2.3 Employment

Question 1

What is employment and how is it stated?

Answer 1

Number of people of working age in the population who are in work. It’s either stated as a level or rate of employment. E.g unemployment was 3.9% in the first quarter of 2020 falling from 5.5% in first quarter of 2015.

Question 2

How can unemployment be broken down?

Answer 2

Into two sub- categories;

Voluntary unemployment: going wage rate not enough to entice someone to accept a job because it doesn’t cover cost of living or reflect the persons skills

Involuntary unemployment: when someone is unable to find work and would be willing to accept work at the going wage rate.

Question 3

What is labour market participation rate?

Answer 3

Proportion of working age people who are in employment or actively seeking employment and therefore economically active

Question 4

What does economically active mean?

Answer 4

Someone is of working age and neither employed or unemployed, therefore they are not participating in the labour market. In the UK the working age is still considered to be age 16-64.

Question 5

What is the policy objective of full employment?

Answer 5

Full employment= a situation in which all those who are economically active in the workforce are willing and able to work at the going wage rate and are in employment.

Also that the economy is making effective use of its human capital stock e.g the labour force

If at full employment there will not be spare capacity and the economy will be operating on its production curve or the equilibrium rate of unemployment/ non- accelerating inflation rate of unemployment. The demand for labour is matched by the supply of labour.

Question 6

Does full employment mean unemployment is zero?

Answer 6

In a dynamic economy where there is a flexible labour market, frictional unemployment will exist due to changes in the demand for labour. There is a sufficient degree of occupational and geographical mobility to remove barriers between occupations and regions, promoting the transition to different labour sub-markets

Question 7

How do we measure unemployment?

Answer 7

Using the Labour Force Survey and the Claimant Count

Question 8

What is the Labour Force Survey?

Answer 8

Measures the percentage of the workforce who are without jobs but are available for work, looking for work and willing to work.

Advantages= can be used to make international comparisons and definition corresponds with that used by the International Labour Organisation

Disadvantages= estimate calculated by surveying households and extrapolating from a sample of data to give an estimate of unemployment for the whole country so not very accurate.

Question 9

What is a Claimant Count?

Answer 9

Measures number of people in the UK registered as unemployed and claiming Job Seekers Allowance. Claimants have to be over 18 and under state pension age, working less than 16 hours a week, available to work full time, actively looking, not in full time education, not claiming income support and without illness or disability which means they can not work.

Advantages= measure can be conducted cheaply and easily as govt already has a record of number of people claiming allowance.

Disadvantages-excludes those who are unemployed but can’t claim/ unwilling to claim Job Seekers allowance, not all countries have a benefit system so can’t make international comparisons, roll out of universal credit has distorted the Claimant Count by increasing Claimant Count considering it to be an unreliable economic indicator.

Question 10

What are the causes of unemployment?

Answer 10

Frictional - short term cause - unemployment associated with job search and does not indicate any weakness in the economy

Cyclical - short term cause that can be damaging to the economy as a large no of workers could be made redundant at the same time - usually at a downturn or recession

Demand deficient - short term - unemployment that arises because of a deficiency in AD in the economy

Seasonal - short term - unemployment that arises during seasons of the year - fruit pickers/tourist industry

Structural - LONG TERM - unemployment that arises due to changes in the pattern of economic activity within an economy

Question 11

What is frictional unemployment?

Answer 11

Unemployment associated with job search or those between jobs. Doesn’t cause any weakness or damage to the economy as they are only out of work for a short time.

Question 12

What is Cyclical unemployment?

Answer 12

Unemployment that arises throughout the course of the economic cycle, during a downturn or recession. These can result in a lower demand for labour.

Question 13

What is demand - deficient unemployment?

Answer 13

Unemployment arising from a deficiency in aggregate demand in an economy. Firms make workers redundant because they want to reduce their output in response to less demand from consumers. This can be damaging because workers from a particular industry or region can lose their jobs at the same time.

Question 14

What is seasonal unemployment?

Answer 14

Unemployment that arises during the seasons of the year. For example fruit pickers or those working in the tourist industry. The damage to the economy will depend on the reliance of the primary sector. Some countries rely on tourism/ agriculture so this can be very damaging.

Question 15

What is Structural unemployment?

Answer 15

Unemployment which arises due to changes in pattern of economic activity within an economy. It may experience deindustrialisation, resulting in an economic activity relying on secondary and then tertiary sectors. This type of unemployment can signify structural weaknesses in the economy because it suggests that labour is occupational immobile.

Question 16

What are the consequences of unemployment?

Answer 16

Lower gross domestic product - economy not producing at its PPC

Lower standards of living - households incomes fall consumers not able to purchase products that would boost their living standards
greater income inequality

pressure on govt finances - need to find money for benefit payments yet less tax from income tax as people unemployed so Govt might need to borrow more/cut spending in other areas or raise taxes to fund this expenditure

the hysteresis effect - deterioration of someone’s skills through a long period of unemployment

depends on cause of unemployment - cyclical is generally OK, structural more concerning

higher rates of unemployment - the higher the rate of unemployment the higher the costs will be

long term unemployed

wages - one benefit from high unemployment is reduced pressure on wage rates

Question 17

How does lower gross domestic product affect economy?

Answer 17

Unemployment = significant waste of economic resources and its likely economy will be producing within the PPCand not producing at its productive potential. This loss of input could discourage firms to invest, affecting job opportunities in the future.

Question 18

How does lower standard of living affect economy?

Answer 18

As household income falls consumers are not able to purchase products, which would boost their material living standards

Question 19

What is greater income inequality?

Answer 19

Unemployment can be socially divisive e.g certain regions experiencing structural unemployment may show signs of greater disparity.

Question 20

How do the pressures on govt finances affect the economy

Answer 20

Greater payments of benefits and lower tax revenue from income tax or indirect taxation receipts from consumer spending can put pressure on govt finances. This could force the govt to borrow more, cut spending and raise taxes elsewhere. This could be lessened if there are fewer people who are economically active and participating in the labour market.

Question 21

What is the Hysteresis effect?

Answer 21

The deterioration of someone’s skills through a long period of unemployment can render them less productive and increase the probability of them remaining unemployed in the long term.

Question 22

How do higher rates of unemployment affect economy?

Answer 22

The higher rate of unemployment= the more serious the costs are likely to be.

Question 23

How does the long term unemployed affect economy?

Answer 23

The loss to the macroeconomy through a high rate of unemployment depends on the length of time people are out of work. Costs tend to build over time.

Question 24

How do wages affect the economy?

Answer 24

One benefit of higher rates of unemployment is that wage rates will have a reduced pressure and therefore reduced wage rate inflationary pressure.

Question 25

What are the effects of full employment?

Answer 25

The economy is operating efficiently

The economy is not experiencing the negative consequences

Operating at full capacity can mean there is a risk of experiencing demand-pull inflationary pressure when there’s a rise in aggregate demand

Underemployment- workers who are in employment but not using their skills to their full potential. As skills are not being used the economy is operating below its productive potential.

Rising numbers of young people unemployed- economy could face deep structural/ fundamental weakness if large numbers of its labour force is underemployed or discouraged workers ( those who have been unable to find work and are no longer looking)