Macro 10 - Causes/consequences of unemployment Flashcards
What are the advantages of the ILO count?
- Good for international comparisons
- Some unemployed people may not be able to claim benefits
- some people may be claiming benefits on false pretences
What are the advantages of the claimant count?
Claimant count is significantly cheaper as data is already there.
What are the 5 causes of unemployment?
- Structural unemployment
- Demand deficient unemployment
- Seasonal unemployment
- Frictional unemployment
- Real wage inflexibility
What is structural unemployment?
Caused by changes in the economy such as deindustrialisation and occupational immobility or geographical immobility
What is demand deficient unemployment?
Lack of demand in the economy causes labour to decrease as labour is derived demand.
Unemployment rises
What is seasonal unemployment?
People who work in seasonal jobs become unemployed when demand decreases
What is frictional unemployment?
Short term unemployment caused by the time workers take while moving in-between jobs.
What is real wage inflexibility?
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
Evaluate real wage inflexibility
Benefits may be higher than than minimum wage, so no incentive to work.
What are the costs of unemployment?
- Lost output
- Lower living standards
- Lost tax revenue
- Government spending on unemployment benefits
- Pressure on other forms of spending
- Social costs
- Hysteresis
- Costs for other economies
what is lost output?
loss of potential national output + waste of scarce resources
what is lower living standards?
Unemployment rises,
People have less RDI,
Thus less purchasing power,
So they focus on inferior necessities over normal luxuries.
Evaluate lower living standards
The UK has a generous welfare system, so the very low income may not see a large fall in living standards
What is lost tax revenue?
Unemployment,
Less income,
less tax revenue,
Less expenditure,
Gov spending might fall,
AD and AS affected
What 3 things does the government do if unemployment is high?
Government will either:
increase spending (social welfare)
cut taxes
decrease Interest rates
Evaluate lost tax revenue
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.
What is government spending on unemployment benefits?
Government may redirect spending from other areas to boost unemployment benefits (job seekers allowance). (high opportunity cost)
Evaluate government spending on unemployment benefits
Whether or not spending on benefits increases depends on the scale of unemployment
What is pressure on other forms of spending?
Pressure on health/police spending as crime could increase
What are the social costs to increased unemployment?
Increased poverty
More inequality
More crime
Evaluate social costs to society
Welfare state may prevent large scale poverty
Correlation between crime rates and unemployment in low income areas and big cities are low.
What is hysterises?
Long term unemployment causes people to lose motivation to find a job so they remain on benefits.
Evaluate hysteresis.
Depends on the skill level of people affected
People must be unemployed for long periods of time, so not everyone is affected
What are the 3 benefits of unemployment?
- It can help firms grow
- Give people time to look for jobs
- Reduce inflation
How can unemployment help firms grow?
High Unemployment,
Excess supply of labour,
Wages fall as people are willing to work for less
How does unemployment reduce inflation?
High unemployment,
Less RDI,
Less spending,
Less consumption,
AD decreases,
Firms lower prices to meet demand
What are the 5 reasons on whether or not unemployment will actually harm the economy:
- Whether there is stagflation
- Scale of unemployment
- Structural unemployment
- Length of unemployment
- Youth unemployment
What is stagflation?
High inflation coupled with high unemployment is significantly more dangerous as people have no income and their purchasing power falls.
Why does scale of unemployment matter?
If the unemployment is happening across the country or in certain areas (In big cities or rural areas)
Why does structural unemployment matter?
Geographical / occupational immobility causes long term unemployment
Why does length of unemployment matter?
Unemployment could end up into a downwards spiral and result in a recession
Why does youth unemployment matter?
Youth employment is dangerous as they are mobile, which could lead to brain drain as they settle in other countries
What is the effect of full employment?
All people who are able and willing to work are employed in labour and all resources are being fully utilised.
Benefits of an economy reaching full employment
Economic growth
AS Shifts right
Output increases
Negatives of reaching full employment?
Demand pull inflation
Increase in imports
Inequality increases
