Topic 3.2 Employment and Unemployment

Question 1

Unemployment definition

Answer 1

The unemployed consists of those of working age who are willing and able to work, actively seeking work but who do not have a job.

Question 2

2 ways to measure unemployment

Answer 2

Labour Force Survey (LFS)
Claimant Court

Question 3

Labour Force Survey (LFS)

Answer 3

A massive survey conducted by the ONS in 40,000 households and they can extrapolate from these answers to be magnified/representative to the rest of the population. Main measure of unemployment.
Gives figures on employed, unemployed and economically inactive.

Question 4

Drawbacks of LFS

Answer 4

1. Very small sampling size; therefore sampling errors (+- 3% error)
2. Very expensive
3. It doesn’t take into account underemployed people
4. Disparities (doesn’t tell unemployment within specific groups, e.g race, sex, regions etc)

Question 5

Economically inactive

Answer 5

The number of people of working age who aren’t willing to work

Question 6

Unemployment rate formula

Answer 6

Unemployment rate = (Unemployed / Economically Active) x 100
Economically active - number of employed + unemployed people

Question 7

Claimant count

Answer 7

This is the total number of people claiming unemployment benefits.

Question 8

Drawbacks of Claimant Count

Answer 8

1. Not everyone will be able to claim it
2. Not everyone can claim it (e.g you have a large amount of savings/a different person is earning)
   The 2 above explains why this measure often leads to a lesser value of unemployment.
3. Subject to fraud

Question 9

4 types/causes of unemployment

Answer 9

Seasonal unemployment
Frictional unemployment
Cyclical unemployment
Structural unemployment

Question 10

Seasonal unemployment

Answer 10

This is where, during specific seasons, you are unemployed, for example a ski instructor during summer

Question 11

Frictional unemployment

Answer 11

This is when a worker is in between jobs, for example they voluntarily left that job to look for a better job.

Question 12

Cyclical unemployment (+ Diagram)

Answer 12

When there is a lack of AD in an economy. This results in lower GDP and higher unemployment. Due to 2 factors:
1. Since labour is derived demand and consumption is a large factor of AD, if consumprion decreases so does labour.
2. Consequently, less consumption means less profits and in order to maintain profits they must cut costs (largest cost being workers) so more unemployment.
(Diagram - One LRAS curve and AD1 shifted left to AD2).

Question 13

Structural unemployment

Answer 13

The immobility of labour due to a long-term change in the structure of an economy.

Question 14

2 types of immobility of labour (SU)

Answer 14

1. Occupational immobility of labour - skills mismatch
2. Geographical immobility of labour - people unable/unwilling to physically move to job vacancies

Question 15

Causes of SU

Answer 15

1. Technology advancements - automate physical jobs
2. Loss of comparative advantage - when an industry can produce a good/service lower than ones abroad/far away. This will see a big decline in demand (if advantage lost), therefore, SU.
3. Existing industries modernise therefore different skills are requires (or if economies go from primary -> secondary)

Question 16

Costs of unemployment

Answer 16

1. Low output -> constraint to economic growth
2. Deterioration of Govt Finances (income tax + VAT, corporation tax decreases + more govt spending results in national debt)
3. Social costs (benefits, mental health, crime) needed to be paid by governments + bad for society
4. Costs to other countries - damages their exports
5. Lost income - lower living standards
6. Hysterisis - when unemployment becomes long-term in nature therefore someone is likely to lose their skills/become outdated. Essentially during time, people become more unemployable so they adjust to low income life, and eventually could become economically inactive.

Question 17

Benefits to unemployment

Answer 17

1. Greater pool of workers for firms
2. Low inflation
3. Improved current account position (less imports)

Question 18

Evaluation on unemployment

Answer 18

1) Rate of unemployment (if it’s near the natural rate, then it’s ok)
2) Duration of unemployment
3) Type of unemployment (structural much worse than other 3)
4) Distribution of unemployment (don’t want high youth unemployment as they can be deskilled much easily and more victim to hysterisis.

Question 19

Policies to reduce cyclical unemployment

Answer 19

1) Expansionary Fiscal Policy
2) Expansionary Monetary Policy
Labour is a demand derived from the demand for goods/services; therefore, an increase in AD will lead to an increase in labour demand, thus helping to reduce unemployment.

Question 20

Policies to reduce structural unemployment

Answer 20

This has to be met with supply-side policies:

1) Interventionist SSPs
- increase G on education/training (so people develop transferrable skills reducing occupational immobility of labour)
- Subsidies for in-work training (reducing occupational immobility of labour)
- G on infrastructure (reducing occupational immobility, seen by project HS2)
- Grants on low cost housing (reducing occupational immobility of labour

2) Market-based SSPs
- Reduce benefits (encourages to learn new skills therefore reducing Occ but also can’t be as picky thus reducing Geo)
- Deregulate hiring/firing laws (this gives firms a higher incentive to hire workers, as don’t have to deal with things like redundancies thus reducing occ).

Question 21

Policies to reduce frictional unemployment

Answer 21

This has to be met with supply-side policies:

1) Interventionist SSPs
- Better resources for job centres (more likely to find job vacancies they’re after)
- Subsidies to Private Job Agencies (as they already have good resources)
- G on infrastructure (access to more jobs)

2) Market-based SSPs
- Reduce benefits (incentives to keep on looking/don’t have a safety net to feel relaxed in)