inflation

Answer 24

• lower purchasing power; drive people in poveety as people cannot meet basic need
• erosion of savings; esp old age pensioners
• shoe leather costs of searching for better interest rates at diff banks
• lower export competitiveness esp bad for countries focussed on exports
• wage/consumer price spiral, menu costs
  + wokrers spend wages now before eages become worth less later
• fiscal drag whe incomes rise just in line of infation but dragged into hgiher tax bands
• inflationary noise. volatile inflation

Question 25

Weigh up costs vs benefits of inflation

Answer 25

• rate; low stable is beneficial
• cause; demand pull is beneficial bc high employment and growth, easier to solve
• duration
• anticipated vs unanticipated
• stability