3.2 Employment And Unemployment

Question 1

What are the two main measures of unemployment in the UK?

Answer 1

• The Claimant Count
• The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS)

Question 2

How does the claimant count measure unemployment?

Answer 2

• This counts the number of people claiming unemployment related benefits, such as Job Seeker’s Allowance (JSA).
• They have to prove they are actively looking for work
• However not every unemployed person is eligible for, or bothers claiming JSA. -Those with partners on high incomes will not be eligible for the benefit, even if they are unemployed.
• Although there may be instances of people claiming the benefit whilst they are employed, the method generally underestimated the level of unemployment.

Question 3

How does The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS) measure unemployment?

Answer 3

-The LFS is taken on by the ILO. It directly asks people if they meet the following
criteria:
•Been out of work for 4 weeks
•Able and willing to start working within 2 weeks
•Workers should be available for 1 hour per week. Part time unemployment is included.

-Since the part time unemployed are less likely to claim unemployment benefit, this method gives a higher unemployment figure than the Claimant Count.

Question 4

What is voluntary employment?

Answer 4

-Voluntary unemployment occurs when someone chooses not to work at the current wage rate.

-This could be encouraged in welfare payments are generous relative to real wages.

-A high income tax rate might also discourage people from participating
in the labour market.

Question 5

What is involuntary unemployment?

Answer 5

-A person is involuntarily unemployed when they are willing and able to work at the current wage rate, but they cannot find work.

-It is usually cyclical, since it is caused by a fall in AD.

-It occurs when there is an excess supply of labour, which ‘sticky wages’ are unable to correct.

-When an economy experiences involuntary unemployment, it is not operating at full employment.

Question 6

The significance of changes in the rates of Employment and Unemployment:
•Consumers

Answer 6

-If consumers are unemployed, they have less disposable income and their standard of living may fall as a result.

-There are also psychological consequences of losing a job, which could affect the mental health of workers.

Question 7

The significance of changes in the rates of Employment and Unemployment:
•firms

Answer 7

-With a higher rate of unemployment, firms have a larger supply of labour to employ from.
-This causes wages to fall, which would help firms reduce their costs.

-However, with higher rates of unemployment, since consumers have less disposable income, consumer spending falls so firms may lose profits.

-Producers which sell inferior goods might see a rise in sales. It might cost firms to retrain workers, especially if they have been out of work for a long time.

Question 8

The significance of changes in the rates of Employment and Unemployment:
•workers

Answer 8

-With unemployment, there is a waste of workers’ resources.
-They could also lose their existing skills if they are not fully utilised.

Question 9

The significance of changes in the rates of Employment and Unemployment:
•the gocernment

Answer 9

-If the unemployment rate increases, the government may have to spend more on JSA, which incurs an opportunity cost because the money could have been invested elsewhere.

-The government would also receive less revenue from income tax, and from indirect taxes on expenditure, since the unemployed have less disposable income to spend.

Question 10

The significance of changes in the rates of Employment and Unemployment:
•society

Answer 10

-There is an opportunity cost to society, since workers could have produced goods and services if they were employed.

-There could be negative externalities in the form of crime and vandalism, if the unemployment rate increases.

Question 11

The significance of changes in the rates of Employment and Unemployment:
•inactivity

Answer 11

-The economically inactive are those who are not actively looking for jobs.
-These could include carers for the elderly, disabled or children, or those who have retired.

-Some workers are discouraged from the labour market, since they have been out of work for so long that they have stopped looking for work.

-If the number of the economically inactive increases, the size of the labour force may decrease, which means the productive potential of the economy could fall.

Question 12

What are the different types of unemployment?

Answer 12

-Structural
-Frictional
-Seasonal
-Cyclical
-Real wage unemployment

Question 13

What is Structural unemployment?

Answer 13

-Occurs with a long term decline in demand for the goods and services in an
industry, which costs jobs.
-This is especially true of jobs in industries such as car manufacturing, where labour is replaced by capital (this is also called technological unemployment).
-the decline of the coal and ship building industries in the UK, led to a great deal of structural unemployment.

-This type of unemployment is worsened by the geographical and occupational
immobility of labour.

-If workers do not have the transferable skills to move to
another industry, or if it is not easy to move somewhere jobs are available, then those facing structural unemployment are likely to remain unemployed in the long run.

Question 14

What is frictional unemployment?

Answer 14

-This is the time between leaving a job and looking for another job.

-It is common for there to always be some frictional unemployment, and it is not particularly damaging since it is only temporary.
-For example, it could be the time between graduating from university and finding a job.

-This is why it is rare to get 100% employment: there will always be people moving between jobs.

Question 15

What is seasonal unemployment?

Answer 15

-This occurs during certain points in the year, usually around summer and winter.

-During the summer, more people will be employed in the tourist industry, when
demand increases.

Question 16

What is Cyclical unemployment (also knows as demand deficiency)?

Answer 16

-This is caused by a lack of demand for goods and services, and it usually occurs
during periods of economic decline or recessions.

-It is linked to a negative output gap.

-Firms are either forced to close or make workers redundant, because their
profits are falling due to decreased consumer spending, and they need to reduce
their costs.
-This then causes output to fall in several industries.

-This type of unemployment could actually be caused by increases in productivity,
which means each worker can produce a higher output, and therefore fewer workers are needed to produce the same quantity of goods and services.

Question 17

What is real wage unemployment?
Draw and explain a diagram to go with this

Answer 17

-Wages above the market equilibrium may cause unemployment. This is because the supply of labour exceeds demand.

-Classical economists argue that by letting wages fall to the equilibrium level, there would be no unemployment.

-Classical economists would argue that by letting wages be flexible, by removing
trade union power and removing the NMW, wages could fall and unemployment
would fall to 0.

-However, cutting wages during times of weak consumer spending would cause
further falls in consumer spending, and there would be even lower economic
growth.
-the classical economist argument is made on the assumption of a perfectly competitive market, which is not true in reality.

Question 18

How do changes in the rest of the world affect employment and unemployment in the UK?

Answer 18

-Globalisation also contributes to structural unemployment, since production in the manufacturing sectors, such as in clothing or motor cars, moves abroad to countries with lower labour costs.
-This means that workers trained for these jobs will become unemployed, because the industry has declined in size or has been removed from the economy.

-Migrants are usually of working age, so the supply of labour at all wage rates tends to increase with more migration.
-There could be more competition to get a job due to the rise in the size of the working population.

-Migrants tend to be of working age, and many are looking for a job.
-Migrants tend to bring high quality skills to the domestic workforce, which can increase productivity and increase the skillset of the labour market.

-This could increase global competitiveness.

Question 19

What are the consequences of unemployment?

Answer 19

-If consumers are unemployed, they have less disposable income so standard of living may fall as a result.

-psychological consequences of losing a job, which could affect the mental health of workers.

-a higher rate of unemployment means firms have a larger supply of labour to employ from. This causes wages to fall, which would help firms reduce their costs.

-However, with higher rates of unemployment, since consumers have less disposable income, consumer spending falls so firms may lose profits.
-Producers which sell inferior goods might see a rise in sales.

-It might cost firms to retrain workers, especially if they have been out of work for a long time.

-With unemployment, there is a waste of workers’ resources. They could also lose
their existing skills if they are not fully utilised.

-If the unemployment rate increases, the government may have to spend more on JSA, which incurs an opportunity cost because the money could have been invested elsewhere.

-The government would also receive less revenue from income tax, and from indirect taxes on expenditure, since the unemployed have less disposable income to spend.

-There is an opportunity cost to society, since workers could have produced goods and services if they were employed.

-There could be negative externalities in the form of crime and vandalism, if the
unemployment rate increases.

Question 20

What is the natural rate of unemployment?

Answer 20

-The unemployment rate when the labour market is at equilibrium is called the
natural rate of unemployment.

-It is a concept developed by Milton Friedman and Edmund Phelps.

-This type of unemployment is the difference between those who are willing to have a job at the current market wage level, and those who are willing and able to have a job.

-It is caused by supply-side factors.

-It includes the frictional level of unemployment, structural unemployment and
workers who do not have the necessary skills for a job.

-It is also called the NAIRU: non-accelerating inflation rate of unemployment.
-It means that inflation does not have a tendency to increase at this unemployment rate.

-Sometimes, it is also referred to as the full level of employment, since there is
no demand-deficient unemployment.

-In the long run, the unemployment rate reverts to the natural rate of
unemployment. However, it can fluctuate around this rate due to economic
variables.