2.5.4 Unemployment

Question 1

Employment

Answer 1

People 16-64 in work

Question 2

unemployment

Answer 2

People willing and able to work who are not able to find a job

Question 3

Underemployment

Answer 3

Those who are employed but the work doesnt meet their qualifications/they are in part time work against their wishes

Question 4

Claimant count

Answer 4

Official measure based on the number of people claiming unemployment benefits

Question 5

Structural unemployment

Answer 5

People have the wrong skills for the job on offer or are located far away from the job → structural change

Question 6

problems with the definition of unemployment

nuance in definition

Answer 6

• An unemployed person covers all people not in employment but who want to work, measured by the claimant count
• Does not take into account: part time workers who want to work full time, women with families who would take a job if offered, and people discouraged from looking for a job, people who dont claim benefits
• Unemployment rate: refers to the number unemployed as a percentage of the working population; depends on local/regional differences
• politicians do not like to talk about unemployment, as voters see it as a negative thing

Question 7

occupational and geographical immobility of labour

Answer 7

• OCCUPATIONAL immobility of labour: workers cannot take new jobs due to the lack of transferable skills (skills mismatch)
• GEOGRAPHICAL immobility of labour: workers tied to areas due to house prices, family commitments

Question 8

types of SUPPLY SIDE unemployment

Answer 8

• seasonal
• frictional
• structural
• technological
• search
• classical
• cyclical

Question 9

seasonal U

Answer 9

• Linked to seasons (winter), especially in primary sector dominated economies
• Affects key industries: Construction, building, tourism etc
• Caused by regular seasonal changes in business activity
• Gov cannot intervent much

Question 10

frictional U

Answer 10

• This is unemployment whilst changing jobs → in booms as the job market has changed
• Reflects job turnover in the market
  It is the irreducible minimum unemployment in a dynamic economy
• Caused by imperfect information about available job opportunities

Question 11

structural U

Answer 11

• Arises from long term changes in the economy - decline in a particular industry or region eg collapse in manufacturing
• Structural unemployment is regional in nature (coal mining and steel manufacturing) → sectors move to other countries and they gain comparative advantage (china)
• Difficulty as they may be new jobs in the economy but experience and skill doesnt fit those new jobs

Question 12

technological U

Answer 12

• Caused by the adoption of new labour saving technology (AI)
• Labour immobility is a factor in structural unemployment

Question 13

search U

Answer 13

• Caused by people remaining in the job market for extended periods looking for the right job
• Search U is caused by people being unwilling to accept any job but instead holding out for the right job

Question 14

classical U

Answer 14

• Result of real wages being set above the equilibrium wage rate
• If wage cost = high proportion cost in labour intensive firms → will the costs saved in wages be taken by shipping costs etc?

Question 15

cyclical U

Answer 15

• Associated with a recession
• Caused by a downturn in the economy
• AD increased using supply side policies

Question 16

demand deficient unemployment

Answer 16

• Unemployment caused by a deficiency of aggregate demand, spending falls so does demand and output → firms need less workers, leading to redundancy
• Demand deficient unemployment is usually associated with recession but can exist in the long run when the economy has an output gap

Question 17

economic costs of unemployment

Answer 17

Waste of scarce resources → the economy could grow more if people were working, so reduction in growth potential
- opportunity cost: people could be employed and generating GDP, loss of potential growth output and income

• Reduction in national output and income
• Reduction in AD
• Reduction in sales and profit → firm impact
• Fall in living standards (individual impact)
• Fall in tax yield, as income has fallen

Rise in gov spending on benefits
- Opportunity cost as money could have been used elsewhere (health and education which has benefits in the long run)

• Rise in government borrowing -> as spending on benefits has increased but tax revenue has decreased, ineffective as it does not increase long term growth

Question 18

social costs of unemployment

Answer 18

Social hardship, deprivation and social problems -> increase gov spending
- Health and wellbeing problems increase, like crime and depression
- Social costs increase government spending

• Loss of human capital
• Loss of skills

Rise in unemployability
- If after a recession, the economy goes through structural changes, those with skills mismatch will stay unemployed until trained again

Discouraged worker effect (discouraged from seeking a job)
- Hard to get those who are unemployed for a long time back into work
- Negative impact on morale

Question 19

benefits of unemployment but overall judgement (macro objectives)

Answer 19

• Reduction in pressure to push up wages, so lower costs for firms
• Lower inflation
• Improvement in the balance of payments as imports fall and firms are forced to look to export markets

OVERALL: fall in demand and the economic and social costs of unemployment far outweighs any benefits
- Tackling unemployment is a significant part of gov macro objectives
- Problem is how to promote unemployment without unacceptable economic problems such as inflation

Question 20

negative impacts of unemployment on firms

Answer 20

• Reduces demand for the products of business organisation
• Moving from a wage to job seeker allowance reduces income and ability to spend
• Fear of unemployment might discourage spending even by those who remain in work
• Impact on luxury items → inelastic demand
• Declining demand: firms might postpone/abandon investment projects
• Saves costs in the short run but could be damaging in the long run
• Cut back in investment may extend to human capital eg training

Question 21

positive impacts of unemployment on firms

Answer 21

• Unemployment increases the pool of labour from which to recruit
• Firms will have less difficulty recruiting employees even recruiting people with specialist skills
• Fewer job opportunities due to unemployment: reduce labour turnover, increase employee retention rates, reduce wage push inflation
• Firms selling inferior goods see an increase in demand and may therefore experience growth

Question 22

a Keynesian approach to solving unemployment

Answer 22

• raising aggregate demand
• Reduce taxation to increase consumer spending and investment (more disposable income)
• Reduce interest rates when borrowing, to increase consumer spending and investment
• Encourage inward foreign investment
• Increase government spending
• Depreciation of the exchange rate to boost exports and reduce imports
• HOWEVER: raising aggregate demand is likely to result in inflation which slows down economic growth in the long run

Question 23

supply side approach to solving unemployment

Answer 23

Argue that U is caused by: lack of competition in the market, immobility of labour, geo and occupational immobility of labour and lack of incentives to supply and should therefore create incentives, making the market more competitive and efficient

• training/retraining to increase occupational mobility
• Housing market changes to improve geographical mobility
• Improve the flow of information on job vacancies
• Eliminate barriers to competition
• Labour market flexibility
• Local wage bargaining
• Short term contracts
• Tax and benefits changes to make it more worthwhile for the low paid to work
• Reduce the rate of income tax
• Raise tax thresholds to remove the low paid from the tax net
• Reduce job seekers allowance
• Repeal employment protection laws
• Reduce trade union powers (thatcher)