L12 - Unemployment: Causes Consequences and Cures

Question 1

What are the two measures of unemployment?

Answer 1

• One of the traditional central concerns of macroeconomics is with the social problem of unemployment – this is not measured in the national income accounts, but separate data is collected which I will briefly review now
  There are two measures of unemployment
• the claimant count
• ILO unemployment

Question 2

What is the Claimant Count?

Answer 2

• In the UK the claimant count is all those people claiming unemployment-related benefits at Employment Service offices
• This is calculated by:
  ((No. of Claimants)/(No. employed in FT or PT jobs + No. of Claimants)) x 100

Question 3

What are the Problems with the Claimant count?

Answer 3

3 problems:

• as the benefit system changes No of claimants changes
• Those who don’t claim benefit are not counted
• Counts anyone with two jobs twice

Question 4

How does the International Labour Office classify unemployment?

Answer 4

All people aged between 16 - 65 are put into 1 of 3 classes:

(1) ILO employed – those who have at least 1 hours work per week; or who are on job training scheme or who do unpaid work for a family business
(2) unemployed – either out of work or who have not tried to find work for 4 weeks, or who will start a job in the next 2 weeks
(3) Economically inactive – everyone else

Question 5

What are the Advantages to the ILO classification of unemployment?

Answer 5

it measures those who say they are unemployed and not just those claiming benefits

Question 6

What are the Disadvantage to the ILO classification of unemployment?

Answer 6

is it lumps together as ‘employed’ anyone who does just one hour’s paid work with those who work much longer hours

Question 7

What are the Three Key concepts used in the ILO measure of unemployment?

Answer 7

• unemployment rate
• labour force
• participation rate

Question 8

How do you calculate the unemployment rate?

Answer 8

((No. of unemployed people)/(total labour force)) x 100

Question 9

How do you calculate the Labour Force?

Answer 9

• Total No. employed + Total No. unemployed

Question 10

How do you calculate the Participation rate?

Answer 10

• ((Labour Force)/(Working Population)) x 100

Question 11

What is the Comparison between the Claimant Count and how the ILO measures unemployment?

Answer 11

On the ILO measure unemployment is 5.8% May-July 2015, on the claimant count (CC) UK unemployment is 3.0% - only half as large!
Reasons for differences:
- ILO is a survey based measure rather than a number count (based on 40,000 interviews per month) - even those working 1 hour a week count
- discouraged worker effects means CC is too low (partly offset by benefit frausters!)
- ILO employment measure is too high
- problems of treatment of PT work

Question 12

What is the discouraged worker effect?

Answer 12

he discouraged worker effect means that someone has given up looking for a job because they believe there aren’t any jobs available

Question 13

What are the six of unemployment?

Answer 13

• Frictional Unemployment
• Structural Unemployment
• Equilibrium Unemployment
• Cyclical Unemployment
• Involuntary Unemployment
• Voluntary Unemployment

Question 14

What is Friction Unemployment?

Answer 14

the short term unemployment associated with the process of matching workers with jobs

Question 15

What is Structural Unemployment?

Answer 15

the long-term and chronic unemployment that exists due to mis-matching of skills and vacancies even when the economy is producing at a normal rate

Question 16

What is Equilibrium Unemployment?

Answer 16

Frictional + Structural Unemployment is the unemployment that exits when the economy is producing at its potential level (also called full employment)

Question 17

What is Cyclical Unemployment?

Answer 17

– the extra unemployment that occurs during periods of recession – this once was the main target of macroeconomic policy
- Demand deficient unemployment

Question 18

What is Demand Deficient Unemployment?

Answer 18

demand deficient unemployment occurs when there is insufficient demand in the economy to maintain full employment.:
- In a recession (a period of negative economic growth) consumers will be buying fewer goods and services.
Selling fewer goods, firms sell less and so reduce production.
- If firms are producing less, this leads to lower demand for workers – either workers are fired, or a firm cuts back on employing new workers. - In the worst case scenario, the fall in demand may be so great a firm goes bankrupt, and everyone is made redundant.

Question 19

What is Involuntary Unemployment?

Answer 19

most people who are out of work don’t choose to be and so their idleness is involuntary – usually due to redundancy

Question 20

What is Voluntary Unemployment?

Answer 20

those workers who choose to be unemployed; i.e. are not prepared to work at the going real wage rate

Question 21

What are some Characteristics/Statistics of Unemployment?

Answer 21

• Long-term unemployed (> 1 year) Belgium, Ireland and Italy 60%; Germany, France and UK around 35%. Canada and the USA around 10% (before 2007, now around 30%)
• the USA was so low pre 2007 as it was a more competitive labour market as welfare payments are so low
• Low-skilled workers are 4 to 5 times more likely to be unemployed than skilled worker.75% of unemployed men are manual workers.
• In most EU countries female Un > male Un, but the UK is an exception with 6.5% < 7% for males in March 2014. (Although in UK a higher proportion of female employment is part-time.)

Question 22

What are some Consequences of Unemployment?

Answer 22

• Lost output to the economy as a whole and to the welfare of the individuals.
• Cumulative loss to UK between 2009-2014 is estimated at £230bn or nearly £4,000 for every member of the population or (£7,200 for each member of the working population.)
• Social welfare payments prevent unemployment being the personal disaster it once was, but longer term effects of high unemployment for the disillusioned who are no longer trying to make it within the system and who contribute to social unrest and crime are a matter for concern.
• Increases income inequality (since the unemployed loose more than the employed)
• Unemployment often results in health problems including mental health issues

Question 23

What are the Causes of Cyclical Unemployment?

Answer 23

Cyclical or demand deficient unemployment is due to the presence of a negative output gap.
For a negative output gap to cause demand deficient unemployment it is also necessary for wages to be sticky:
- labour markets not competitive (auction) markets
- wages are effectively a regular payment to workers over an extended employment relationship
-Good workers are “tied in” with perks (pensions, health insurance company car) rather than face flexible wage rates (but bonuses)

Question 24

What is the Causes of Equilibrium Unemployment?

Answer 24

Unemployment which occurs when there is no GDP gap:

• Frictional (or search) unemployment – caused by the normal turnover of labour, as people take a break between jobs
• Structural unemployment – caused by shifts in demand for existing products and development of new products; also geographical distribution of jobs and technological change
• recent changes: decline in manufacturing and rise in service sector employment – fostered by sharp appreciation of sterling the early 1980s and competition from China joining the global market as a supplier

Question 25

How can the Hysteresis Effect be defined?

Answer 25

• In economics, hysteresis refers to an event in the economy that persists into the future, even after the factors that led to that event have been removed.
• Unemployment rate and international trade are two areas that are mostly used to explain the hysteresis effect.

Question 26

What is Hysteresis?

Answer 26

• The size of equilibrium unemployment is affected by “hysteresis” – meaning ‘coming late.’ In economics it means that the rate of unemployment is path dependent; i.e. not independent to what has gone before.
• Equilibrium unemployment may be higher after periods of high unemployment associated with large negative GDP gaps than after periods of low unemployment.
• Evidence suggests that such hysteresis effects are part of the explanation of high and persistent levels of unemployment in the EU (including the UK).

Question 27

What is the Beveridge Curve?

Answer 27

To identify different types of unemployment we can draw a Beveridge curve – or U-V chart for the UK – by plotting vacancies (V) on the x-axis against unemployment (U) on the y- axis.
Equilibrium unemployment corresponds to points along a 45-degree line,
- there is a negative gradient curve that shows difference unemployment levels against vacancies
- if the point above the equilibrium line - unemployment is rising faster than vacancies therefore in a recession
- if the point is below the equilibrium line unemployment is falling but vacancies are rising therefore in a boom

Question 28

in the Beveridge curve how can the 45 degree line also be interpreted?

Answer 28

• the line of mismatch
• lots of vacancies but also high unemployment –> the unemployed just dont have the right skills
• a shift to the right of the Beveridge curve indicates an increase in mismatching

Question 29

What causes a Shift in the Beveridge Curve?

Answer 29

• Matching Process
• Skill Mismatches
• Labour Force Participation Rate
• Long-term unemployment
• Frictional unemployment
• Economic and Policy uncertainty

Question 30

How does the Matching Process cause a Shift in the Beveridge Curve?

Answer 30

The matching process will determine how efficiently workers find new jobs. Improvements in the matching system would shift the curve towards the origin, because an efficient matching process will find jobs faster- filling vacancies and employing the unemployed

Question 31

How does Skill Mismatches cause a Shift in the Beveridge Curve?

Answer 31

Skills mismatches occur when changes in the skills employers want differ from the available skills in the labour pool. Greater mismatches would shift the Beveridge Curve outward. If this were the driving factor behind the shift, one would expect to also see employers bid up wages for the few candidates who were desirable.

Question 32

How does Labour Force Participation Rise cause a Shift in the Beveridge Curve?

Answer 32

Labour force participation rate; as the number looking for jobs increases relative to total population, the unemployment rate increases, shifting the curve outwards from the origin. Labour force participation can increase due to changes in education, gender roles, population age and immigration.

Question 33

How does Long-term Unemployment cause a Shift in the Beveridge Curve?

Answer 33

Long-term unemployment will push the curve outward from the origin. This could be caused by; deterioration of human capital or a negative perception of the unemployed by the potential employers

Question 34

How does Frictional Unemployment cause a Shift in the Beveridge Curve?

Answer 34

Frictional unemployment; a decrease in frictions would reduce the number of firms searching for employees and the number of unemployed searching for jobs. This would shift the curve towards the origin. Frictional unemployment is due to job losses, resignations and job creation

Question 35

How does Economic and Policy Uncertainty cause a Shift in the Beveridge Curve?

Answer 35

Economic and policy uncertainty may cause employers to hold vacancies open longer in the search for the “perfect candidate,” particularly when there is high unemployment with a large number of candidates from which to choose. More uncertainty would tend to shift the curve outward

Question 36

What have the UK looked like under a V-U Analysis of the UK between 2001-2016?

Answer 36

• financial crash sent unemployment shooting up away from the mismatch (U=V) line leading us into a recession
• even though we recovered hysteresis occurred –> higher level of unemployment for every level of vacancies
• Along 2V=U some long-term “core unemployment” is allowed for which gives a better indication of cyclical unemployment during the recession