Unemployment Flashcards
(22 cards)
Define Disequillibrium Unemployment
Unemployment that occurs when aggregate supply of labour is greather than aggregate demand for labour at the current wage rate
What kind of unemployment falls under Disequillibrium Unemployment
- Cyclical Unemployment
In a recession due to a downturn of the economic cycle - Real Wage Unemployment [Classical Unemployment]
When wages are forced above the equilibrium in a labour market creating excess supply
Define Equilibrium Unemployment
The Natural Rate of Unemployment
Unemployment that exists when the labour market is in equilibrium. It includes Structural, Frictional and Seasonal Unemployment
Define Structural Unemployment
The immobility of labour due to a long term change in the structure of the industry
Skills Mismatch / Physical inability to Move
What are the reasons that create Structural Unemployment
- Technological Advancements removes the need for physical labour
- Loss of Comparitive Advantage [Declines in demand and industry] - [Skills may or may not be able to be transferable]
- Modernisation of Exisiting Industries - Need for new skills [New comparitive advantages forming]
- Education systems may not be able to keep up with advancements
What are the Free Market Determinants for the NRU?
- Generous Benefits System [No reskilling, no movements, improvements of MRP]
- Excessive Labour Market Regulations [Hiring and Firing is strict, High trade union legislations]
Too much Govt. Intervention
What are the Interventionist Determinants of the NRU
- Lack of Transport / Housing infrastructure due to negative externalities [More supply of public services are needed]
- Lack of inward training programmes due to positive externalities [more provision is needed]
What are the costs of Unemployment?
- Lost Output
- Deteriorations of Fiscal Dividends
- Social Costs
- Costs to other countries
- Lost incomes
- Hysteresis
Explain Lost Output
Firms operate inside the PPF curve which creates a negative output gap and it reduces the availability of goods and services which can affect living standards and growth
Explain Deteriorations of Fiscal Dividends
Less spending on goods and services and hits on firms profits due to lower incomes can reduce different tax revenues, which can deteriorate govt. finances as they spend on benefits and other areas to improve unemployment
Budget deficits can rise causing implications
Explain Social Costs
Deprevation and more people living in poverty - burdens on govt. finances which hits tax payers and creates negative externalities
Explain Lost Income
Living standards can drop and drive people into relative or absolute poverty - It can force extended borrowing which can risk bankruptcy
Explain Hysteresis
When unemployment becomes long term in nature, it is more likely of deskilling to take place and new entrants in the labour force can outcompete previous unemployed workers, making them UNEMPLOYABLE
What are two major concerns with Hysteresis
- Workers adjust on low incomes and living off benefits which constraints consumption and AD
- Despondance when they are constantly rejected from work - dropping out of the labour force, reducing LRAS
Constraint to Economic Growth
What are the Benefits of Unemployment
- Greater Pool of Workers for firms
- Low Inflation
- Improved Current Account Position
Explain Greater Pool of Workers to Firms
Most productive workers can be chosen - which can reduce costs of production and increase profit margins for firms and increase worker morale
Explain Low Inflation
Abundant labour reduces wage bargaining power which can reduce costs of production and wage rises in addition to goods and services
Explain Improvement in Current Account Deficit
Lower incomes through unemployment can reduce spending on imports [ceteris paribus]
What are the Evaluative Points relating to Unemployment
- Rate of Unemployment [Is it at the NRU? or is the NRU % very high?]
- Duration [LR unemployment is bad]
- Type [Structural is the worst , especially occupational mobility which can be LR] , [Cyclical and Frictional is okay]
- Distrubution [High rates of youth unemployment is risky as they are more likely to suffer from LR unemployment due to experience]
What policies can be used to correct Cyclical Unemployment?
Demand Side Policies [i.e Expansionary Fiscal Policy & Expansionary Monetary Policies]
What are the trade-offs of using Demand Side Policies to reduce unemployment?
- Inflationary Pressure
- Current Account Deficit
- Government Finances
What policies can be used to correct Real Wage Unemployment?
- Reducing Minimum Wages
- Reducing strength of Trade Unions
- Internventionist and Market Based Supply Side Policies
