Unemployment Flashcards

Question

what is frictional unemployment

Answer 1

- in between jobs, when a worker has quit their job and is in the process of looking for a better one

Answer 2

- when there is a temporary fall in demand for workers eg because of a seasonal change

Answer 3

where there is a skills mismatch between skills a worker has and the jobs they are able to find with those skills

Answer 4

when workers are not willing/able to move to where jobs exist, maybe because of personal preference, housing issues etc

Answer 5

🧠 1. Skills Mismatch The economy shifts towards high-tech or service-based industries → demand for new or specialised skills ➡️ Workers from declining industries (e.g. coal mining, manufacturing) lack the necessary skills(their skills become obsolete) ➡️ They become occupationally immobile and cannot fill new vacancies ➡️ Results in structural unemployment, even if vacancies exist 🗺️ 2. Regional Decline Industries in certain regions (e.g. North of England) shut down or relocate ➡️ Local workers are left jobless with few alternatives nearby ➡️ If they are unwilling or unable to move, this causes geographical immobility ➡️ Leads to persistent unemployment in those areas 🌍 3. Globalisation and Outsourcing Firms outsource production to cheaper overseas markets to cut costs ➡️ Domestic workers in traditional industries lose jobs permanently ➡️ If they lack retraining or support, they remain unemployed ➡️ Causes long-term structural unemployment in exposed sectors 📉 4. Technological Change Automation and AI reduce the need for low-skilled or routine jobs ➡️ Workers replaced by machines may struggle to find new roles ➡️ Especially common in logistics, retail, or admin jobs ➡️ Creates a technology-induced structural unemployment problem

Answer 6

when a company can produce a good at a lower opportunity cost compared to a similar industry abroad

Answer 7

- unemployment that occurs when the labour market is in equilibrium - consists of structural, frictional and seasonal unemployment

Answer 8

💰 1. Higher Wages Lead to Higher Costs for Firms Workers demand higher wages → to keep up with rising living costs (inflation) ➡️ Firms agree to higher wages to retain employees and maintain productivity ➡️ However, higher wages lead to higher costs of production for firms (e.g., salaries, benefits) ➡️ Firms raise prices of goods and services to cover these increased costs, leading to inflation 📈 2. Inflationary Pressures Lead to More Wage Demands Higher prices reduce consumers' purchasing power and increase the cost of living ➡️ Workers, seeing the rise in living costs, demand higher wages to maintain their standard of living ➡️ As wages increase, firms again face higher production costs ➡️ This cycle repeats, creating a wage-price spiral where both wages and prices continually rise 📉 3. Reduced Purchasing Power for Consumers As prices increase due to the wage-price spiral, the real value of wages (i.e., purchasing power) may not increase proportionally ➡️ Consumers can afford less with their income, reducing real consumption ➡️ In turn, this may slow down the economy as people cut back on spending ➡️ If inflation outpaces wage increases, this can hurt overall economic well-being and consumer confidence 🏛️ 4. Impact on Monetary Policy and Central Banks The ongoing wage-price spiral increases inflationary pressure in the economy ➡️ Central banks, like the Bank of England, may need to respond by raising interest rates to control inflation ➡️ Higher interest rates may slow down borrowing and spending, but this also increases the cost of servicing debt ➡️ In the long run, higher interest rates may reduce investment and slow down economic growth

Answer 9

1️⃣ Cyclical Unemployment → Fall in Aggregate Demand (AD) → Firms Cut Output → Lower Demand for Labour → Unemployment Rises If consumer and business confidence falls, spending and investment decline. This reduces demand for goods and services, leading to lower revenues for firms. In response, firms cut production, requiring fewer workers. Mass layoffs occur, increasing cyclical unemployment, especially in recessions. 📌 Example: 2008 Global Financial Crisis – Businesses cut costs, leading to job losses in construction, banking, and retail. 2️⃣ Structural Unemployment → Industry Decline → Jobs Become Obsolete → Mismatch of Skills → Long-Term Unemployment If industries decline due to technological change or global competition, certain jobs disappear. Workers lack the skills for new industries, creating a skills mismatch. These workers struggle to find employment in different sectors, increasing long-term unemployment. Without retraining, they may remain unemployed for years, reducing labour market participation. 📌 Example: Automation replacing manufacturing jobs in the UK led to long-term unemployment in industrial regions. 3️⃣ Frictional Unemployment → People Switching Jobs → Short-Term Joblessness → Time Lag in Finding New Employment When people leave jobs voluntarily (e.g., for better opportunities), they experience temporary unemployment. Searching for a new job takes time, leading to frictional unemployment. The more information gaps about job vacancies, the longer it takes to find work. This is a natural form of unemployment that always exists in an economy. 📌 Example: A software engineer leaving a job to find a better-paid role may be unemployed for a few months. 4️⃣ Seasonal Unemployment → Demand Fluctuates by Season → Temporary Layoffs → Unemployment Rises in Off-Peak Periods Some industries experience higher demand in certain seasons (e.g., tourism, agriculture, retail). During off-peak seasons, firms reduce their workforce, causing temporary unemployment. Workers struggle to find alternative employment, increasing short-term unemployment. This occurs yearly in affected industries, making it a recurring issue. 📌 Example: Ski resorts lay off workers after winter, and retail stores reduce staff after Christmas. 5️⃣ Real Wage Unemployment → Wages Set Above Equilibrium → Excess Labour Supply → Firms Hire Fewer Workers If minimum wages or trade unions push wages above market equilibrium, firms face higher costs. This reduces the number of workers they can afford to hire, leading to excess labour supply. Unemployment rises, as more people want to work at higher wages, but firms cannot afford to employ them. This is common in industries with strong union influence or rigid wage structures. 📌 Example: A government setting a high minimum wage may lead to job losses in low-skilled sectors.

Answer 10

1️⃣ Lower Incomes → Falling Consumption → Lower Aggregate Demand (AD) → Economic Decline Unemployed workers lose income, reducing their ability to spend on goods and services. Lower spending causes firms to experience reduced revenue, forcing them to cut costs or lay off more workers. This lowers aggregate demand (AD), further weakening economic growth. If widespread, it can cause a negative multiplier effect, deepening recessions. 📌 Example: High unemployment in Spain post-2008 led to falling consumer spending, worsening the economic downturn. 2️⃣ Loss of Skills (Hysteresis) → Reduced Employability → Long-Term Unemployment → Lower Productive Capacity Long-term unemployed workers lose skills, experience, and confidence, making it harder to find a job. This reduces the quality of the labour force, lowering labour market efficiency. Firms may struggle to find suitably skilled workers, reducing potential output (LRAS shifts left). The economy becomes less productive, limiting long-term economic growth. 📌 Example: Post-industrial decline in the UK left many manufacturing workers unemployed for years, reducing their employability. 3️⃣ Increased Government Spending on Welfare → Higher Budget Deficit → Risk of Future Tax Increases More unemployed people claim benefits, increasing government spending on welfare (e.g., Jobseeker’s Allowance). At the same time, tax revenues fall, as fewer people are earning and paying income tax. This worsens the budget deficit, forcing the government to borrow more or raise taxes in the future. If unsustainable, it may lead to spending cuts in other areas like healthcare and education. 📌 Example: Greece’s high unemployment led to unsustainable welfare costs, contributing to the 2010 sovereign debt crisis. 4️⃣ Lower Business Confidence → Lower Investment → Slower Growth & Innovation High unemployment reduces consumer demand, making firms less confident about future sales. This discourages businesses from investing in new projects, slowing capital accumulation. Lower investment in technology and training reduces long-term productivity and innovation. This leads to a weaker economic recovery, making it harder to generate future job opportunities. 📌 Example: During the COVID-19 pandemic, high unemployment discouraged business investment, delaying recovery.

Answer 11

1️⃣ Expansionary Fiscal Policy → Higher AD → Increased Demand for Labour → Lower Unemployment Government increases spending on infrastructure, education, or public services, creating new jobs. Higher government spending raises aggregate demand (AD), leading to higher output and sales. Firms need more workers to meet increased demand, leading to higher employment. This reduces cyclical unemployment, especially in a recession. 📌 Example: The US stimulus package after the 2008 financial crisis helped lower unemployment by boosting demand. 📌 Evaluation: If the economy is close to full capacity, extra spending could cause inflation rather than job creation. 2️⃣ Expansionary Monetary Policy → Lower Interest Rates → Increased Investment & Consumption → Job Creation The central bank lowers interest rates, making borrowing cheaper for businesses and consumers. Firms invest more, expanding production and hiring new workers. Consumers borrow and spend more, increasing demand for goods and services. This reduces demand-deficient (cyclical) unemployment. 📌 Example: The Bank of England cut interest rates after COVID-19 to support economic recovery. 📌 Evaluation: If businesses and consumers lack confidence, they may not borrow or invest, limiting the effectiveness of the policy. 3️⃣ Supply-Side Policies → Increased Labour Market Flexibility → More Job Creation & Lower Structural Unemployment Improving education and vocational training increases workers' skills, making them employable in growing industries. Reducing trade union power allows wages to adjust flexibly, reducing real wage unemployment. Encouraging self-employment and entrepreneurship helps create new businesses and job opportunities. This helps reduce structural and frictional unemployment in the long run. 📌 Example: Germany’s investment in vocational training helps workers transition into high-skilled jobs. 📌 Evaluation: These policies take time to show results and require government funding, which may not always be available. 4️⃣ Lowering Employment Taxes & Reducing Red Tape → Lower Business Costs → More Hiring Cutting payroll taxes makes it cheaper for firms to hire workers, encouraging job creation. Reducing regulations (e.g., simplifying hiring and firing laws) increases labour market flexibility. This encourages businesses to expand and hire more workers, reducing structural unemployment. Helps small businesses and startups create jobs more easily. 📌 Example: Some Eastern European countries, like Estonia, have low employment taxes to encourage hiring. 📌 Evaluation: Can lead to lower job security and exploitation if worker protections are weakened. 5️⃣ Regional & Sector-Specific Policies → Tackling Geographical & Structural Unemployment Investment in deprived areas (e.g., transport infrastructure, tax breaks) attracts businesses and creates jobs. Encouraging workers to move (e.g., housing subsidies, relocation grants) helps reduce geographical immobility. Government-funded retraining schemes help unemployed workers shift into high-demand industries. This reduces structural unemployment caused by declining industries. 📌 Example: UK government incentives to encourage businesses to invest in Northern England to reduce regional disparities. 📌 Evaluation: High costs and uncertain success – firms may not move even with incentives. 🏫 1. Education & Training The government could invest in education and vocational training to improve the skills and employability of the labour force → This increases the productivity of workers and makes them more adaptable to changing industries and technologies → Firms are more likely to hire workers who are better trained and efficient, reducing structural unemployment → Over time, this leads to lower natural unemployment and a more flexible labour market. 📉 2. Reducing Income Tax (Incentive to Work) Cutting income tax rates increases the reward for working, especially for those on low incomes → This incentivises people to join or rejoin the labour force, increasing the labour supply → It can also reduce voluntary unemployment, as the opportunity cost of not working becomes higher → The economy benefits from a larger, more motivated workforce, leading to higher employment levels. 🧾 3. Labour Market Reforms (e.g. reduced union power, flexible contracts) Making the labour market more flexible by reducing barriers like strict employment laws or excessive trade union power allows firms to hire more easily → Firms become more confident in recruiting, especially during uncertain periods, due to lower costs and risks of hiring/firing → This increases labour demand, particularly for small and medium businesses that may have been reluctant to expand their workforce → As hiring becomes more responsive to market needs, unemployment falls. 🏗️ 4. Improving Infrastructure Supply-side policies that improve transport links and digital infrastructure can reduce geographical immobility of labour → Workers can access more job opportunities if commuting becomes easier or remote working infrastructure improves → This helps reduce frictional and regional unemployment, especially in economically deprived areas → As labour becomes more mobile and accessible, firms can match with suitable workers more efficiently, reducing unemployment.

Answer 12

a situation where an individual is working, but their job does not fully utilize their skills or abilities, and/or does not provide sufficient hours or pay to meet their needs

Answer 13

💸 1. Lower Disposable Income Unemployed individuals lose their primary source of income → This reduces their ability to afford basic goods and services → Consumption falls, especially on non-essential items → Leading to a decline in overall living standards and quality of life. 🛍️ 2. Fall in Consumer Confidence Rising unemployment increases fear of job loss among those still employed → Consumers become more cautious and save more rather than spend → This causes a fall in aggregate demand (C component of AD) → Slowing down economic recovery and worsening the unemployment cycle (negative multiplier effect). 🧾 3. Increased Reliance on State Benefits / Fiscal Strain More consumers may depend on unemployment benefits or government support → This increases government spending on welfare and reduces tax revenue from income and VAT → The budget deficit may widen, forcing spending cuts or tax rises elsewhere → Leading to reduced public services that many consumers rely on (e.g. healthcare, education).

Answer 14

🛒 1. Fall in Consumer Demand Unemployed consumers have less disposable income → This reduces demand for firms’ goods and services, especially non-essentials → Firms experience lower revenue and may struggle to cover fixed costs → Potentially leading to downsizing or business closure. 🏭 2. Underutilisation of Capacity Lower demand due to high unemployment means firms operate below full capacity → This leads to a fall in productive efficiency and higher average costs (due to fixed costs spread over fewer units) → Profit margins shrink, reducing incentives to invest or expand → Slowing down long-term growth and innovation. 💰 3. Increased Pressure to Cut Prices In a high-unemployment environment, demand becomes more price-sensitive → Firms may be forced to lower prices to attract budget-conscious consumers → This leads to lower revenue per unit and squeezed profits → Potentially causing cost-cutting measures like layoffs or lower wages. 📉 4. Reduced Business Confidence and Investment Rising unemployment signals weaker economic conditions and falling demand → This creates uncertainty, making firms less willing to invest in capital or expand output → Lower investment can reduce future productivity and competitiveness → Slowing both firm-level and macroeconomic recovery.

Answer 15

💷 1. Increased Government Spending on Welfare Unemployment rises → More people claim Jobseeker’s Allowance or Universal Credit → This increases government expenditure on welfare benefits → Worsening the fiscal balance and possibly increasing the budget deficit. 📉 2. Fall in Tax Revenue Unemployed workers pay no income tax or National Insurance → Plus, lower consumption reduces VAT and indirect tax revenues → This lowers total government revenue → Limiting the government's ability to fund public services or invest in infrastructure. 🏛️ 3. Pressure on Public Services and Intervention Persistent unemployment may require government intervention schemes (e.g. job creation, training programs) → These policies involve additional public spending or tax incentives → They may increase short-term costs to the government → And require trade-offs against other policy areas like healthcare or education. 4. lower tax rev --> due to fiscal relief --> diverts funds and reduces development

Answer 16

⚖️ 1. Depends on the Type of Unemployment Not all unemployment is equally damaging. For example, frictional unemployment (short-term and voluntary) may have minimal economic impact → Whereas cyclical or structural unemployment reflects deeper economic problems and has longer-lasting effects. So, the severity of impact depends on the underlying cause. 🕰️ 2. Short-Term vs Long-Term Effects In the short run, unemployment leads to immediate reductions in income, demand, and tax revenue. But in the long run, high and persistent unemployment can erode skills (hysteresis), lower human capital, and reduce productivity. Therefore, the long-term effects are typically more damaging for all stakeholders. 📊 3. Size and Duration Matter A small rise in unemployment may have limited macro effects. However, large-scale or prolonged unemployment (e.g. after a recession) has a far greater impact on growth, welfare, and fiscal stability. So, the extent of the damage depends on how widespread and long-lasting it is. 🌍 4. Depends on Government Response The government’s ability to respond (e.g. with fiscal stimulus, retraining schemes, or subsidies) can reduce the negative impacts. A well-targeted response can prevent long-term damage and support recovery. In contrast, poor or delayed intervention can worsen the problem and increase costs over time. 🧮 5. Hidden Unemployment / Inactivity Official unemployment statistics may underestimate the true scale of the problem. Many people may become discouraged and leave the labour force (e.g. early retirement, long-term illness) → This lowers the participation rate and productive potential, even if headline unemployment seems to fall.

Unemployment Flashcards

(40 cards)