Employment & unemployment

Question 1

Measures of unemployment

Answer 1

• Claimant count: based on No. of people claiming unemployment-related benefits (Jobseeker’s Allowance). provides a narrow definition of unemployment, as it only includes those actively seeking & receiving government benefits.
• LFS: Uses ILO definition & is the primary source of unemployment data in the UK

Question 2

Under-Employment

Answer 2

Occurs when individuals are employed but their job does not fully utilize their skills and qualifications. This can result in part-time work, low wages, or jobs below their skill level.
- overeducation is one possible source of underemployment.

Question 3

Employment, unemployment, and inactivity rate

Answer 3

• Employment rate: Measures the proportion of the working-age population in employment
• Unemployment rate: Measures the proportion of the labour force actively seeking work
• Inactivity rate: Measures the proportion of the working-age population that is not in the labour force. It can indicate a lack of job opportunities or demographic factors

Question 4

Causes of unemployment

Answer 4

• Structural unemployment
• Frictional unemployment
• Seasonal unemployment
• Cyclical unemployment
• Real wage inflexibility

Question 5

Structural unemployment

Answer 5

• a form of involuntary unemployment caused by a mismatch between the skills that workers in the economy can offer, and the skills demanded of workers by employers
• Result of various factors causing long-term job loss across industries.
• reflects a shifting pattern of demand for different kinds of labour

Question 6

From an individual perspective, structural unemployment can be due to:

Answer 6

• Inability to afford or decision not to pursue further education or job training.
• Choice of a field of study which did not produce marketable job skills.
• Inability to afford relocation.
• Inability to relocate due to inability to sell a house (for example due to the collapse of a real estate bubble or of the local economy).
• Decision not to relocate, in order to stay with a spouse, family, friends, etc.

Question 7

From a larger perspective, there can be a number of reasons for structural unemployment across large numbers of workers:

Answer 7

• Technological obsolescence: Digitization leading to the disappearance of certain expertise (e.g., manual typesetters).
• Productivity increases: Reduced workforce needs due to efficiency improvements.
• Shifts in technology: Automation requiring fewer, but higher-skilled workers.
• Competition and globalization: Job relocations to lower-cost regions or countries.
• Political changes: Impacting industries and employment patterns (e.g., collapse of the Soviet Union).
• Economic shifts: Challenges when large companies close, leaving workers with limited options.

Question 8

Discrimination and structural unemployment with example

Answer 8

• Employers may also reject workers for reasons unrelated to skills or geography, so for example structural unemployment can also result from discrimination, including ableism and cultural factors such as race or sexual orientation.
• TUC analysis found that the BME (Black, minority and ethnic) unemployment rate stood at 6.9% in 2022, compared to 3.2% for white workers.
• Race to Equality report in 2021 found that Two in three UK finance workers from black and minority ethnic backgrounds have suffered discrimination in the workplace

Question 9

Middle skills jobs and structural unemployment

Answer 9

• happens within industries as technology changes the nature of work within a given field.This is a driver of skills gaps as technology and globalization “hollow out” many middle-skill jobs, positions that traditionally have not required a college degree.
• A 2017 report by the OECD found that between 1995 and 2015, the middle-skill share of employment fell by 9.5 percentage points in the OECD area. the share of workers in middle-skill jobs fell from 49% in 1995 to under 40% in 2015.
• About 80% of those lost middle-skill jobs have been replaced by high-skill jobs (good for young people attending Uni, bad for middle-aged workers who do not upskill)

Question 10

March 2023 Goldman Sachs report

Answer 10

• AIcould replace the equivalent of 300 million full-time jobs
• The bank’s analysis of jobs in the U.S. & Europe shows that two-thirds of jobs could be automated at least to some degree.
• In the U.S., office and administrative support jobs have the highest proportion of tasks that could be automated with 46%
• On the other end of the scale, just 1% of tasks in the building and ground cleanings and maintenance sector are vulnerable to automation

Question 11

Labour, Geographical, and occupational immobility

Answer 11

• Labour Mobility refers to the ability of workers to change from one job to another
• Geographical immobility refers to the inability of labour to move from one area to another to find work
• Occupational immobility refers to the inability of labour to move from one type of job to another
• Occupational and geographic exacerbate structural unemployment. They do not cause it!

Question 12

Government Strategies to increase Geographical Mobility

Answer 12

• Relaxation of building laws: this increases the availability of houses, and also lowers prices.
• Increasing construction of social housing: Council flats tend to be more affordable for migrants.
• Housing subsidies: the Gov offers subsidies to Key Workers. These subsidies include mortgage relief and relocation grants.

Question 13

Structural unemployment example of possible Relaxation of building laws

Answer 13

• the Town and Country Planning Act 1947 and successors
• ASI says The TCPA nationalised land more than it did anything else

Question 14

WHAT IS A SECTION 106 AGREEMENT?

Answer 14

A section 106 agreement is an agreement between a developer and a local planning authority about measures that the developer must take to reduce their impact on the community. A section 106 agreement is designed to make a development possible that would otherwise not be possible, by obtaining concessions and contributions from the developer. It forms a section of the Town And Country Planning Act 1990.

Question 15

What are planning obligations?

Answer 15

Planning obligations are legal obligations entered into to mitigate the impacts of a development proposal.

This can be via a planning agreement entered into under section 106 of the Town and Country Planning Act 1990 by a person with an interest in the land and the local planning authority; or via a unilateral undertaking entered into by a person with an interest in the land without the local planning authority.

Planning obligations run with the land, are legally binding and enforceable. A unilateral undertaking cannot bind the local planning authority because they are not party to it.

Planning obligations are also commonly referred to as ‘section 106’, ‘s106’, as well as ‘developer contributions’ when considered alongside highways contributions and the Community Infrastructure Levy.

Question 16

Average regional house prices in England 2023

Answer 16

• London: £527,909
• South East: £389,759
• North East: 159,741

Question 18

Housing affordability in England and Wales: 2022

Answer 18

In 2022, full-time employees in England could expect to spend around 8.3 times their annual earnings buying a home.
- Over the last 25 years, housing affordability has worsened in every Local Authority, especially in London or surrounding areas.
- The most affordable area in London was less affordable than the least affordable area in the North East.

Question 19

Labour Party commissioned report: Land For The Many

Answer 19

• “The question of who gains the benefit from rising land values, and how this is used, has sat at the centre of land debates for centuries.”
• reccomended introducing a land value tax

Question 20

Land Value Tax (LVT)

Answer 20

• A method of assessing property taxes that only considers the value of the land itself and related improvements, and not the structures built on the land.
• Considered to be a more fair method of land taxation for agricultural regions where the land is productive
• Changes in property values are largely determined by market swings and can be extremely volatile. LVT helps mitigate these market swings by separating the more stable value of the land from the buildings
• An example of an ad valorem tax.

Question 21

WEhat does martin Woilf say about Land value Tax

WEhat does martin Woilf say about Land value Tax

Answer 21

• Incorporating land into produced capital led to the neoclassical “two factor” models of the economy, which are grossly misleading. As a result, taxes on land were increasingly considered in the context of taxes on wealth, even though natural resources are quite different from the capital stock created out of effort and foregone consumption.
• The moral case for separating the return on natural resources from that on other assets is that the former pre-exist human efforts
• tax unearned rent far more and capital formation and people’s work far less.

Question 22

Levelling Up Fund

Answer 22

• launched in 2020
• designed to “create new jobs, drive economic growth, help restore people’s pride in the places where they live, and spread opportunity more equally”
• £4.8 billion
• So far two rounds of funding
• Round 2: More than 100 projects awarded share of £2.1 billion.
  More than £645 million has been allocated to 26 projects across the United Kingdom to improve transport links.

Question 23

Criticisms of the Levelling up funding process

Answer 23

• The centralised system of London civil servants distributes the funds rather than local policy makers who may be better positioned to understand which areas most need it
• Contributes to “begging bowl culture” - mayor for the West Midlands Andy Street
• Conservative-held constituencies in Parliament were the biggest winners
• the money awarded was dwarfed by the cuts to local authority funding since 2010

Answer 24

In March 2024 The Public Accounts Committee (PAC) said barely any of the 71 “shovel-ready” projects due to be completed in that month were on track.
- The chair of the comittee said that Department for Levelling Up, Housing and Communities appeared to have been “blinded by optimism” in funding projects that were “clearly anything but ‘shovel-ready’, at the expense of projects that could have made a real difference”.

Question 25

What is the government looking at apart from The Levelling Up Fund

Answer 25

• Having 22,000 civil servants based outside London by the end of the decade
• The Gov wants to level up skills with an extra £126m announced in March 2021 to fund work placements and training for 16 to 24-year-olds in England
• Eight freeports have been set up in England, with two planned in Scotland and one more in Wales.

Question 26

English council house waiting lists

Answer 26

• There were 1.21 million households on local authority waiting lists on 31 March 2022, an increase of 2% from 1.19 million in 2020/21
• 21,600 social homes were either sold or demolished in 2021/22, while only 7,500 new homes were built leading to a net loss of 14,100homes

Applications for social housing in England determined by local councils

Question 27

London social housing waiting list

Answer 27

• Highest among English regions
• 323,827 households on local authority waiting lists in London in 2023.
• The capital has 60,580 homeless households, which include more than 80,000 children
• Rise of about 70% in No. of households in temporary accommodation since 2010
• London boroughs spent £450m on homelessness in 2023-24

Question 28

Requirements for being an applicant to Reigate and Banstead Housing register

Answer 28

• Have lived in the borough of Reigate & Banstead continuously for at least the last three years, or worked here continuously for at least the last 12 months
• Have gross annual household income under:
  £30,000 (single applicants)
  £35,000 (joint applicants - two adults only in household)
  £50,000 (all other households)
• Not have savings/capital/assets over £16,000
• Not own their own home (this includes shared ownership)
• Not have rent or Council Tax arrears
• Not have a record of unacceptable behaviour/ASB
• Have a ‘housing need’ as defined in the Housing Register and Allocations Policy (waiting list applicants only)
• Be eligible for an allocation of social housing according to their immigration status

The application is in two parts and will take approximately one hour to complete

Question 29

Steps to get social housing in Reigate & Banstead

Answer 29

1. join the Housing Register
2. Use the HomeChoice website to view and bid for (i.e. express an interest in) available properties
3. Every week any available properties will be advertised on HomeChoice. Applicants can bid on up to three properties.Only those who have bid on a property can be nominated to it.
4. Once bidding has closed for the week, shortlists are created. The homes will be offered to the applicants who have waited the longest

Bidding process is callled a choice based lettings system

These are properties owned and managed by various housing associations. Reigate & Banstead Borough Council does not own any housing stock

Question 30

Gov’s long-term plan for housing February 2024 proposal councils to prioritise brownfield developments

Answer 30

• every council in England will be told that they will need to prioritise brownfield developments and instructed to be less bureaucratic and more flexible in applying policies that halt housebuilding on brownfield land.

Question 31

Levelling-up and Regeneration Act 2023

(the LURA)

Answer 31

The Act is said to “speed up the planning system, hold developers to account, cut bureaucracy, and encourage more councils to put in place plans to enable the building of new homes” by the Government. This is said by the Government to transform town centres by “ giving councils the powers to work directly with landlords to bring empty buildings back into use by local businesses and community groups, breathing life back into empty high streets”.
- The Act was opposed to by a large amount of local government who said it would undermine regional and local leaders

Question 32

recent example of negative of right to buy

Answer 32

In March 2019 a BBC investigation found that A total of 139 former council tenants bought their homes under Right to Buy and resold them within one month, making a £2.8m collective profit
- The Chartered Institute of Housing (CIH) said it was “shocking to see the extent of the profit margin in black and white”.
It called for Right to Buy to be suspended in England. In January it was halted in Wales, as it was in Scotland in 2016.
- Housing commentator Henry Pryor said: “Far too many… simply profited from a scheme that had much bigger social ambitions.”
- Right to Buy profits biggest in South East L

Question 33

structural unemployment move jobs to unemployed

Answer 33

Another policy to correct geographical mobility is to move the jobs to the location where there is unemployment. Job numbers can increase in a location if there are enterprise zones and increasing the investment in certain locations. George Osborne plans to create a Northern Powerhouse, which is meant to increase the number of businesses that choose to locate in the north. As firms demand labour, jobs and employment should increase.

Question 34

Winston Churchill’s budget speech in 1929 on employment

Answer 34

“It is the orthodox Treasury dogma that, whatever the social and political advantages, … no permanent additional employment can … be created by state borrowing and public expenditure.”

Question 35

White Paper on Employment Policy May 1944

Answer 35

“The Government accept as one of their primary aims and responsibilities the maintenance of a high and stable level of employment after the war.”

Question 36

Full Employment in a Free Society (1944)

Answer 36

• full employmernt is compatiblewith 3% unemployment rate (allows for frictional & seasonal unemployment, and overseas factors)
• book begins with the thesis that because individual employers are not capable of creating full employment, it must be the responsibility of the state.

Question 37

What did the Chancellor of the Exchequer Norman Lamont say in 1991

Answer 37

“Rising unemployment and the recession have been the price we’ve had to pay to get inflation down. That is a price well worth paying.”

Question 38

Unemploymernt in UK is past deacdes

Answer 38

• rate of unemployment avaeraged around 2% for most of the 1960s and was never above 3% until 1971
  In early 1993, UK unemployment again all but reached the notorious 3 million mark, or 10.6 percent.
  -Post war unemployment was at lows of 1-2% in thr 1960s to levels above 10% in the 1980s and 90s.

Question 39

History of Gov departments focusing on employment/unemploymenmt

Answer 39

• The Board of Trade ….
• Ministry of Labour (1916 - 1970)
• Departmenr for Employment (1970 - 1995)
• the Department for Education and Employment (DfEE) (1995 - 2001)
• The Department for Work and Pensions (DWP)

Question 40

Keynes and H. D. Henderson’s pamphlet to support Lloyd George in the 1929 election

Answer 40

“The Conservative belief that there is some law of nature which prevents men from being employed, that it is ‘rash’ to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period, is crazily improbable

Question 41

Difference between voluntary and involuntary unemployment

Answer 41

• Voluntary unemployment is attributed to the individual’s decisions, but involuntary unemployment exists because of the socio-economic environment (including the market structure, government intervention, and the level of aggregate demand) in which individuals operate.
• while Classical economists saw all unemployment as “voluntary”, Keynes saw the possibility that involuntary unemployment can exist when the demand for final products is low compared to potential output.
• In these terms, much or most of frictional unemployment is voluntary since it reflects individual search behavior.

Question 42

Keynesian full employment

Answer 42

• full employment is achieved when there is sufficient aggregate demand to utilize all available resources, including labor, capital, and technology. It is the level of employment at which there is no involuntary unemployment or a significant output gap.
• refers to a situation where the economy is operating at its potential level of output or employment that is consistent with stable inflation.
• emphasises the key role of aggregate demand in determining employment levels and economic output
• To achieve full employment, Keynesians advocate for active government intervention in the economy, particularly through fiscal policy.

Question 43

The natural rate of unemployment

Answer 43

• this concept clarifies that “full employment” does not mean “zero unemployment
• the demand and supply of labor is at equilibrium
• The major criticism of a natural rate is that there is no credible evidence for it, as Milton Friedman himself said we “cannot know what the ‘natural’ rate is”
• The natural rate hypothesis makes the fundamental assumption that there exists a unique equilibrium level of unemployment
• Friedman and Edmund Phelps both received the Nobel Memorial Prize in Economic Sciences

Question 44

What did Milton Friedman say about the Great Depression & unemployment

Answer 44

The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.

Question 45

Research Briefing: UK Labour Market Statistics.
Published Tuesday, 16 April 2024

latest!!!!

In the year to December 2023 to February 2024, employment levels fell and unemployment and economic inactivity levels increased. Real wages continued to grow in the three months to February 2024.

Answer 45

• The No. of people aged 16+ in employment was 32.98 million
• The employment rate for people aged 16-64 was 74.5%
• The UK unemployment rate was 4.2%
• 1.44 million people aged 16+ were unemployed
• 9.40 million people aged 16-64 were economically inactive
• The inactivity rate was 22.2%
• The No. of vacancies was 916,000 in Jan to Mar
• The annual change in average wages including bonuses was 1.8% in real terms

Question 46

Employment and unemployment during the 1980s

Answer 46

• In 1980 workforce was 26.8. Unemployed were 1.3.
• In 1989 workforce was 28.3. Unemployed was 1.8.
• Unemployment had to grow to accomdate the increase in the workforce. High birth rates in the 60s meant large No.s of young people entered the workforce in the 80s. In addition, there was increased participation of women in the workforce.

Question 47

What does the size of the labour force depend on

Answer 47

• No. of people in full time education
• the retirement age
• participation of women in the workforce
• size of the population

Question 48

What was the unemployment rate at the height of the late 1980s boom

Answer 48

• 5.9%
• or 1,661,000 million

Question 49

Calculating the Unemployment Rate

Answer 49

unemployment rate = number of unemployed persons / labor force x 100

Question 50

How does the minimum wage lead to structural unemployment

Answer 50

• Some economists argue that setting a minimum wage above the level that certain workers’ labour is worth in terms of productivity can lead to unintended consequences
• When the minimum wage exceeds the MRP of certain individuals in certain jobs, employers may find it economically unviable to hire them at that wage. This can result in those individuals being priced out of the labor market, leading to unemployment. This type of unemployment is termed “structural unemployment” because it stems from structural factors such as government policies (in this case, the minimum wage) rather than cyclical factors like changes in demand during economic downturns.
• particularly low-skilled workers & industries with low productivity level

Question 51

The Misery Index

Answer 51

• calculated by adding the seasonally adjusted unemployment rate to the inflation rate
• created by economist Arthur Okun
• It is assumed that both a higher rate of unemployment and a worsening of inflation create economic and social costs for a country.

Question 52

BBC article

Answer 52

• More than a fifth of working-age adults in the UK are deemed not to be actively looking for work
• The UK’s economic inactivity rate was 21.8% between November and January, marginally higher than a year earlier.

It means 9.2 million people aged between 16 and 64 in the UK are not in work nor looking for a job. The total figure is more than 700,000 higher than before the coronavirus pandemic.

Concerns have been raised over worker shortages affecting the UK economy
Long-term illness has been cited as the main reason for about a third of the working-age inactive population not being in the labour force.

Workforce shortages have led to Chancellor Jeremy Hunt setting out a series of measures, most recently in his Budget last week, aimed at encouraging people to find work, or increase hours.

A rise in the number of people leaving the labour market, mostly due to ill-health, will also likely mean that employers struggle to find staff and wages growth falls slowly over the coming months.

Question 53

What is a characteristic of real-world labor markets regarding wage flexibility?

Answer 53

Real-world labor markets often lack perfectly flexible wages. While wage increases may happen relatively easily, wage decreases are infrequent.

Question 54

How do economic laws and institutions affect wage flexibility, particularly for low-skilled workers?

Answer 54

Economic laws and institutions contribute to wage stickiness. For instance, it’s illegal to reduce the wages of low-skilled workers paid the minimum wage.

Question 55

Full impact of the minimum wage on wage stickiness

Answer 55

Minimum wage laws and union contracts alone don’t fully explain wage stickiness across the entire economy.

Only a small fraction of workers are affected by minimum wage laws or union contracts.

Question 56

How many workers on minimum wage UK

Answer 56

The Low Pay Commission estimates that there were around 1.6 million workers paid at or below the minimum wage in April 2023, around 5% of all UK workers.

Question 57

Trade Union Membership, UK

Answer 57

The proportion of UK employees who were trade union members was 22.3% or 6.25 million in 2022

Question 58

Why Wages Might Be Sticky Downward

Answer 58

• efficiancy wage theory
• Adverse selection of wage cuts argument
• The insider-outsider model
• the relative wage coordination argument
  All tend to imply that wages will decline only very slowly, if at all, even when the economy or a business is having tough times. When wages are inflexible and unlikely to fall, then either short-run or long-run unemployment can result.

Question 59

Efficiency Wage Theory

Answer 59

• Increasing wages can lead to increased labour productivity because workers feel more motivated to work with higher pay
• In addition, because it is costly and time-consuming to hire and train new employees firms would prefer to pay workers more rather than to lose them and have to hire and train new workers
• Thus, by avoiding wage cuts, the employer minimizes costs of training and hiring new workers, and reaps the benefits of well-motivated employees.

Question 60

Shirking model

developed by Carl Shapiro and Joseph Stiglitz

Answer 60

employees are incentivized to shirk if a firm pays them a market-clearing wage, because even if they get fired, they can find a job elsewhere.
if workers are paid a higher wage, they have more to lose from being made redundant.
Incentive for firms to pay high wages

Question 61

How does loyalty impact efficiancy wage theory

Answer 61

if workers receive a higher pay, they may just feel more loyalty towards the company and be willing to work harder and with more determination. By contrast, if they feel they are being exploited by a monopsonist employer, then they will do the minimum amount of work to get by, but try to take more breaks and not work as hard.

Question 62

Efficiency wage theory and involuntary unemployment

Answer 62

Shirking models of efficiency wage theory, state that employers have an incentive to pay a wage above the market clearing level. If this is the case, and efficiency wage payments are widespread then it can cause involuntary unemployment with wages above the equilibrium and wages.

Question 63

Limitations of efficiency wage theory

Answer 63

In practice, many factors determine worker morale and productivity, wages are just one of them. Often other factors are more important such as work conditions, management, e.t.c. If non-wage factors are negative, then higher wages may be insufficient to boost productivity.
It depends on the reaction of other firms. If other firms also start paying above market clearing levels, then the gain from attracting the best quality workers will be lost.

Question 64

The adverse selection of wage cuts argument

Answer 64

If an employer reacts to poor business conditions by reducing wages for all workers, then the best workers, those with the best employment alternatives at other firms, are the most likely to leave.

Question 65

Cyclical unemployment example USA

Answer 65

The Monthly unemployment rate in the US was 4.4% in March 2020 and in April it was 14.7%.

Question 66

Seasonal unemployment example USA

Answer 66

In 2019, the private shipping and logistics company UPS hired nearly 100,000 workers to meet the holiday season rush. Only 35% of those workers were expected to become permanent UPS workers, meaning that the remaining 65% became seasonally unemployed.

Question 67

Calculating cyclical unemployment

Answer 67

The easiest way to determine the cyclical unemployment rate is to look at the excess job loss during the trough of the business cycle
- Cyclical unemployment rate = Unemployment rate at peak – Unemployment rate at trough

Question 68

Flowchart: Why unemployment is high in a negative output gap

Answer 68

An output gap refers to the difference between an economy’s actual output and its potential output. A fall in AD leads to a negative output gap as the economy operates below its potential output level.
This decline in demand prompts firms to decrease production levels, as they adjust to the lower demand, leading to underutilization of resources.
As production decreases, firms often resort to laying off workers to align labor input with the reduced demand for output. Consequently, the unemployment rate tends to increase during periods of negative output gaps due to these layoffs.

Question 69

Flowchart: Why unemployment continues to grow if economic growth is below trend

Answer 69

The trend rate of economic growth is the long run average rate for a country over a period of time. If economic growth is below the trend rate the economy is in a negative output gap meaning there are underutilized resoruces due to a lack of AD.
Until economic growth recovers to the trend rate or above, there are underutilised factors of production including labour, resulting in an excess supply of labor relative to demand, leading to unemployment.
As the labour force continues to grow in line with the trend rate due to factors such as population growth , the number of people entering the workforce increases, however if in the short term there is no demand, unemployment will increase. As a result, despite the short run economic growth, unemployment can still increase because the demand for labor has not kept pace with the expansion of the workforce that is part of the trend rate.

Question 70

A rise in the minimum wage may reduce unemployment in a number of ways:

Answer 70

• Increased consumer spending: Higher wages = spending more, which can increase demand for goods and services leading to more jobs Workers on relatively low wages tend to have a high propensity to consume.
• Reduced poverty: lift many workers out of poverty and reduce income inequality, which can lead to a more stable and robust economy.
• Improved worker productivity: Efficiency wage theory
• Reduced worker turnover: Higher wages makes it more attractive for workers to stay in their jobs, reducing need for employers to hire and train new employees
• Improved work incentives: higher minimum wage increases the hourly reward from working rather than remaining economically inactive.

Question 71

Card and Krueger on the economic effects of a minimum wage

Answer 71

They compared employment trends in fast food restaurants in New Jersey, which raised its minimum wage, to those in Pennsylvania, which did not.

They found that the increase in the minimum wage in New Jersey did not lead to a decrease in employment in the fast food industry, contrary to what many economists had predicted.

Instead, they found that employment in fast food restaurants actually increased slightly after the minimum wage was raised.

Question 72

Low Pay Commission (LPC)

Answer 72

An indepeestablished as a result of the National Minimum Wage Act 1998 to advise the Government about the National Minimum Wage

an advisory NDPB of the Department for Business and Trade (DBT).

Question 73

Hysteresis unemployment

Answer 73

• Type of long-term unemployment that results from the persistence of high unemployment rates over an extended period of time
• Occurs when the economy experiences a period of prolonged weakness, such as during a recession, which leads to a high level of structural unemployment
• historical rates of unemployment are likely to influence the current and future rates of unemployment

Question 74

Understanding Hysteresis

Answer 74

• Coined by Sir James Alfred Ewing, a Scottish physicist and engineer to refer to systems, organisms, and fields that have memory. In other words, the consequences of some input are experienced with a certain time lag or delay
• History affects the value of a current issue

Question 75

What is hysteresis in the context of unemployment?

Answer 75

Refers to the phenomenon where the unemployment rate continues to rise even after the economy has started to recover. This occurs because people adjust to a lower standard of living and may become less motivated to return to the workforce, and employers may demand more from remaining workers before hiring new ones.

Question 76

What happens to cyclical unemployment during a recession?

Answer 76

During a recession, cyclical unemployment rises as the economy experiences negative growth. It falls when the economy enters an expansionary phase and businesses start rehiring.

Question 77

How does demotivation from redundancy in a recession affect future employability?

Answer 77

Demotivation and loss of on-the-job training make individuals less employable. After a period of unemployment, it becomes harder for them to find work, and firms may be reluctant to hire those who have been unemployed for a long time.

Question 78

What did Blanchard and Summers (1996) suggest about the impact of recessions on unemployment?

Answer 78

Blanchard and Summers suggested that recessions could have a permanent impact by changing the characteristics or attitudes of those who lost their jobs, leading to long-term unemployment.

Question 79

How do sticky wages contribute to hysteresis in unemployment?

Answer 79

Sticky wages contribute to hysteresis because unemployed workers become outsiders unable to influence wages. Remaining workers prevent cuts in nominal wages, so real wages don’t fall to equilibrium levels, perpetuating unemployment

Question 80

Hysteresis and the European Unemployment Problem (1986) Olivier J. Blanchard, Lawrence H. Summers

Answer 80

This study examines the persistent European unemployment since the 1980s, examining the role of hysteresis in raising the average unemployment rate.

Question 81

Evidence of Hysteresis in unemployment: 1980s

Answer 81

After the 1981 UK recession, unemployment rose to 3 million. However, as the economy recovered, unemployment didn’t fall but continued to slowly rise to a peak in 1986. This suggests there was a hysteresis effect.

Question 82

Argument against Hysteresis unemployment: How did unemployment in the UK behave differently post-2008 recession compared to previous expectations?

Answer 82

Despite a deeper recession, unemployment in the UK fell much quicker than expected, indicating that unemployment was no longer a lagging factor. High unemployment rates in 2009 did not prevent a subsequent decline in unemployment.

Question 83

What factors contributed to the unexpected decline in unemployment in the UK post-2009?

Answer 83

The UK labor market became more flexible, with more part-time, temporary, and self-employment jobs created. Additionally, low wage growth encouraged firms to retain workers, contributing to the decline in unemployment.

Question 84

How did low wage growth affect employment in the UK after 2009?

Answer 84

Low wage growth encouraged firms to keep workers, contributing to the unexpected decline in unemployment despite relatively weak economic growth.

Question 85

What is the insider-outsider theory?

Answer 85

The insider-outsider theory, developed by Assar Lindbeck and Dennis Snower, explains how firm behavior, national welfare, and wage negotiations are affected by a group in a more privileged position, known as insiders.

Question 86

Who are considered insiders in the insider-outsider theory?

Answer 86

Insiders are those already employed by a firm who have bargaining power over wages and are not interested in expanding job opportunities for outsiders.

Question 87

Why are firms inclined to negotiate wages with insiders?

Answer 87

Firms negotiate with insiders due to the high cost of replacing them, which includes severance pay, hiring process expenditures, and firm-specific training.

Question 88

How does insider bargaining affect the unemployment rate?

Answer 88

Insiders negotiate higher wages, preventing wage underbidding and creating a market failure where unemployment remains high as wages do not adjust to market needs.

Question 89

What is labor turnover cost?

Answer 89

Labour turnover cost includes the expenses associated with severance pay, the hiring process, and firm-specific training for new employees.

Question 90

What role can government intervention play in the insider-outsider model?

Answer 90

Back: Government intervention can mitigate inefficiencies by participating in national wage negotiations, as seen in corporatist models like Sweden, preventing insiders from tightly controlling wages

Question 91

What are the consequences of insiders setting higher wages post-recession?

Answer 91

Insiders setting higher wages after a recession can lead to hysteresis, where unemployment becomes permanently higher due to reduced hiring of outsiders

Question 92

What are the long-term effects on outsiders due to the insider-outsider model?

Answer 92

Outsiders face long-term unemployment, skill atrophy, social stigmatization, and limited opportunities, perpetuating high unemployment rates.
- Social consequences: Outsiders face social exclusion, reliance on welfare, limited resources, and few opportunities to advance, making them the real “outsiders” in society.

Question 93

What is the job separation rate in the context of the insider-outsider theory?

Answer 93

Back: The job separation rate is the rate at which employees leave jobs. Insiders have a low job separation rate, while outsiders have a high rate, contributing to persistent unemployment

Question 94

Why do firms avoid hiring the long-term unemployed?

Answer 94

Firms perceive the duration of unemployment as a signal of poor productivity and work ethic, further entrenching hysteresis and keeping outsiders from becoming insiders.