Unemployment Flashcards
(26 cards)
Unemployment
Refers to people who are in the workforce, actively seeking employment but unable to find any
Unemployment Rate
Workforce
- Refers to those who are willing and able to work.
- exclude - children, retirees, parental leaves, students, disabled, etc
The Labour Market
Natural rate of unemployment:
- Unemployment that persists at full employment with stable inflation.
- Includes those unwilling to work at current wages; reducing it risks higher inflation.
The “natural” rate of unemployment can be decreased by:
I. Increasing the money supply (i.e. monetary policy)
II. Reducing taxation (i.e. fiscal policy)
III. Retraining workers (i.e. supply side policy)
a) I only
b) II only
c) III only
d) I and II
Which one of the following is most likely to reduce a country’s natural rate of unemployment?
a) A general rise in government spending
b) Improved training for the labour force
c) The imposition of a national minimum wage
d) The imposition of tariffs and quotas
a) A general rise in government spending
Hidden unemployment
- Unemployed individuals not counted in official statistics due to reporting methods
- Unemployed individuals who have stopped actively looking for work but are still willing to work.
Underemployment
Workers are employed part-time or in jobs that do not match their skills or economic needs
What are the costs of unemployment?
- Very low moral, low confidence in economy, low consumption, lower contribution to economy
- Different age, ethnic group would have different impact
- People are more likely to leave from area with high unemployment level
Types of unemployment - Equilibrium (natural) unemployment
- Demand for labor = number of people prepared to supply their labor at the prevailing wage
- Natural rate of unempl. = structural + frictional + seasonal unempl.
equilibrium unemployment = voluntary unemployment
Type of unemployment - seasonal unemployment
Unemployment that comes and goes with seasons - depends on demand for particular jobs
- E.g. fruit pickers, ski instructors, rafting instructors, summer worker
Type of Equilibrium unemployment - Frictional unemployment
Short-term unemployment during job transitions.
- E.g. graduated school leaver, a temp worker
Type of Equilibrium unemployment - Structural unemployment
Unemployment that arises as a result of structural changes in the economy
- When a goods and services becomes obsolete
- The overall fall in the demand for good → may lead to regional unemployment
- A shift of the production abroad
- When human skills are replaced by machines = technological unemployment
Types of Disequilibrium unemployment - Cyclical or Demand-deficit unemployment
- Occurs during economic downturns when demand for goods and services falls, leading to job losses.
- In recessions → AD decrease → less profit → business cut jobs → increase unemployment → less income → less spending → AD decrease
- NEED government intervention to stop
Types of Disequilibrium unemployment - Classical (real wage) unemployment
The “real wage” is driven up above the equilibrium level (minimum wage is being pushed up) → surplus of labor (unemployment increase)
Solutions to Seasonal unemployment
- Agencies match winter unemployed with summer jobs
- Tax laws encourage year-round earning
- Subsidies for off-season industries
Solutions to Frictional unemployment
Government needs to encourage workers to find a new job before they quit their current job. Could be done by:
- Require earlier leave notice
- Improve info flow between employers and job seekers
- Extend wait time for benefits after voluntary job exit
- Reduce unemployment benefits
Solution to Structural unemployment
Increase occupational mobility:
- Retrain workers via gov’t programs
- Tax breaks for firms training staff
- Tax breaks for hiring untrained workers to train
- Grants for students entering growing fields
Increase regional mobility:
- Cut wages in struggling towns to encourage relocation
- Reduce welfare support
- Build infrastructure in high-unemployment areas
- Offer grants to firms set up in high-unemployment regions
- Incentivize workers to move to areas with more job opportunities
Solutions to Cyclical/Demand-deficit unemployment
Remove labor market regidities:
- EFP to push out output to encourage firms to hire more workers
- AD increase → increase PL and output → firms will need to hire more people → reduce unemployment
Exchange rate policy:
- Devalue or depreciate its exchange rate
- Make exports cheaper for foreign country and imports more expensive
- Switch demand from foreign good to domestic goods
Solutions to Classical (real wage) unemployment
Remove labor market regidities:
- Decrease power of trade unions
- Remove minimum wage legislation
- Raise wages via mandatory pensions; cut social insurance
Solutions to Natural unemployment
Short run:
- Increase AD
- Persuade workers to work for longer hours → produce more output
- Run down on inventories
Long run:
- Supply side policies
- SSP increase AS → encourage more individuals to join the workforce → shift LRAS
Trade-off between unemployment and inflation
Philips Curve - Shows the relationship between unemployment and (wage) inflation
Explain the relationship between inflation and unemployment
- Any components of AD increase → AD increase → inflation
- AD increase → more output → can only be met by firms hiring more workers → low unemployment
Stagflation - Oil crisis (OPEC)
- High unemployment and high inflation
- OPEC decrease supply of oil → price increase → caused supply shock as oil is essential → SRAS decrease → high inflation, output decrease → less people needed → high unemployment
