4.7 employment and unemployment Flashcards
What is unemployment
Situation where people in the labour force are actively looking for jobs but are currently unemployed.
What is full employment
situation where the entire labour force is employed. All the people who are able and willing to work are employed – unemployment rate is 0%.
What is the labour force
Total number of people of working age in an economy who are willing to work
What is the labour force participation rate
Labour force as a proportion of the total working-age population
What is ‘dependent population’
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.
Some people in the dependent population
students in education
retired people
stay at home parents
prisoners or similar institutions
those choosing not to work.
What happens as the economy develops
(3 trends)
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
Why the the proportion of female labour increase
Countries become more progressive
Poverty and rising living costs in developing countries force many women to work
Definition of informal and formal sectors
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
What are the 2 types of short lived unemployment
Frictional
Seasonal
What is frictional unemployment
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.
What is seasonal unemployment
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
What is cyclical unemployment
occurs as a result of fall in aggregate demand due to an economic recession.
What effect can a fall in demand have on an economy
A downward multiplier effect on output, employment and incomes
What is a multiplier effect
A relatively small change in total expenditure can cause much larger changes in income, output and employment
What is structural unemployment
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 Workers have outdated skills that aren’t required anymore, and are occupationally immobile.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.
What is technological unemployment
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.
What is sectoral unemployment
Unemployed caused as a sector/industry declines and leave its workers unemployed.
Eg: as an economy progress - goes from primary sector to tertiary sector.
What are some labour market barriers and failures.
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
Why is Powerful trade unions forcing up wages a market failure
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
How do trade unions drive up wage rates
Restrict the supply of labour to a industry/occupation
Threatening to take industrial action
How do unemployment benefits reduce the incentive to work
If the benefits are too generous, people may not want to work and just stay on those benefits.
Who and how does cutting unemployment benefits impact
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.
How do other employment costs reduce the demand for labour
what is a possible solution
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.
When does a lack of information hurt for job search hut the economy?
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
When does minimum wage legislation reduce demand for labour
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
Why is labour immobility a labour market failure
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.
3 costs of unemployment
Personal
Fiscal
Economy
What are the personal costs of unemployment
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
What are the fiscal costs of unemployment
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
What are the policies to reduce unemployment
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
What are the expansionary policies the govt can employ to reduce unemployment
Main drawback
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
How would Depreciating the exchange rate reduce unemployment
Exports become cheaper
export demand from abroad will increase
helping boost production and employment in the export industries
How would controlling inflation reduce unemploymnet
what is the conflict
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
How would Restricting imports lead to employment
Put tariffs on imports. Domestic firms would have to fulfil the demand and therefore would produce more. Employment rises
How does training/retraining reduce unemployment’
timeframe
drawback
Makes labour more occupationally mobile. Reduces structural unemployment.
Long term
Drawback - can be quite expensive to carry out nationwide
How do govts promote industries in unemployed areas
timeframe
drawback
Subsidies and tax incentives if firms locate in areas where there is high structural unemployment
long term
expensive
How do governments increase geographical mobility of labour
investing in transport and housing services.
Providing subsidies to employees that are willing and able to shift places
Reduces frictional unemplyoment
What type of unemployment does providing information reduce
Frictional unemployment. Easier to find the right job vacancies
