4.7 employment and unemployment

Question 1

What is unemployment

Answer 1

Situation where people in the labour force are actively looking for jobs but are currently unemployed.

Question 2

What is full employment

Answer 2

situation where the entire labour force is employed. All the people who are able and willing to work are employed – unemployment rate is 0%.

Question 3

What is the labour force

Answer 3

Total number of people of working age in an economy who are willing to work

Question 4

What is the labour force participation rate

Answer 4

Labour force as a proportion of the total working-age population

Question 5

What is ‘dependent population’

Answer 5

People not in the labour force and thus depend on the labour force to supply them with goods and services to fulfill their needs and wants.

Question 6

Some people in the dependent population

Answer 6

students in education
retired people
stay at home parents
prisoners or similar institutions
those choosing not to work.

Question 7

What happens as the economy develops

(3 trends)

Answer 7

employment shifts from primary sector to manufacturing and then to the tertiary services

Employment shifts from the informal sector to the formal sector

Increase in proportion of female labour

Question 8

Why the the proportion of female labour increase

Answer 8

Countries become more progressive

Poverty and rising living costs in developing countries force many women to work

Question 9

Definition of informal and formal sectors

Answer 9

informal - unrecognised trades where the output is not included in GDP and incomes are not taxed

formal - recognised trades where the output is included in GDP and incomes are taxes

Question 10

What are the 2 types of short lived unemployment

Answer 10

Frictional
Seasonal

Question 11

What is frictional unemployment

Answer 11

individuals that voluntarily choose to leave their job in search of a new one or when new workers enter the job market.

‘in-between jobs’ unemployment.

Question 12

What is seasonal unemployment

Answer 12

occurs as a result of the demand for a product being seasonal. When the season gets over, the employs are laid off.

For example - hotel workers (more during holidays less during rest of the year), agriculture etc

Question 13

What is cyclical unemployment

Answer 13

occurs as a result of fall in aggregate demand due to an economic recession.

Question 14

What effect can a fall in demand have on an economy

Answer 14

A downward multiplier effect on output, employment and incomes

Question 15

What is a multiplier effect

Answer 15

A relatively small change in total expenditure can cause much larger changes in income, output and employment

Question 16

What is structural unemployment

Answer 16

Occurs due to the long-term change in the structure of an economy. Workers have outdated skills that aren’t required anymore, and are occupationally immobile. This causes them to remain unemployed.

Question 17

What is technological unemployment

Answer 17

When technology and machinery can complete tasks more efficiently and at a lower cost, companies switch to those capital-intensive methods of production. This leaves the labour that used to do those tasks unemployed.

Question 18

What is sectoral unemployment

Answer 18

Unemployed caused as a sector/industry declines and leave its workers unemployed.

Eg: as an economy progress - goes from primary sector to tertiary sector.

Question 19

What are some labour market barriers and failures.

Answer 19

Powerful trade unions forcing up wages

Unemployment benefits reducing the incentives to work

Increase in other costs of employment that reduce demand for labour

Lack of information that prevents people from getting jobs

Minimum wage legislation

Labour immobility

Question 20

Why is Powerful trade unions forcing up wages a market failure

Answer 20

Trade unions may try to force the wages up without ensuring that labour productivity is going up as well. Employers may not be able to afford to employ all the employees at the new wage rate, hence unemployment would rise

Question 21

How do trade unions drive up wage rates

Answer 21

Restrict the supply of labour to a industry/occupation
Threatening to take industrial action

Question 22

How do unemployment benefits reduce the incentive to work

Answer 22

If the benefits are too generous, people may not want to work and just stay on those benefits.

Question 23

Who and how does cutting unemployment benefits impact

Answer 23

Voluntarily unemployed - People who chose not to work - may be forced to work.

Involuntarily unemployed - people who are unemployed out of no fault of their own (eg structural unemployment) - unfair to them.

Question 24

How do other employment costs reduce the demand for labour

what is a possible solution

Answer 24

Firms that employ labour have to pay other costs barring salaries and wages as well, such as contribution to fund publicly provided unemployment and welfare benefits and training costs.

if these costs rise, demand for labour would fall as firms don’t want to pay these additional costs

Solution - cutting payroll tax increases the demand for labour.

Question 25

When does a lack of information hurt for job search hut the economy?

Answer 25

Cost of job search too high
Takes people too long to find a suitable job therefore they take a job with too many compromises
People wait for better jobs to become available

Allocation of resources will not be at an optimal level and productivity will be lower

Question 26

When does minimum wage legislation reduce demand for labour

Answer 26

When it is set too high. Employers can’t afford that wage rate for all their employees especially for low skilled workers with low levels of productivity

Question 27

Why is labour immobility a labour market failure

Answer 27

Occupational immobility - Inability of workers to move easily between jobs because of a lack of transferable skills. If there is structural unemployment that labour cant get another job

Geographical immobility - Unable to or unwilling to move to another area to take up a job.

Question 28

3 costs of unemployment

Answer 28

Personal
Fiscal
Economy

Question 29

What are the personal costs of unemployment

Answer 29

Economic and emotional costs on people.

Poverty, homelessness and ill health.
Encourage people to steal and commit other crimes to make money– crime rates will rise.
Retraining costs
Living standards fall - gdp/capita reduces

Question 30

What are the fiscal costs of unemployment

Answer 30

Unemployment benefits - public expenditure increases but tax revenue reduces.

People that have jobs have to pay higher taxes

OC - govt cant spend on schls, healthcare, roads, etc

Question 31

What are the policies to reduce unemployment

Answer 31

Expansionary policies to increase demand
Depreciate the exchange rate
Control inflation
Cutting unemployment benefits
Restricting imports and encourage exports:
Cutting down minimum wages:
Remove labour market regulations
Training/Retraining:
Promote industries in unemployed areas: a
Increase geographical mobility of labour:
Provide information

Question 32

What are the expansionary policies the govt can employ to reduce unemployment

Main drawback

Answer 32

Cutting down taxes
increasing government spending
cutting interest rates

Main drawback - low confidence which could also result in a liquidity trap (if monetary is applied) Less spending, Less lending, more saving

Question 33

How would Depreciating the exchange rate reduce unemployment

Answer 33

Exports become cheaper
export demand from abroad will increase
helping boost production and employment in the export industries

Question 34

How would controlling inflation reduce unemploymnet

what is the conflict

Answer 34

higher inflation causes firms to lay off workers to reduce costs.

If inflation reduces, firms can employ more workers

conflict: as firms employment rises, incomes rise, leads to inflation as well

Question 35

How would Restricting imports lead to employment

Answer 35

Put tariffs on imports. Domestic firms would have to fulfil the demand and therefore would produce more. Employment rises

Question 36

How does training/retraining reduce unemployment’

timeframe
drawback

Answer 36

Makes labour more occupationally mobile. Reduces structural unemployment.

Long term
Drawback - can be quite expensive to carry out nationwide

Question 37

How do govts promote industries in unemployed areas

timeframe
drawback

Answer 37

Subsidies and tax incentives if firms locate in areas where there is high structural unemployment

long term
expensive

Question 38

How do governments increase geographical mobility of labour

Answer 38

investing in transport and housing services.
Providing subsidies to employees that are willing and able to shift places

Reduces frictional unemplyoment

Question 39

What type of unemployment does providing information reduce

Answer 39

Frictional unemployment. Easier to find the right job vacancies