Employment + Unemployment Flashcards
Two main measures of unemployment in the UK are:
- The claimant count (measures the number pf people who are claiming unemployment benefits) - no longer used
- The Labour Force survey (LFS) - official measure of unemployment
Voluntary unemployment
Voluntary unemployment - occurs when workers choose to remain unemployed and refuse job offers at current market wage rates
Involuntary unemployment
Occurs when workers are willing to work at current market wage rates but there are no jobs available
Frictional unemployment
- Transitional unemployment and is ‘between jobs’ unemployment
- Occurs in the labour market when a worker moves from one job to another job
- There is always some frictional unemployment in the labour market regardless of the economic cycle
- Also caused by imperfect information in labour market. Incentive problems relating to the generosity of unemployment benefits or high taxes on low paid jobs.
Structural unemployment
- Caused by a lack of suitable skills for the jobs available; a result of de-industrialisation or shutdowns (coal mining/ type writers)
- Often a result of occupational immobility and geographical immobility
Cyclical unemployment
- Caused when there is a lack of aggregate demand in the economy
- Occurs when the economy goes into a recession or depression
- When aggregate demand falls, this will cause a contraction in national output and some businesses may make workers redundant as a result
- The demand for labour is derived from the demand (and spending on) goods and services
Full employment
- Refers to the lowest level of unemployment practically achievable
- (Beveridge definition 1944) identified this as 3% unemployment, and it is a target for government policy
- This was an arbitrary (random) level, free market economists developed a theory = full employment as occurring when the aggregate demand and supply curves of labour were in equilibrium at the market clearing real wage rate.
Unemployment
Unemployment exists when those able, willing and available yo work are unable to find a job despite searching for one.
Full employment diagram
Full employment diagram
- Diagram illustrates there no unemployment when we have full employment - this is NOT the case
- There will will always be some unemployment as in the changing economy, jobs are constantly being created and disappearing
4 types of unemployment =
- Frictional
- Structural
- Cyclical
- Seasonal
Seasonal
- Occurs when workers are laid off on a short term basis at certain times of the year
- Commonly in industries such as agriculture + tourism (fruit pickers/ ski instructors)
- Result from weather conditions or changes in demand
- Seasonality refers to fluctuations in output and sales related to the season of the year. For most products there will be seasonal peaks and troughs peaks and troughs in production/ sales.
Cyclical unemployment - Keynes
- Keynes argues that the economy could settle into an under full employment equilibrium (caused by continuing lack of effective demand)
- Unlike frictional unemployment (voluntary), this is involuntary (not caused by the workers themselves)
Cyclical employment - Keynes / free market
Effect of an economic downswing (depression/ recession): -
- Keynes = Major cause of persistent cyclical unemployment
- Free market economists = May be a temporary cyclical unemployment
Keynes explanation
When aggregate demand is low and wage rates are sticky (do not fall), demand for labour will decrease, therefore causing unemployment to rise and economic growth can slow down
Free market explanation
If workers lowered their wage rates, demand for labour would increase.
Cyclical unemployment =
- Temporary
- Self correcting
Provided that markets are competitive and prices and wages are both flexible
Cyclical unemployment - PPF
Cyclical unemployment caused by an inwards shift in AD
Real Wage theory
- Free market economists view that unemployment is caused by too high a level of real wages
- However as long as labour markets are competitive, market forces cure the problem by bidding down the real wage rate to get rid of excess labour supply
Occupational immobility
Refers to workers being unable to move between different types of jobs and sectors - usually due to a lack of relevant skills/ qualifications
Geographical Immobility
Occurs when workers are unable to move to find work, perhaps because of transport systems are poor or because of house price and living cost differentials - (north and south divide)
Unemployment trap
Situation in which there is little financial incentive for someone who is unemployed to start working because the combined loss of welfare benefits and a need to pay income tax and other direct taxes might result in them being worse off.
Policies to reduce unemployment
- Macro stimulus policies
- Cutting the cost of employing extra workers
- Competitiveness policies
- Improving occupational mobility
Economic/ social costs of unemployment
- Slower economic growth
- Risks of period price deflation because of falling aggregate demand
- Rising income inequality
- Erosion of peoples skills (human capital) arising from long turn unemployment
- Fiscal budget costs to the government as tax revenues shrink and welfare spending increases
Macro stimulus policies
- Low interest rates and improving credit supply to businesses
- Depreciation in the exchange rate (to help exports)
- Infrastructure investment projects (fiscal policy)
Cutting the cost of employing extra workers
- Reductions in the rate of national insurance contributions
- Financial support for apprenticeships/ paid internships
- Extra funding for regional policy - special economic zones
Competitiveness policies
- Reductions in corporation tax (to increase investment)
- Tax incentives for research/ innovation spending
- Enterprise policies to encourage new business start ups
Improving occupational mobility
- Better funding for and more effective work training
- Teaching new skills e.g. coding / languages
- An expansion of apprenticeship/ internship programmes
Policies to reduce unemployment - Labour demand
- Macro stimulus policies (+ multiplier effects)
- Cutting the cost of employing workers
- Competitiveness policies
Policies to reduce unemployment - labour supply
- Reduce occupational mobility
- Improving geographical mobility
- Stimulate stronger work incentives
Improving geographical mobility
- Rise in house building will help keep property prices lower and encourage more affordable rents
- Active regional policy to create new jobs and businesses
Stimulate stronger work incentives
- Higher minimum wage or a living wage
- Reductions in income tax / national insurance
- Welfare reforms to reduced the risk of the poverty trap
