7. Unemployment

Question 1

define unemployment…

Answer 1

the proportion of people in an economy’s labour force who are willing and able to work but cannot find a job despite an active search for work

Question 2

what’s the equation for the unemployment rate?

Answer 2

unemployment rate = unemployed/labour force (unemployed + employed)
x 100

Question 3

who is included in the employed category?

Answer 3

full time employed, part time employed, underemployed (less hours than desired) and self employed

Question 4

who is included in the unemployed category?

Answer 4

willing and able and actively seeking work but unable to find work - real wage, cyclical, seasonal, frictional and structural

Question 5

who is not in the labour force?

Answer 5

not seeking work - independently wealthy, full time parent, restired, student and discouraged (hysteresis)

Question 6

what factors influence the participation rate?

Answer 6

1) demographic changes (baby boomers ageing)
2) female participation
3) income tax rates and unemployment benefits

Question 7

what policies will increase the participation rate?

Answer 7

1) increase minimum wage
2) better/ subsidised childcare
3) education and retraining schemes
4) reduce benefits and restrict access
5) raise retirement age

Question 8

what is the claimant count?

Answer 8

measure the number of people who are claiming unemployment benefits such as universal credit (JSA was absorbed into UC)

Question 9

what are 2 advantages of the claimant count?

Answer 9

1) quick,cheap and easy to gather the data
2) highly accurate data always up-to-date

Question 10

what are 2 disadvantages of the claimant count?

Answer 10

1) only counts those that successfully claim benefits between jobs
2) misleading restricting access to benefits will ‘improve’ unemployment figures but there will be no change in real jobs secured.

Question 11

what is the labour force survey?

Answer 11

it counts those who are without any kind of job including part time work but who have looked for work in the past month (actively seeking) and are able to start work immediately.

Question 12

what are 2 advantages of the LFS?

Answer 12

1) more accurate for identifying actual unemployed not just hose on benefits
2) more in line with international comparisons

Question 13

what are 2 disadvantages of the LFS?

Answer 13

1) small sample size in the survey
2) expensive to run and updated less regularly than the claimant count

Question 14

why is the claimant count usually lower than the LFS?

Answer 14

Because not all who claim unemployment benefits receive them, not all people qualify, not all people apply

Question 15

what are the 5 types of unemployment?

Answer 15

cyclical, seasonal (demand)
frictional, structural & real wage (supply)

Question 16

what is seasonal unemployment?

Answer 16

is temporary unemployment created by seasonal variations in particular industries, especially industries such as farming and tourism that are affected by the weather and time of year.
–> minor and not considered a crucial issue for government

Question 17

What is real-wage unemployment?

Answer 17

when the real wages for workers in an economy are too high, meaning that firms are unwilling to employ every person looking for a job.

Question 18

What are 3 reasons wages can be inflexible/ sticky?

Answer 18

1. trade unions - workers band together to negotiate for better pay and working conditions and can strike if demands are met.
2. national living/minimum wages - increases costs of employing low skilled labour
3. employment contracts - workers sign contracts that guarantee a certain wage and can take years before renegotiation, the employer has no right to reduce the wage below the contract level.

Question 19

what are 3 policies to reduce real wage unemployment? what does this allow?

Answer 19

1. reducing trade union power - government legislation to reduce the rights of workers to strike and gather will reduce their ability to bargain with employers
2. removing or reducing minimum wages - this will allow firms to hire at lower wages, giving jobs to those with low skills a chance to gain employment.
3. reforming labour law to allow more flexible contracts - “hire and fire at will” and the ability to change the wage or salary in a contract will give firms the ability to keep workers on rather than fire them during a recession.

–> these policies will relieve these inflexibilities and allow wages to adjust downwards

Question 20

how does real wage unemployment create lower wages?

Answer 20

quantity of labour supplied is greater than quantity demanded of labour.

Question 21

what are 3 evaluation points when analysing policies to combat real wage unemployment?

Answer 21

1. reducing TU power - can cause severe impact on workers that see their incomes and working conditions fall, can contribute to inequality
2. removing or reducing minimum wages - hurts the lowest paid workers, contributes to inequality
3. reforming labour law to allow more flexible contracts - reduces incomes, contributes to lack of job stability

Question 22

what is the cause of cyclical unemployment?

Answer 22

a downturn of the economic cycle

Question 23

what is cyclical unemployment?

Answer 23

it is involuntary unemployment due to a lack of demand for goods and services, as labour is a derived demand. When there is a negative output gap, we see a rising unemployment rate. Furthermore, according to Keynes’ theory of sticky wages, the unemployment rate will be long term and persistent as wages aren’t able to adjust and clear the market.

Question 24

what are two policies the reduce cyclical unemployment? - gotta increase demand!!

Answer 24

1. expansionary fiscal policy - increase G (transfers, current spending, capital spending, FURLOUGH), reduce taxes (income and corporate)
2. expansionary monetary policy - lower bank rate (transmission mechanism), quantitative easing and devaluing the pound

Question 25

how would you evaluate expansionary fiscal policy? what would 5 bad affects be? why may it not work?

Answer 25

1. increase government spending and reducing tax rates --> demand-pull inflation --> trade deficit and debt --> environmental damage --> crowding out --> inequality may not work because : time lag, depends on size of the output gap and type of unemployment, won't work at full employment , might be lacking animal spirits (confidence) in depression

Question 26

How would you evaluate expansionary monetary policy - specifically lower bank rate and quantitative easing? What would 5 bad effects be? Why may it not work?

Answer 26

1. lower bank rate and quantitative easing: --> demand pull inflation --> trade deficit --> environmental damage --> inequality --> asset bubbles may not work because: time lag, banks may not pass on rate cut, consumers might be lacking confidence in depression

Question 27

How would you evaluate expansionary monetary policy - specifically devaluing the pound? What would 5 bad effects be? Why may it not work?

Answer 27

2. devaluing the pound: --> cost push inflation (expensive raw material imports) --> demand pull inflation (higher exports and AD) may not work because: imports and exports may be price inelastic, UK is committed to free-floating exchange rate, other countries may be in recession, other trade barriers may prevent trade (tariffs and quotas)

Question 28

what is the natural rate of unemployment?

Answer 28

the level of unemployment accounting for frictional and structural unemployment.

Question 29

what is frictional unemployment?

Answer 29

short term unemployment experienced between jobs. Alternatively, it can be the search time while finding the first job after education and training.

Question 30

why can searching for a job take time? (2)

Answer 30

1. job matching is difficult 2. unemployment benefits are too generous

Question 31

what are 4 policies to reduce frictional unemployment?

Answer 31

1. more government spending on job centres (interventionist) - this will help these agencies to assist the unemployed fine new work as quickly as possible once they are unemployed 2. subsidies to private job agencies (interventionist) - private job agencies are able to specialise in specific industries to assist people of all skill levels to find work, including highly skilled occupations 3. government spending on transport infrastructure (interventionist) - this will imprpve the mobility of labour, expanding job opportunities to those seeking new jobs 4. reduce unemployment benefits and decrease income tax rates (free market) - these will increase the reward for working and create an incentive to find work as quickly as possible

Question 32

how would you evaluate each policy to reduce frictional unemployment?

Answer 32

1. more G on job centres - budget deficit, doesn't create job opening so no affect on demand for workers 2. subsidies to private job agencies - tend to specialise in highly skilled work, benefitting high income earners 3. G on transport infrastructure - budget deficit, time lag and effectiveness 4.reduce unemployment benefits and decrease income tax rates - worsen inequality and hurts lower income earners the most (RISK OF POVERTY TRAP), benefits are ALREADY LOW IN THE UK, doesn't increase demand for workers or improve employability of workers

Question 33

what is structural unemployment/the natural rate of unemployment?

Answer 33

unemployment caused by decline in a particular industry such as coal mining in the UK.

Question 34

what are 3 reasons jobs can disappear?

Answer 34

technological change, automation outsourcing

Question 35

what are two reasons people struggle to find jobs?

Answer 35

occupational/skill immobility geographical/location immobility

Question 36

policies to reduce occupational & geographical structural unemployment... analysis and evaluation!!

Answer 36

occupational: --> Gov spending on education and training which will increase productivity of workers and can lower average costs more than just hiring cheap labour, increase likelihood works can find jobs in other industries by learning transferable skills BUT...may not work,increase budget deficit there will be a time lag --> subsidise on the job training which will lower the training cost to incentivise firms to train domestic workers rather than foreign workers BUT... may not work, budget deficit, risk of fraud geographical: --> Gov spending on transport infrastructure and internet infrastructure which will give workers more access to job opportunities BUT...may not work as distance s still limited, not all jobs are able to be done from home, budget deficit, time lag --> subsidise low-cost housing and relocation costs which makes it easier to move and to find a new job BUT... budget deficit

Question 37

what effect will the use of interventionist and free market supply side policies have?

Answer 37

as they improve the geographical and occupational mobility of labour, it will increase the mobility and quality, boosting LRAS, lowering the natural rate of unemployment

Question 38

what are 5 costs of unemployment for infividuals?

Answer 38

Poverty: Unemployment is one of the biggest causes of poverty in the UK. Debt: Prolonged periods of unemployment can push households into debt and increase rates of relative poverty. Homelessness: Loss of income can leave people without sufficient income to meet housing costs. Hysteresis/Loss of Skills: If people are out of work, they miss out on ‘on the job training.’ This is a vital component of human capital and labour skills; high rates of unemployment can reduce labour productivity. If someone is out of work for two years, they miss out on the latest working practices and trends. Being unemployed can also affect the confidence of the unemployed (they may become discouraged and give up) and they become less employable in the future. Poor Mental and Physical Health: Another study found that common outcomes of unemployment include depression, substance abuse, admissions to psychiatric hospitals, death by suicide, and violence.

Question 39

What are the costs of unemployment for the economy and government

Answer 39

Costs of unemployment to society.... Lower GDP & Lower incomes: High unemployment indicates the economy is operating below full capacity and is inefficient; this will lead to lower output and incomes. Lower Spending: The unemployed are also unable to purchase as many goods, so will contribute to lower spending and lower output. Negative Multiplier: A rise in unemployment can cause a negative multiplier effect. Crime: Areas of high unemployment (especially youth unemployment) tend to have more crime and vandalism. It can lead to alienation and difficulties in integrating young unemployed people into society. Political/Social Instability: The period of mass unemployment in the 1930s led to social unrest. In Germany, an unemployment rate of 6 million was an important factor in the rise of Hitler and the Nazi party. Costs of unemployment to Government.... Budget Deficit/Debt: Loss of income will reduce income tax receipts and less spending will reduce VAT and Corporate Tax receipts. Furthermore, government spending on unemployment benefits will rise.

Question 40

what is one silver-lining of unemployment?

Answer 40

it will improve trade and reduce demand pull inflation

Question 41

what are benefits of real wage, frictional and structural unemployment?

Answer 41

real wage: perhaps these wages are necessary part of providing stability and protection from exploitation in a complex and unsecure labour marker frictional unemployment: in a healthy economy we want to see workers moving between jobs from where they are low value to where they are high value structural: it can allow for new industries to emerge.

Question 42

what is voluntary unemployment?

Answer 42

defined as a situation where the unemployed choose not to accept a job at the going wage rate --> associated with frictional unemployment

Question 43

what is involuntary unemployment?

Answer 43

a situation where workers are willing to work at the market wage or just below but are prevented by factors beyond their control. These factors could include deficiency of AD, labour market inflexibilities (sticky wages), implicit wage bargaining and efficiency wage theory. --> associated with structural unemployment