17. Low unemployment

Question 1

Define unemployment

Answer 1

Unemployment: is defined as “people of working age who are without work, available for work, and actively seeking employment”

Question 2

Define labour force

Answer 2

Labour force (workk force): is the “economically active population”

Question 3

Who are not part of the labour force?

Answer 3

• people below/above working age
• students/stay at home parents/retired people/other who are not looking for work

They are not considered unemployed because they are not actively seeking work

Question 4

Different ways of measuring unemployment

Answer 4

• counting who are registered as unemployed (Austria, Switzerland)
• counting who are claiming unemployment benefits (Britain, Belgium)

Highly not accurate both measures

Question 5

Define hidden unemployment

Answer 5

Hidden unemployment: several groups that are considered:

• people who have been unemployed for a long time and have given up searching for work
• poeple who work part-time but would likke to work full time
• people who are over qualified for thei job positions

Question 6

Explain problems with unemployment distribution

Answer 6

• geographical disparities
• age disparities
• ethnic differences
• gender disparities

Question 7

Explain unemployment costs

Answer 7

• lower standards of living for the unemployed: lower income, stress, mental health, suicide rates
• costs to the society: higher crime rates, poverty, homelessness (not entirely only uneployment is accountable)
• costs to economy as a whole: PPC output is lower than potential output, gov spends its revenue on unemployment benefits, less taxes collected

Question 8

Factors that cause unemployment ro rise/fall

Answer 8

The level of unemployment depends on the relationship between who becoming unemployed/who are gaining jobs

Question 9

List causes of both types of unemployment

Answer 9

Disequilibrium:

• classical unemployment
• cyclical unemployment

Equilibrium (natural):

• frictional
• seasonal
• structural

Question 10

Explain labour market

Answer 10

Macroeconomic market - all types of labour in economy - AD_L and AS_L

AD_L is dependent on AD in economy

Question 11

Define AS of labour

Answer 11

AS_L: illustrates the total number of an eocnomy’s workers that are willing and able to work in teh economy at any given average wage rate

As the wage rate increases - more poeple are willing to work at every wage - AS_L shift upwards

Question 12

Define disquilibrium unemployment

Answer 12

Disequilibrium unemployment: occurs when tehre are any conditions preventing the labour market from “clearing” - reaching labour market equilibrium

2 types:

• real-wage unemployment
• demand-deficient unemployment

Question 13

Explain real-wage (classical) unemployment

Answer 13

Caused by: trade unions, gov minimum wages interfering with labour market -> AS_L higher than AD_L - unemployment of a-b is created

Solutions: trade union interfere - gov reduce power of trade unions, minimum wage reduced/abolished - harm poorest workers - greater inequity

Question 14

Explain demand-deficient (cyclical/Keynesian) unemployment

Answer 14

Caused by: associated with cyclical downturns in the eocnomy - business cycle: AD falls - firms lower production - lay off workers => av wage level should also fall but they are “sticky” downwards - reduced motivation - lower productivity - unemployment a-b created

Solutions: gov interfere to increase AD by fiscal/monetary policies

Question 15

Explain unemployment when labour market is at equilibrium (natural unemployment)

Answer 15

Solutions - supply-side policies

Frictional: short-term, when between jobs/waiting to take up first job

Solutions: not serious unemployment - lower unemployment benefits, improving flow of information about vacancies

Seasonal: fluctuation in demand for certain jobs - ski resorts

Solution: encourage people to seek jobs “off season”

Structural: worst type, due to change in structure of economy - increase in technology - workers not qualified enough, foreign labour cheaper - local not demanded, changes in consumer taste

Solution: iform of riring long before, better education system, retraining = improving occupatinoal mobility, susbdidies firms to give training, tax breaks/subsidies for geographical mobility

Question 16

AS_L compared to total labour force

Answer 16

LF - total labour force - able but not all able/willing to work - thus unemployment of a-b exists

• unqualified
• willing to stay at home
• not aware of available jobs

Question 17

Which policies are more effective are reducing unemployment? Demand or supply side?

Answer 17

Depends on unemployment type, place in business cycle:

• downsides: revenue reallocation, in tax reductions consumers might save money - not use it to increase AD (same with interest rates), time lags of taken measures and effects

BEST: combination of both supply and demand side - mixed types of unemployment in reality

There always be some natural unemployment - must be maintained in an appropriate level by supply side polices

Question 18

Explain crowding out

Answer 18

CROWDING OUT: potential problem when gov run budget deficit to stimulate economy and reduce unemployment

Gov borrows money from banks - sell gov bonds to banks - sell to people - encourage investment - gov wished to increase AD but decreased AD

Debatable topic - might/might not

Question 19

What are the labour market reforms?

Answer 19

labour market reforms which are aimed at economic growth

• unemployment benefits
• labour union power at protecting workers
• elimination of minimum wage

All fo these reforms would help the firms to be more flexible in hiring and firing workers - resulting in larger outputs - larger econ growth