Book 8: Unemployment

Question 1

What is the cause of DD deficient unemployment ?

Answer 1

Fall in AD & sticky wages

Question 2

Explain DD deficient unemployment

Answer 2

• Explain root cause
  : fall in AD
• Brief downward multiplier process
  :
  unplanned rise in the level of inventories. Firms will decrease production and employ fewer factors of production (FOP), since demand for labour is derived from the demand of the goods and services they produce.

The fall in national income triggers cuts in
consumer spending due to the multiplier effect and AD falls further.

This leads to further fall in production and less FOPs hired resulting in another cycle of decreased spending.

The national income
will be lower as output decreases further.

• Assumption
  :
  Assuming the economy was operating with spare capacity.
• increase in output gap
  :
  the fall from AD2 to AD4 results in equilibrium real GDP falling to Y4.
  There is an increase in the output gap from Yf-Y1 to Yf-Y4, signifying an increase in demand-deficient unemployment

Question 3

Why firms can only respond to unplanned rise in inventories by cutting employment of workers ?

Answer 3

When firms cut back on production, DD for labour fall while wage rates remain constant as wage rates are sticky downwards due to contracts.

Question 4

Causes for structural unemployment

Answer 4

1. Structural changes
2. Occupational immobility

Question 5

Explain structural unemployment

Answer 5

• Explain the structural change
  :
  Advancement in technology implies automation and artificial intelligence that have transformed work processes.

This allows same level of output to be produced with fewer workers, making certain occupations less in demand, leaving redundant worker retrenched.

• Explain occupational immobility
  :
  While there may be new jobs created, many unemployed wokrers are unable to filll these jobs as their old skills away no longer be applicable.

The mismatch in skills results i retrenched works remaining structural unemployed

Question 6

Impact of unemployment on HH

Answer 6

Lower mSOL
- loss on income due to being unemployment
- lower purchasing power
- less consumption of goods and services to meet their needs and wants

Lower non-mSOL
- rising unemployemnt makes HH worried at future loss of income sources
- rising unemployment increases crime rates
- stress and anxiety

Question 7

Impact on unemployment on firms

Answer 7

Decrerase in revenue
- HH lower purchasing power less consumption
- less production and sales of g&s

Question 8

Impact of unemployment on gov

Answer 8

Loss of tax revenue
- unemployed HH don’t need to pay income tax
- lower income tax revenue collected
- unemployed HH spend less
- lower GST collected

Increase gov expenduture
- more unemployed HH
- spend more on unemployment benefits
- (use up funds for capital goods like infrastructure
- slower potential growth)

Question 9

Impact on unemployment on economy

Answer 9

Negative economic growth
- poor business confidence, epcxceted rate of returns low, fall in I
- HH lower pp to spend on g&s, fall in C
- fall in AD
- downward multipler
- multiplied fall in rGDP

Slower potential growth
- fall in I
- gov use up funds for capital goods like infrastructure on unemployment benefits
- capital stock expand more slowly
- slower potential growth

Decrease in producitve capacity
- wastage of resources like labour
- economy producing at a point within PPC
- societ’s w;effervescent not maximised

Question 10

Benefits of low unemployment on HH

Answer 10

Higher non- mSOL
- employed HH pay icome tax
- gov higher revenue to upgrade healthcare facilities and education standards