Lesson 10 - Unemployment

Question 1

What is the natural rate of unemployment (NRU)?

Answer 1

When the number of job vacancies match the number of people who are unemployed (there is no lack of demand)

Question 2

What are the four types of unemployment?

Answer 2

• frictional
• structural
• voluntary
• cyclical

Question 3

What is cyclical unemployment?

Answer 3

• there is a lack of demand for labour

Question 4

What is structural unemployment?

Answer 4

Skills are no longer needed (usually sunset industries)

Question 5

What is voluntary unemployment?

Answer 5

People who choose not to work

Question 6

What is frictional unemployment?

Answer 6

In between jobs/seasonal unemployment

Question 7

What are the consequences and solutions for frictional unemployment?

Answer 7

Consequences
- Short term = not a big issue
- Long term = can lead to structural or voluntary unemployment, which is a scourge to society

Solutions
- job centres to help with cv’s/finding jobs
- information

Question 8

What are the consequences and solutions for structural unemployment?

Answer 8

Consequences
- often long term and regional
- difficult to fix

Solutions
- protectionism (increasing the price of imports)
- supply side policies (training/education)

Question 9

What are the consequences and solutions for voluntary unemployment?

Answer 9

Consequences
- harsh new classicalists consider a lot of unemployment as voluntary, so it can be a huge issue
- the resources used on benefits could be better used elsewhere

Solutions
- incentivise workers by lowering benefits
- taper benefits (slowly reduce them)

Question 10

What are the consequences and solutions for cyclical unemployment?

Answer 10

Consequences
- individual = lower living standards
- country = low confidence, low AD, high unemployment (fiscal implications)

Solutions
- expansionary fiscal and monetary policy

Question 11

What is the Keynesian view on unemployment?

Answer 11

• argues that there will always be some structural and frictional unemployment, but there is a risk of this unemployment becoming cyclical
• falling AD can lead to the negative multiplier effect, and increase unemployment

Question 12

What is the free market view on unemployment?

Answer 12

• believe that the economy operates on full employment in the long run
• if the government lets the market work freely, it will adjust and eliminate cyclical unemployment

Question 13

What are the real wage theories?

Answer 13

• free market thinkers believe that unemployment is caused by too high a level of real wages (purchasing power)
• lack of competitiveness keeps real wages high
• believe that the solution is to let the market clear on its own by introducing competitivity