Macro 10 - Causes/consequences of unemployment

Question 1

What are the advantages of the ILO count?

Answer 1

• Good for international comparisons
• Some unemployed people may not be able to claim benefits
• some people may be claiming benefits on false pretences

Question 2

What are the advantages of the claimant count?

Answer 2

Claimant count is significantly cheaper as data is already there.

Question 3

What are the 5 causes of unemployment?

Answer 3

1. Structural unemployment
2. Demand deficient unemployment
3. Seasonal unemployment
4. Frictional unemployment
5. Real wage inflexibility

Question 4

What is structural unemployment?

Answer 4

Caused by changes in the economy such as deindustrialisation and occupational immobility or geographical immobility

Question 5

What is demand deficient unemployment?

Answer 5

Lack of demand in the economy causes labour to decrease as labour is derived demand.
Unemployment rises

Question 6

What is seasonal unemployment?

Answer 6

People who work in seasonal jobs become unemployed when demand decreases

Question 7

What is frictional unemployment?

Answer 7

Short term unemployment caused by the time workers take while moving in-between jobs.

Question 8

What is real wage inflexibility?

Answer 8

Fixing the minimum wage above the market equilibrium for labour could result in excess supply of labour while not being enough demand.

Contraction along the demand curve of labour from firms so less people will be employed

Question 9

Evaluate real wage inflexibility

Answer 9

Benefits may be higher than than minimum wage, so no incentive to work.

Question 10

What are the costs of unemployment?

Answer 10

1. Lost output
2. Lower living standards
3. Lost tax revenue
4. Government spending on unemployment benefits
5. Pressure on other forms of spending
6. Social costs
7. Hysteresis
8. Costs for other economies

Question 11

what is lost output?

Answer 11

loss of potential national output + waste of scarce resources

Question 12

what is lower living standards?

Answer 12

Unemployment rises,
People have less RDI,
Thus less purchasing power,
So they focus on inferior necessities over normal luxuries.

Question 13

Evaluate lower living standards

Answer 13

The UK has a generous welfare system, so the very low income may not see a large fall in living standards

Question 14

What is lost tax revenue?

Answer 14

Unemployment,
Less income,
less tax revenue,
Less expenditure,
Gov spending might fall,
AD and AS affected

Question 15

What 3 things does the government do if unemployment is high?

Answer 15

Government will either:

Cut spending (social welfare)
Raise taxes
Raise Interest rates

Question 16

Evaluate lost tax revenue

Answer 16

Government may raise income taxes

Whether or not tax revenue falls depends on the tax that raises the most revenue for the government. In the UK, this is income tax, so tax revenue is likely to fall.

Furthermore, most income tax revenue is paid by the top 5% of earners in the UK, so tax revenue may not fall as in a recession.

Question 17

What is government spending on unemployment benefits?

Answer 17

Government may redirect spending from other areas to boost unemployment benefits (job seekers allowance). (high opportunity cost)

Question 18

Evaluate government spending on unemployment benefits

Answer 18

Whether or not spending on benefits increases depends on the scale of unemployment

Question 19

What is pressure on other forms of spending?

Answer 19

Pressure on health/police spending as crime could increase

Question 20

What are the social costs to increased unemployment?

Answer 20

Increased poverty
More inequality
More crime

Question 21

Evaluate social costs to society

Answer 21

Welfare state may prevent large scale poverty

Correlation between crime rates and unemployment in low income areas and big cities are low.

Question 22

What is hysterises?

Answer 22

Long term unemployment causes people to lose motivation to find a job so they remain on benefits.

Question 23

Evaluate hysteresis.

Answer 23

Depends on the skill level of people affected

People must be unemployed for long periods of time, so not everyone is affected

Question 24

What are the 3 benefits of unemployment?

Answer 24

1. It can help firms grow
2. Give people time to look for jobs
3. Reduce inflation

Question 25

How can unemployment help firms grow?

Answer 25

High Unemployment,
Excess supply of labour,
Wages fall as people are willing to work for less

Question 26

How does unemployment reduce inflation?

Answer 26

High unemployment,
Less RDI,
Less spending,
Less consumption,
AD decreases,
Firms lower prices to meet demand

Question 27

What are the 5 reasons on whether or not unemployment will actually harm the economy:

Answer 27

1. Whether there is stagflation
2. Scale of unemployment
3. Structural unemployment
4. Length of unemployment
5. Youth unemployment

Question 28

What is stagflation?

Answer 28

High inflation coupled with high unemployment is significantly more dangerous as people have no income and their purchasing power falls.

Question 29

Why does scale of unemployment matter?

Answer 29

If the unemployment is happening across the country or in certain areas (In big cities or rural areas)

Question 30

Why does structural unemployment matter?

Answer 30

Geographical / occupational immobility causes long term unemployment

Question 31

Why does length of unemployment matter?

Answer 31

Unemployment could end up into a downwards spiral and result in a recession

Question 32

Why does youth unemployment matter?

Answer 32

Youth employment is dangerous as they are mobile, which could lead to brain drain as they settle in other countries

Question 33

What is the effect of full employment?

Answer 33

All people who are able and willing to work are employed in labour and all resources are being fully utilised.

Question 34

Benefits of an economy reaching full employment

Answer 34

Economic growth
AS Shifts right
Output increases

Question 35

Negatives of reaching full employment?

Answer 35

Demand pull inflation

Increase in imports

Inequality increases