Chapter 24 - Employment Flashcards
What does ‘in employment’ mean?
People who are either working for firms or other organisations, or self-employed
What does economically inactive mean?
Those people of working age who are not looking for work, for a variety of reasons
What does discouraged workers mean?
People who have been unable to find employment and who are no longer looking for work
What does workforce mean?
People who are economically active - either in employment or unemployed
What does unemployed mean?
People who are economically active but not in employment
What is full employment?
A situation where people who are economically active in the workforce and are willing and able to work (at going wage rates) are able to find employment
Why will unemployment not be zero if there is full employment?
Setting aside those who are economically inactive, there will always be some unemployment in a society, if only because there will be some people between jobs, or engaging in job search. Furthermore, if the economy were to be operating very close to full capacity, this would be likely to put upward pressure on wages and therefore prices. In other words, there may be a conflict between achieving full employment and maintaining the stability of prices.
So full employment does not mean that unemployment will be zero. But it is difficult to specify a particular percentage that would constitute full employment. This may vary in different periods, and in different countries, partly reflecting the degree of flexibility in the labour market.
What is the claimant count of unemployment?
The number of people claiming JSA each month.
What is the ILO unemployment rate (Labour Force Survey unemployment)?
Measure of the percentage of the workforce who are without jobs, but are available for work, willing to work and looking for work
Why may there be some problems in measuring unemployment?
It is important to be aware of the difficulties in measuring unemployment accurately. The claimant count is unreliable because it only captures those people who are eligible for JSA, so it excludes some people who might be validly recognised as being unemployed. For example, it excludes people returning to the workforce after raising children or for other reasons of absence.
It also excludes those who are on government training schemes and a range of other categories of people. The ILO unemployment data are based on sample evidence, and extrapolated up to give the picture for the UK as a whole. The sample cannot be guaranteed to be fully representative. From the perspective of economic analysis, it would also be helpful to know how many people are unemployed in the sense of not being able to find employment at their desired wage, but this is not covered in the definition.
Measuring unemployment in developing countries becomes even more difficult. If there is no social security system, unemployed workers have no incentive to register as being unemployed. Furthermore, there may be people who cannot find jobs for which they are qualified, and who take jobs in second-choice occupations. This is a form of underemployment: for example, where qualified lawyers or doctors find themselves working as taxi drivers. In the UK context, underemployment could take the form of workers being unable to work for as many hours as they would like.
What is frictional unemployment?
Unemployment associated with job search: that is, people who are between jobs
What is structural unemployment?
Unemployment that arises because of changes in the pattern of economic activity within an economy
How does structural unemployment work?
In some cases, this transfer of workers between sectors may be quite difficult to accomplish. For example, coal mining may be on the decline in an economy, but international banking may be booming. It is clearly unreasonable to expect coal miners to turn themselves into international bankers overnight. In this sort of situation there may be some longer- term unemployment while workers retrain for new occupations and new sectors of activity. Indeed, there may be workers who find themselves redundant at a relatively late stage in their career and for whom the retraining is not worthwhile, or who cannot find firms that are prepared to train them for a relatively short pay-back time. Such unemployment is known as structural unemployment. It arises because of the mismatch between the skills of workers leaving contracting sectors and the skills required by expanding sectors in the economy.
Structural unemployment may be reinforced when unemployed workers find that they do not have the skills required to adapt to changing technology (technological unemployment), or if the available jobs are in a different location (geographical unemployment)
What is cyclical unemployment?
Unemployment that arises during the downturn of the economic cycle, such as a recession
What is demand-deficient unemployment?
Unemployment that arises because of a deficiency of aggregate demand in the economy, so that the equilibrium level of output is below full employment
What is seasonal unemployment?
Unemployment that arises in seasons of the year when demand is relatively low
What is real wage inflexibility?
An argument that if real wages do not adjust downwards the result would be persistent unemployment
What is voluntary unemployment?
Situation arising when an individual chooses not to accept a job at the going wage rate
What is involuntary unemployment?
Situation arising when an individual who would like to accept a job at the going wage rate is unable to find employment
How is there a link between migration and unemployment?
A contentious issue in recent years has been the question of migration, and the effect of an inflow of migrants on the domestic labour market. From the point of view of economic analysis, this issue turns on the characteristics of immigrant workers, especially in relation to skills. If immigrant workers have skills that are complementary to those of native workers, then an inflow of migrants can have beneficial effects on the domestic economy, by raising national income, resulting in an increase in the demand for workers. The situation is different where migrants are substitutes for domestic workers, such that the result may be a decrease in the equilibrium wage, and an increase in unemployment among native workers.
What are the consequences of unemployment?
Perhaps the most obvious consequence of unemployment is the costs it imposes on prospective workers, in the sense that involuntary unemployment carries a cost to each such individual in terms of forgone earnings and the need to rely on social security support. At the same time, the inability to find work and to contribute to the family budget may impose a cost in terms of personal worth and dignity.
From society’s perspective, if the economy is operating below full capacity, then it is operating within the PPC, and therefore is not making the best possible use of society’s resources. In other words, if those unemployed workers were in employment, society would be producing more aggregate output, and the economy would be operating more efficiently overall.
When unemployment is high, the government will find that it raises less tax revenue in the form of income tax, but will face high expenditure in the form of social security payments. Firms will be unable to sell as much output as previously, so will make lower profits. In addition, when unemployment is rising and aggregate demand is falling, there will be negative multiplier effects, so other workers will suffer, either by becoming unemployed, or by being able to work fewer hours.
Long-term unemployment has potentially important social effects. Workers who are unemployed for a long period will become dispirited and deskilled, and therefore find it increasingly difficult to get back into the workforce. A by-product of this may be an increase in crime and vandalism, imposing costs on other members of society.
Frictional unemployment, on the other hand, may have beneficial effects. Workers who are able to find better jobs will lead to an improvement in the overall efficiency of production, and could potentially improve allocative efficiency, by moving to sectors for which demand is buoyant.
What are the effects of full employment?
On the face of it, achieving full employment seems a no-brainer as a policy objective. Why would you not want to be using the economy’s resources to the full? Full employment means not only that the economy is operating efficiently but that society is avoiding the negative consequences that can flow from high unemployment.
A common misconception is that full employment means unemployment should be zero. This chapter has argued that this is not going to happen, as there will always be some unemployment present in the economy, if only frictional unemployment as people change jobs in a dynamic economy.
Another view of full employment is that it occurs when there is no cyclical or demand-deficient unemployment. This corresponds to the full employment level of real GDP as used in the AS/AD model. However, you can see that if there is an increase in aggregate demand when the economy begins at the full employment level of real GDP, the result is an increase in the price level but no change in real GDP. In other words, when the economy is operating at full employment, it may be vulnerable in the face of an increase in aggregate demand because of the potential effect on prices.
In the light of the possible pressure on prices, some economists have argued that full employment should be regarded as the level of unemployment at which there is no tendency for inflation to accelerate.
It is also worth being aware that the measured level of employment and unemployment may not be a true representation of whether the economy is at capacity. There may be people who are employed, but who would like to work more or differently. For example, some part- time workers might prefer a full-time job, while some people may find themselves in second-choice occupations, in which they are less productive than they could be. However, notice that in late 2018, 85.8% of part-time workers indicated that they did not want a full-time job.
There may also be discouraged workers, who are not registered as being economically active, so do not appear in the unemployment figures.
The definition of full employment is therefore rather imprecise. These arguments may suggest that we cannot be exactly sure whether or not the economy is at full employment. However, it remains an important objective of policy, given the negative consequences of having high unemployment.
