9.3 employment/unemployment Flashcards
Labour force
The working age population is between the ages of 18 and 65 who are actively looking for work. These are the economically active members of the population.
Inactivity: The economically inactive are those who are not actively looking for jobs. These could include carers for the elderly, disabled or children, or those who have retired. Some workers are discouraged from the labour market, since they have been out of work for so
long that they have stopped looking for work. If the number of the economically inactive increases, the size of the labour force may decrease, which means the productive potentialof the economy could fall.
What is the natural rate of unemployment/full employment?
The unemployment rate when the labour market is at equilibrium is called the natural rate of unemployment.
Sometimes, it is also referred to as the full level of employment, since there is no demand-deficient unemployment.
What is full employment?
Full employment is the state when all factors of production are used to their productive potential. It maximises the output of the economy.
This could put up upward pressure on the price level, since consumer demand in the economy is high which will lead to demand-pull inflation. There could also be wage inflation, which can push up the price of production for firms. This is since labour is in shortage.
There are social benefits of having full employment. Crime rates might fall if more people are in employment, and standards of living might increase if people have more disposable income. Inequality and poverty might fall if fewer people are unemployed.
Consumers and firms might have more confidence in an economy where resources are used to their full potential. This should encourage long term sustainable growth. With full employment, government budgets might improve since tax revenues increase and spending on welfare benefits falls.
Governments aim to have as near to full employment as possible. They account for frictional unemployment by aiming for an unemployment rate of around 3%. The labour force should also be employed in productive work.
What are the costs of unemployment on an economy?
Lost output - waster resources (operating within the PPF)
Deterioration of gov finances - higher spending on benefits, lower tax rev collection and increased spending on areas which suffer with unemployment for things like health services for depression and police for crime
Hysteresis - workers that keep getting rejected so are discouraged and their skills become outdated. This happens in the long term.
Social costs - High crime, mental health and divorce
Reduced trade in other countries - UK is a big export market for other countries. Less imports.
What are the costs of unemployment on an individual?
Loss of income
Loss of status/self worth
What are the benefits of unemployment?
Firms benefit from greater choice of workers
Workers have time to search for the best job for them
Evaluation of unemployment
Type and duration of unemployment
Severity of unemployment - NRU?
What are the level of unemployment benefits available
What are the types of unemployment?
Structural unemployment
This occurs with a long term decline in demand for the goods and services in an industry, which costs jobs. This is especially true of jobs in industries such as car manufacturing, where labour is replaced by capital (this is also called technological unemployment). Moreover, the decline of the coal and ship building industries in the UK, led to a great deal of structural unemployment.
This type of unemployment is worsened by the geographical and occupational immobility of labour. If workers do not have the transferable skills to move to another industry, or if it is not easy to move somewhere jobs are available, then those facing structural unemployment are likely to remain unemployed in the long run.
Globalisation also contributes to structural unemployment, since production in the manufacturing sectors, such as in clothing or motor cars, moves abroad to countries with lower labour costs. This means that workers trained for these jobs will become unemployed, because the industry has declined in size or has been removed from the economy.
Frictional unemployment
This is the time between leaving a job and looking for another job. It is common for there to always be some frictional unemployment, and it is not particularly damaging since it is only temporary.
For example, it could be the time between graduating from university and finding a job.
This is why it is rare to get 100% employment: there will always be people moving between jobs.
Seasonal unemployment
This occurs during certain points in the year, usually around summer and winter. During the summer, more people will be employed in the tourist industry, when demand increases.
Demand deficiency (cyclical unemployment)
This is caused by a lack of demand for goods and services, and it usually occurs during periods of economic decline or recessions. It is linked to a negative output gap. Firms are either forced to close or make workers redundant, because their profits are falling due to decreased consumer spending, and they need to reduce their costs. This then causes output to fall in several industries.
This type of unemployment could actually be caused by increases in productivity, which means each worker can produce a higher output, and therefore fewer workers are needed to produce the same quantity of goods and services.
Real wage unemployment
Wages above the market equilibrium may cause unemployment. This is because the supply of labour exceeds demand. Classical economists argue that by letting wages fall to the equilibrium level, there would be no unemployment.
Classical economists would argue that by letting wages be flexible, by removing
trade union power and removing the National min wage, wages could fall and unemployment would fall to 0.
However, cutting wages during times of weak consumer spending would cause further falls in consumer spending, and there would be even lower economic growth. Moreover, the classical economist argument is made on the assumption of a perfectly competitive market, which is not true in reality.
What are the 2 main unemployment measures in UK?
The Claimant Count
This counts the number of people claiming unemployment related benefits, such as Job Seeker’s Allowance (JSA). They have to prove they are actively looking for work.
Evaluating the Claimant Count:
Not every unemployed person is eligible for, or bothers claiming JSA. Those with partners on high incomes will not be eligible for the benefit, even if they are unemployed. Although there may be instances of people claiming the benefit whilst they are employed, the method generally underestimated the level of unemployment.
The International Labour Organisation (ILO) and the UK Labour Force Survey (LFS) The LFS is taken on by the ILO. It directly asks people if they meet the following criteria:
Been out of work for 4 weeks
Able and willing to start working within 2 weeks
Workers should be available for 1 hour per week. Part time unemployment is included.
Since the part time unemployed are less likely to claim unemployment benefit, this method gives a higher unemployment figure than the Claimant Count.
Policies to correct unemployment
Supply-side policies are the only policies which can deal with structural unemployment, because the labour market can be directly improved with education and training.
Demand-side policies are better at dealing with cyclical unemployment, since they can reduce the size of a negative output gap and shift the AD curve to the right.
There are significant time lags associated with supply-side policies.
Market-based supply-side policies, such as reducing the rate of tax, could lead to a more unequal distribution of wealth.
