4.5 Unemployment

Question 1

Define unemployment

Answer 1

Those who are of age and are willing and able to work but don’t have a job

Question 2

What are the two measures of unemployment?

Answer 2

-The labour force survey (LFS) by the international labour organisation (ILO)
-Claimant count measure

Question 3

What is the Labour Force Survey?

Answer 3

The LFS identifies the number of employed, unemployed and economically inactive people. It is generated from a survey of 60-70,000 households

Question 4

Advantages of the LFS

Answer 4

Allows for comparison between countries as it is used internationally

Question 5

Disadvantages of the LFS

Answer 5

Sampling errors as the sample is so Iarge
Costly and time consuming
Hidden unemployed - Loads of discouraged workers due to rejections aren’t counted as they aren’t looking for work
Only carried out quarterly so may not pick up changes in the labour market quickly
Inactive groups like full time students or early retired
Doesn’t tell you about disparities in unemployment. Gneder or age or race

Question 6

What is the claimant count?

Answer 6

It is the number of people claiming benefits

Question 7

Disadvantages of the claimant count

Answer 7

Hard to compare with other countries
Some people don’t claim or can’t claim due to embarassment
subject to fraud

Question 8

What is long term unemployment?

Answer 8

It accounts for people who have been out of a job for at least one year

Question 9

What is the formula for unemployment rate?

Answer 9

(Number or people unemployed /economically active) x 100

Question 10

What is cyclical unemployment? (demand deficient unemployment)

Answer 10

It is caused by a decrease in AD, reducing the demand for labour
Cyclical unemployment can rise quickly in a recession.

Labour is a derived demand but in recession AD is falling. Also firms aren’t selling a lot so to keep profit margins at a certain level they look to cut costs and one way of this is to get rid of workers

Keynesian believe labour is sticky downwards and they believe when demand for labour shifts left the excess supply stays

Question 11

What is frictional unemployment?

Answer 11

It is caused by workers seeking a better job or who are in-between jobs

Question 12

Who does frictional unemployment affect?

Answer 12

It affects those people who are new entrants to the labour market such as school and university graduates
it affects people who rely on short-term contracts and move between employers more frequently.

Question 13

How can frictional unemployment be reduced?

Answer 13

Making information on jobs more widely available
Making job search and applications more easy and affordable

Question 14

What is structural unemployment?

Answer 14

Immobility of labour primarily due to a long term change in the structure of an industry
There is occupational immobility - there is a skills mismatch
Geographical immobility of labour - workers aren’t willing to move to where vacancies exist. maybe due to preference, personal preference, transport etc
This occurs due to a few reasons:
Maybe major tech advancements which automates everything which reduces the need for physical labour.
Loss of comparative advantage. This is when an industry can produce a good or service more efficiently and at a lower cost than industries abroad. If they lose this comparative advantage they will see a big decline in demand and structural unemployment.
Modernisation / new industry growth. Education system isn’t keeping up with the change of industries

Mainly caused by a lack of suitable skills for the jobs available
Structural unemployment can happen because of other barriers to people finding work

Question 15

What is the unemployment trap?

Answer 15

Situation in which there is little financial incentive for someone who is unemployed to start working because the combined loss of benefits and paying taxes may lead to them being worse off

Question 16

Define economically inactive

Answer 16

Those who are of working age but who are not in/not seeking work

Question 17

What is real wage unemployment?

Answer 17

This is when wages are forced above equilibrium in a labour market creating excess supply of labour. This will happen when new minimum wages are introduced but also when there are strong trade unions formed

When wage rate increases firms are less willing to employ so u see a contraction of demand. But workers are very willing and able to work at higher wages so you see an expansion of labour supply. This gives an excess supply and this is the real wage unemployment

Question 18

What 3 un employments come under the natural wage of unemployment?

Answer 18

Structural unemployment
Frictional unemployment
Seasonal unemployment

Question 19

What is the natural rate of unemployment?

Answer 19

It is unemployment when the labour market is at equilibrium
Consists of structural, frictional and seasonal unemployment
You can never achieve 0% unemployment. The NRU is full employment

Free market economists believe that when there is too generous benefit systems it almost encourages structural unemployment. Have the safety net of benefits. Also excessive labour market regulation means firms aren’t willing to take big risks hiring low skill workers

Interventionist economists believes NRU occurs because
Lack of transport/housing infrastructure because of market failure. Not enough supply as they might be public or merit goods.
Lack of in work training programmes as there are positive externalities which will be ignored. If workers lose their jobs they will still have transferrable skills to take to other industries

Question 20

Costs and benefits of unemployment and evaluation

Answer 20

Costs:
Lost output - economy operating within PPF which means you dont get max production of goods and services. Bad for consumers and households. Living standards will be lower and it is a constraint to econ growth if you arent maxxing econ growth
Deterioration of gov finances as tax revenues will come down. More gov spending on benefits and areas to deal with the high costs of unemployment, especially the social costs. More riots and increase in crime rates. More gov spending on healthcare for physical and mental health. Budget deficits rise which may mean tax rates have to go up to fund these spendings. Or borrow more money which comes with opp cost of debt interest
Lost income which drives people into relative and absolute poverty which feeds through to mental and physical health issues
Hysteresis which is when unemployment becomes long term and the longer this happens the mor eliekly they are to lose their skills and new entrants to the labour force out compete these workers. These workers are then basically unemployable. These workers adust to life on lower income which constrains their spending power which harms short run econ growth (AD). Could be so demotivated that they could drop out of the labour force as they aren’t looking for a job anymore

Benefits:
Greater pool of workers for firms to choose from. They love this flexibility. They choose the best worker which is great for productivity and keeps costs low.
High unemployment should mean low inflation. With abundant labour, workers don’t have that much wage bargaining power which keeps a lid on wage rises and costs of production and overall prices of G and S.
CA position should improve. High unemployment should help reduce CA. Less sucking in off imports
Takes away the pressure of getting straight back into work. They can take their time and find a suitable job for themselves

Evaluation:
Rate of unemployment is crucial. NRU is the best. If it goes beyond then the costs go above the benefits
Duration is important. This is as risk of hysteresis increases significantly. Long term is really bad for economy
Type is crucial. Clear structural is the worst especially occupational immobility as it is very hard to fix and can lead to it being a very long term unemployment
Distribution of unemployment is key. The worst group to be unemployed is the youth. This is as they are more liable to suffer from long term unemploymen