Economics Chap 21

Question 1

Unemployment

Answer 1

A stock concept-measured at a particular date
Percentage of the labor force(no. of people who are willing and able to work, economically active population) that is unemployed.

Question 2

A person may enter the unemployment pool for one of four reasons

Answer 2

First, the person may be a new entrant into the labor force, looking for work for the first time, or a re-entrant – someone returning to the labor force after not having looked for work for some time. Second, a person may leave a job in order to look for other employment and will be counted as unemployed while searching. Third, the person may be laid off. A lay-off means that the worker is not fired but might return to the old job if the demand for the firm’s product recovers. Finally, a worker may lose a job to which there is no chance of returning, either on account of being retrenched (or fired) or because the firm closes down

Question 3

Outflow from the unemployment
pool

Answer 3

First, a person may be hired. Second, someone laid off may be recalled. Third, an unemployed person may become discouraged and stop looking for a job and thus, by definition, leave the labor force.

Question 4

Measuring unemployment

Answer 4

strict definition, unemployed persons are those persons who, being 15 years and older, (a) are not in paid employment or self-employment, (b) were available for paid employment or self-employment during the seven days preceding the interview and (c) took specific steps during the four weeks preceding
the interview to find paid employment or self-employment. The expanded definition, on the other hand, omits requirement (c). In other words, the expanded definition requires only a desire to find employment

Question 5

The costs of unemployment(individual)

Answer 5

The individual who becomes unemployed suffers a loss of income, shock and frustration. In certain circumstances unemployment can result in hunger, cold, ill health and even death enforced joblessness is demoralising and results in a loss of confidence and self-esteem. Increased unemployment tends to result in an increase in psychological disorders,
divorces, suicides and criminal activity a loss of experience and human development

Question 6

The costs of unemployment(society)

Answer 6

If labor is not used when it is available it is lost forever
Unemployment is also damaging to the social and political structure. It tends to give rise to crime as well as to demonstrations, riots and other violent forms of unrest.
Unemployment can also lead to the overthrow of democratic institutions and processes.
Unemployment benefits and other social welfare programmes to assist the unemployed also entail significant financial costs as well as opportunity costs (since other spending possibilities have to be sacrificed).

Question 7

Frictional(search) unemployment

Answer 7

Arises because it takes time to find a job or to move from one job to another. At any particular time there will always be workers who are moving from one job to another. Individuals who leave one job, or who are looking for a first job, often do not find employment immediately, although there are vacancies in the economy. This kind of unemployment is unavoidable and is not considered a serious problem.

Question 8

Seasonal unemployment

Answer 8

arises because certain occupations require workers for only part of each year.
People who depend on seasonal occupations are often unemployed for part of the year. They are then classified as seasonally unemployed.

Question 9

Cyclical(demand-deficiency) unemployment

Answer 9

occurs when a slump or recession in the economy (as a result of a temporary lack of demand) gives rise to unemployment.
When the economy experiences a recession there is a general downturn in economic activity. Sales drop and some workers lose their jobs because there is insufficient demand for the goods and services they produce. However, when aggregate demand increases again the reverse happens and unemployment falls.

Question 10

Structural unemployment

Answer 10

more complex. Whereas cyclical unemployment is related to fluctuations in the general state of the economy (ie to the business cycle), structural unemployment is usually confined to certain industries, sectors or categories of workers. Structural unemployment occurs when there is a mismatch between worker qualifications and job requirements or when jobs disappear because of structural changes in the economy

Question 11

Structural unemployment examples

Answer 11

1. Lack of necessary education, training or skills required even during economic booms
   2.Change in production methods or techniques leading to technologically unemployed
   3.Change in types of goods and services being produced due to changing consumer preferences
   4.Foreign competition due to trade liberalization and globalization
   5.Structural decline in certain industries i.e., gold mine closures
   6.Discrimination

Question 12

Policies to reduce unemployment(on the supply side)

Answer 12

South Africa’s unemployment problem therefore stems from both a rapid increase in the supply of labor and a constant, slowly growing or declining demand for labor.
1.Steps taken to limit population growth can thus be regarded as part of the strategy to reduce unemployment
2.Stricter immigration control can therefore also be regarded as an element of a policy strategy to reduce unemployment.
3. Any strategy to reduce unemployment in South Africa must therefore include policies to improve the quality of labor, for example through education and training(shortage of skills, oversupply of unskilled and semi-skilled labor)

Question 13

Policies to reduce unemployment(on the demand side)

Answer 13

Additional employment opportunities can be created by raising the aggregate demand for goods and services and increasing the labor intensity of production
Government can, of course, always raise the aggregate demand for goods and services by spending more. But increased government spending has to be financed.
Another possible option is to stimulate consumption and investment spending by lowering taxes or interest rates
A more promising strategy would be to raise the demand for domestically produced goods and services by
increasing the demand for exports

Question 14

Other ways to reduce unemployment

Answer 14

The idea here is to promote types of economic activity which are relatively labour intensive(only if the relative price of labour is kept within certain limits)
The government can also embark on special employment programmes that are aimed at employing as many people as possible and to promote small businesses and the informal sector
Yet another possibility is tax incentives or subsidies to stimulate employment. The idea is that employers will receive tax benefits or subsidies if they employ more people
Decrease relative price of labour to cost of capital(w=r)
Relax labour legislation to make it easier or cheaper to employ people

Question 15

The trade-off principle

Answer 15

The Phillips curve was originally regarded as a clear indication that unemployment and inflation could be traded off against
each other. In other words, a lower inflation rate could be achieved by trading it off against, or exchanging it, for greater
unemployment

Question 16

Incomes policy

Answer 16

an attempt to contain or reduce both inflation and unemployment
An incomes policy implies some form of government intervention in the determination of wages and prices.

Question 17

For any incomes policy to be successful:

Answer 17

it has to appear equitable to all parties involved. It also requires a tripartite agreement (between the government, employers and trade unions) on how national income is to be distributed

Question 18

How does income policy work?

Answer 18

An incomes policy usually entails a call to workers to limit their demands for nominal wage adjustments to the average productivity increase in the economy, and
to firms to limit their profit margins. If prices can then be kept constant, such an agreement ensures that the relative shares of wages and profits in the economy also remain constant.

Question 19

Problems with income policy

Answer 19

One of the basic problems is that no single party has a guarantee that every other party will act in the spirit of the agreement
Another problem is that the average increase in productivity does not apply to individual industries – in some industries productivity will be falling while other industries will experience a rapid increase in productivity
It is also unrealistic to expect no price increases if unit costs are not kept down in all industries. For a market system to function effectively, relative prices have to change. One of the major problems of an incomes policy is that it inhibits the working of the market mechanism at the microeconomic level.

Question 20

Other supply-side policy actions

Answer 20

Supply-siders call for a decrease in tax rates aimed at encouraging people to save more, invest more and work harder. Increased saving would keep interest rates low which, in turn, would stimulate further investment and growth. In this way the aggregate supply of goods and
services would increase. At the same time they also call for a tight monetary policy to keep inflation under control

Question 21

Problem with other supply-side policy actions

Answer 21

On the one hand the restrictive monetary policy caused interest rates to rise. On the other, private saving increased at the expense of an increased budget deficit, which also resulted in higher interest rates. The higher interest rates had negative effects on investment and expectations of economic growth were not fully realized. Inflation was brought under control, but unemployment did not fall as had been anticipated.

Question 22

A solution to unemployment, inequality and poverty

Answer 22

Basic income grant(a payment of R300 paid to all adults regardless of their income)
Increased grant payments
Reduced no. of people classified as poor
Deemed unaffordable by government
Opted for EPWP deemed cheaper

Question 23

Could BIG be the solution?

Answer 23

Financed through raising of VAT, fuel levy and alcohol taxes
If you pay less(more) than R300 a month indirect taxes you will benefit(not benefit)
Lower(higher) income will benefit(incur costs)
Lower income pay back part of the grant