2.1.3 - Employment and Unemployment - Caused of Unemployment and Costs of Unemployment

Question 1

Name 5 causes of Unemployment

Answer 1

. Frictional Unemployment

. Cyclical Unemployment (demand deficiency)

. Seasonal Unemployment

. Real Wage Unemployment

. Structural Unemployment

Question 2

Define Frictional Unemployment

Answer 2

. Refers to the short term unemployment when moving from one job to another

Question 3

Define Seasonal Unemployment

Answer 3

. Refers to when workers are unemployed at certain times of the year.

. This is as there is a lack of demand for certain goods in some seasons. Also is hard to produce certain goods in some seasons

. E.g. Agricultural workers in winter

Question 4

Define Structural Unemployment

Answer 4

. Long lasting unemployment where patterns of demand and production changes leaving workers unemployed

There’s three types of Structural Unemployment

. Regional Unemployment due to geographical immobility. It is where jobs exists but workers are unwilling to move to the location as it is too far away

. Technological Unemployment is where workers may be put out of work due to new technology. This is occupational immobility as workers lack the appropriate skills to occupy these positions

. Sectoral unemployment is where there is an mismatch of skills and workers are unable to adapt to changing demand e.g. ship building industries

Question 5

Define Cyclical Unemployment

Answer 5

. Occurs in the recession or negative output phase of the economic cycle

. Occurs when AD is lower than the LRAS

. It is when there is insufficient AD in the economy for all workers to get a job

. Since labour is a derived demand, derived from the demand for goods and services, as the demand for goods and services falls in the economy, firms respond by reducing their production, reducing the size of their workforce increasing cyclical unemployment

. Furthermore, to maintain profit in a recession, when revenues are falling, firms reduce cost of production by reducing the size of labour, through making workers redundant, increasing cyclical unemployment

Question 6

Define Real Wage Unemployment

Answer 6

. Real Wage unemployment occurs when wages are above the equilibrium wage in the labour market leading to an excess supply of labour; real wage rates are inflexible downwards

. This could happen because of higher than equilibrium minimum wages set by the government in order to protect living standards of the poor.

. Another cause could be unemployment benefits being too high, so the unemployed refuse to take low paid jobs. This increases the wage rates to above the equilibrium

. There is excess supply of labour as more individuals are willing to work due to higher wages, but firms hire less people due to wages affect cost of production

. Workers lose their jobs through redundancy as minimum wages increase costs of production for businesses, so business need to maintain their revenue. Firms also less likely to hire new workers due to the cost of production

Question 7

Significance of Migration

Answer 7

. Some studies have shown that immigrants are less likely to claim benefits and more likely to be employed that existing population

. This is as majority of immigrants are of working age and tend to take low job skills were there is a lack of workers, e.g. HGV drivers. This is as immigrants are desperate for money for reasons such as remittances or just to improve their standard of living.

. The spending of these jobs creates further jobs in the UK and total UK employment increases

. HOWEVER, it could be argued that migration depresses wage rates and affect low income families, since immigrant workers are willing to work for lower rates of income

. Additionally, immigrants are most likely not skilled, meaning that their human capital value is not high. This can mean less efficient production if employers were to higher them. It could increase cost of production by firms to train them, resulting in less supply and also inflation (cost - pull inflation).

. Additionally, UK workers will few skills are affected by migration. This is due to more competition for jobs and may result in levels of unemployment rising, with unemployment rates increasing

Question 8

Significance of Skills

Answer 8

. The skills of workers are increasing and it helps maintain employment as its easier to find jobs

. However, if there is a mismatch of skills, it could lead to structural unemployment, due to occupational mobility.

If firms can’t train workers, then the government has to step in to correct this market failure. There may be long term unemployment. Training is costly for UK government

Question 9

Costs of Unemployment workers

Answer 9

1.) Workers loses their income stream when they are unemployed reducing consumer spending in the economy impacting AD and economic growth

2. ) When unemployment becomes long - term (over a year), the greater the loss of skills, hence human capital falls.

Question 10

Impact of unemployment to the economy / government

Answer 10

1. ) There will be more government spending on unemployment benefits. This has an opportunity cost. Also it can lead to tax increases in the long run.
2. ) As incomes are lower, the demand for imports will be lower too meaning lower import expenditure. This means that the value of net exports increases, which increase AD, leading to increased economy growth
3. ) There will be lost output or real GDP in the economy. Workers are productive resources who use their human capital to produce goods and services. With high levels of unemployment, the economy underutilises their factors of production and thus producing less than potential output in the economy. Unemployment means productive efficiency won’t be reached. This can be shown in the PPF diagram.

Question 11

Benefits of Unemployment

Answer 11

1. ) Unemployment makes it easier for firms to find workers from a greater potential pool. This is because there as there is more unemployment, there will be more workers chasing jobs increasing the choice for firms to find the most suitable worker. As a result firms are most likely to find the most productive and suitable workers, which can increase productivity and long term profitability
2. ) Unemployment allows workers to take time in finding a suitable, rewarding job for themselves
3. ) Unemployment keeps inflation under control. This is as incomes are lower, meaning there will be less consumer spending thus lowering levels of AD in the economy keeping demand pull inflation low.

Additionally, with greater unemployment the bargaining power of workers reduces keeping wage growth low. This reduces cost - push inflation

Question 12

Policies to reduce unemployment

Answer 12

. Better infrastructure to reduce geographical immobility

. Education and training to improve human capital

. Reduce welfare benefits to incentive unemployed

. Reduce minimum wages

. Reduce trade unions

Question 13

Impact of Unemployment to firms

Answer 13

1.) Long term unemployment can lead to loss of skills and reduce employability of
workers, so firms have a smaller pool of skilled people to employ. This means that labour will be less productive when producing goods. meaning the productive efficiency falls, shifting LRAS to the left

2.) However, lower wages can be offered to new workers unemployed are more willing to take lower wages. This reduces cost of production to firms

Question 14

Impact on consumers

Answer 14

1.) Consumers may suffer from a lack of choice or decrease in quality due to unemployment reducing labour productivity

2.) However, prices may be lower for consumers as wages costs tend to fall for firms when there is unemployment, reducing cost of production