4.6. Employment and Unemployment Flashcards
Employment
working (includes full-time, part-time, self-employed).
Unemployment
not working but actively seeking work.
Unemployment Rate
(unemployment / labour force) x 100
Working age population
people of legal working age (15-64 OECD measure).
Labour force (workforce, economically active)
employment + unemployment.
Participation rate
(labour force / working age population) x 100
Economically inactive
working age population not employed or unemployed.
Size / composition of the labour force
Labour force is affected by:
- Total size of the population.
- School leaving age.
- Higher education participation rate.
- Retirement age.
- Cultural attitudes (e.g. female employment).
- Welfare payments (e.g. unemployment benefits).
- Birth rate.
- Cost of childcare.
- Death rate.
Reasons for Economic Inactivity
- Stay-at-home parent
- Looking after elderly / sick family members
- Student at university
- Long-term sick
- Disabled
- Early retirement
- In prison
Labour Productivity
output per worker per time period
Factors affecting labour productivity:
- Education
- Training
- Skills
- Qualifications
- Experience
- Technical knowledge
- Use of capital
- Working methods
- Motivation
Production meaning
total output from resources
Productivity meaning
the efficiency of an input into the production process.
Types of unemployment
1) Frictional unemployment
a) Search unemployment
b) Seasonal unemployment
c) Casual unemployment
2) Structural unemployment
a) Technological unemployment
b) Regional unemployment
c) International unemployment
3) Classical (real-wage) unemployment
4) Cyclical (demand-deficient) unemployment
Frictional Unemployment meaning
Unemployment that is temporary and arises when people are in between jobs. There are 3 types
Search Unemployment
(FRICTIONAL UNEMPLOYMENT)
workers do not accept the first job on offer but spend time looking for a better job
Seasonal Unemployment
(FRICTIONAL UNEMPLOYMENT)
workers are only needed at certain times in the year e.g. farming, tourism
Casual Unemployment
(FRICTIONAL UNEMPLOYMENT)
out of work between periods of employment e.g. actors.
Frictional Unemployment Evaluation
economists are not concerned with this type of unemployment because it will always be present and is a sign of a healthy labour market.
Structural Unemployment meaning
Persistent and long-term unemployment caused by a change in the structure of the economy. There are 3 types.
Structural Unemployment Analysis
- Over time as an economy develops it undergoes structural change.
- Some industries expand (e.g. tertiary) whilst others contract (e.g. primary and secondary).
- Some workers are unable to transfer between industries due to geographical immobility (unable to relocate) and occupational immobility (lack of skills).
Technological Unemployment
(STRUCTURAL UNEMPLOYMENT)
when workers are replaced by labour-saving techniques (e.g. machines).
Regional Unemployment
(STRUCTURAL UNEMPLOYMENT)
when declining industries are concentrated in a particular area of the country
International Unemployment
(STRUCTURAL UNEMPLOYMENT)
workers lose their jobs because the industry relocates to cheaper foreign economies
Structural Unemployment Evaluation
more of a problem in developed economies due to the decline of agriculture and manufacturing in recent decades
Classical (real-wage) Unemployment Meaning
when the labour market does not clear resulting in an excess supply of labour
Classical (real-wage) Unemployment Causes
1) National minimum wage
2) Trade union minimum wage
3) Sticky wages (Keynes)
Classical (real-wage) Unemployment Diagram (DRAW DIAGRAM)
- y-axis wages
- x-axis quantity of labour
- normal AD and AS curves
- minimum wage set above the equilibrium
- results in excess supply of labour
Cyclical (demand-deficient) Unemployment Meaning
Fall in demand for workers due to to a lack of aggregate demand (AD).
Cyclical (demand-deficient) Unemployment Analysis
- Downturn / recession.
- Fall in C & I and therefore AD.
- Firms reduce production.
- Output falls.
- Workers resist wage cuts (sticky wages)
- Cyclical unemployment.
Cyclical (demand-deficient) Unemployment Diagram (DRAW DIAGRAM)
- y-axis wages
- x-axis quantity of labour
- normal AD and AS curves
- AD curve shifts left
- equilibrium wage level stays the same
- there is excess supply of labour so there is unemployment (demand-deficient)
Involuntary Unemployment
workers want to work at the current wage rate but are unable to due to factors beyond their control (e.g. real wage unemployment or cyclical unemployment).
Voluntary Unemployment
workers choose not to work at current wage rates because they hope to find a better paid job.
Involuntary / Voluntary Unemployment Diagram (DRAW DIAGRAM)
- y-axis wages
- x-axis quantity of labour
- normal AD and AS curves
- labour force curve to the right of AS curve (same angle as AS curve)
- there is a minimum wage set above equilibrium
- from the AD to AS curve = involuntary unemployment
- from AS curve to labour force curve = voluntary unemployment
Full Employment
a situation where everyone that wants a job has a job, excluding frictional unemployed.
- at maximum employment on LRAS curve
- at boundary of PPC curve
Full Employment Features
- Does not mean 0% unemployment.
- Likely to occur at around 2-3% unemployment.
- There will be no demand deficient unemployment.
- Economy is operating on PPC and where AD = LRAS.
Natural Rate of Unemployment
the rate of unemployment that persists when the labour market is in equilibrium (when aggregate labour supply equals aggregate labour demand).
- from equilibrium of AS and AD to labour force curve
Natural Rate of Unemployment Features
- Unemployment that is left when there is no cyclical unemployment.
- Consists of frictional and structural unemployment.
- Caused by supply-side factors.
- This level of unemployment is consistent with a stable rate of inflation.
Factors determining the natural rate of unemployment:
- Availability of job information
- Level of welfare benefits
- Skills and education
- Labour mobility
- Labour market flexibility
Costs of unemployment on Individuals
- Lower income.
- Lower standard of living.
- Loss of skills.
- Harder to find future employment.
- Poverty.
- Decline in physical & mental health
Benefits of unemployment on Individuals
- Career break / change of job.
- Further education / training.
- Go and travel.
- Time with family.
- More leisure time.
Costs of unemployment on Firms
- Less demand for their G/S.
- Lower revenues and profit.
Benefits of unemployment on Firms
- Larger choice of potential workers.
- Existing workers less likely to ask for pay increases.
Costs of unemployment on the Economy
- Opportunity cost.
- Output below potential.
- Slower economic growth rates.
- Less consumption / spending.
- Worsening of government budget due to:
- Lower government tax revenue (both indirect and direct tax).
- Higher government spending (job creation, welfare payments).
- Social problems e.g. crime.
Benefits of unemployment on the Economy
- Less demand-pull inflation.
- Less demand for imports improves the current account.
Measuring unemployment
1) Claimant Count
2) Labour Force Survey (International Labour Organisation)
Claimant Count
based on those claiming unemployment benefits.
Advantages of using Claimant Count
+ Cheap and easy to collect.
+ Based on Government data.
Disadvantages of using Claimant Count
- Overstates the figure if it includes people not really unemployed (e.g. working and claiming illegally, people not really looking).
- Understates the figure if it omits people genuinely unemployed (e.g. non-claimants, on government training schemes, above retirement age).
- Rules for claiming may change over time.
Labour Force Survey (International Labour Organisation)
based on a survey that identifies people who are actively seeking a job:
- Not working but willing / able to work.
- Able to start a job in the next 2 weeks.
Advantages of using Labour Force Survey (International Labour Organisation)
+ Includes some groups left out of the claimant count.
+ Based on internationally agreed concepts and definitions.
+ International comparisons are easier to make.
Disadvantages of using Labour Force Survey (International Labour Organisation)
- More expensive and time-consuming to collect.
- Based on a sample of households (possible sampling errors).
- Survey might be incorrectly completed.
Unemployment patterns / trends / data
As economies develop, comparative advantage changes and workers become more skilled:
- Proportion employed in the primary sector falls.
- Proportion employed in the secondary sector initially rises and then falls.
- Proportion employed in the tertiary sector rises.
