MACRO - 4. unemployment ✅ Flashcards
what is the difference between underemployment and unemployment
UNDEREMPLOYMENT is when employees in jobs that don’t reflect their skills level whereas UNEMPLOYMENT is when they arent being employed but are actively seeking a job
what is long term unemployment and hidden unemployment
LONG TERM - someone out of work for more than 12 months and longer the duration harder it is to find work as skills decline (frictional, seasonal, structural, real wage caused by supply side)
HIDDEN - workers lose jobs so demotivated and discouraged so don’t actively seek work but if new job came up they would take it
what statistics are important within unemployment
EMPLOYMENT RATE - number of those in work / working age population
UNEMPLOYMENT RATE - number not in work but seeking work / labour force
ACTIVITY/PARTICIPATION RATE - number in work/unemployed / working age population
INACTIVITY RATE - number not in work/unemployed / working age population
what is involved with frictional unemployment
- short term unemployment, loss of job quickly
- in free market frictional unemployment always exists but time varies
- higher unemployment = benefits so workers able to afford to search for good job without poverty risk
- if job services good = less time searching
what is involved with seasonal unemployment
- workers on seasonal basis, high in winter fall in summer
- not much done to prevent labour demand changes
what is involved with structural unemployment
- labour demand less than supply in individual labour market, divided into different sectors:
REGIONAL - lack of mobility between regions
SECTORAL - skills no longer needed without training so unable to adapt to changing demand
TECHNOLOGICAL - new technology so unemployment
what is involved with cyclical unemployment
- involves economic cycle happens when economy isnt in boom
- insufficient AD for all workers, capital also underutilised
- cyclical/real wage unemployment result of market disequilibrium as lack of demand for labour/rigidities in labour market
what is involved with real wage unemployment
- real wages stuck at level above needed to reduce unemployment
- minimum wages as workers may be prepared to work for less
- refusal of jobs as gaining more in benefits replacement ratio = ratio between benefits received and wage a worker could receive
what are the effects to economy and individuals of unemployment
- DEFLATION RISK (high U = lower AD, high deflationary pressures, high spare capacity)
- LOSS OF INCOME (disposable, living standards decline)
- FISCAL COSTS (lower tax revenue, higher welfare spending, budget deficit increase higher risk of increasing taxes/ cutting public spending)
- SOCIAL COSTS (high U linked to poverty growth, widening inequality of income/wealth)
- MIGRATION (moving out when high U)
how does unemployment cause the negative multiplier
negative multiplier = loss of potential national output, waste scarce resources and hysteresis effect if people leave labour market permanently has long term AS effect
what policies can be employed to reduce unemployment
- reducing occupational immobility
- reducing geographical immobility
- benefit and tax reforms
- increasing AD
how can reducing geographical/occupational mobility influence unemployment
- policies like apprenticeship schemes can provide new skills, improve incentives to find work as workplace training poor with skills gaps so better funding
- many economists point to low level of new build housing impeding labour mobility
how can benefits and tax reforms reduce unemployment
- lower marginal tax rates for low incomes
- reducing welfare benefits increasing incentive to take job
how does increasing aggregate demand reduce unemployment
- Keynesian style active policy during recession
- state investment increases and lower taxes to boost disposable income
- stronger positive muliplier
disadvantages of falling unemployment
- extra spending from expanding labour market could worsen current account
- demand-pull, cost-push inflationary pressures increase if rapid fall in unemployment
- fewer spare labour = rise in unfilled vacancies so labour shortages may put off inward investment
what is involved with the labour market equilibrium
achieved when demand = supply of labour
demand is determined by marginal revenue product of labour
more people attracted into workforce with higher real wage
why is demand for labour curved downwards and supply upwards
more workers combined with fixed stock of land/capital, marginal revenue product of labour declines (law of diminishing returns) so demand downwards and supply upwards
explain voluntary unemployment
rate of voluntary unemployment is natural rate of unemployment and only form of unemployment which is involuntary is cyclical
how do economic cycles affect equilibrium
in recession, disequilibrium occurs so macroeconomic forces attempt to restore economy back to long run equilibrium position
can take decades to reduce measured unemployment caused by large scale factory closure
what paradox is involved with unemployment
paradox economy may be experiencing shortage of workers but long term unemployment remains
what does the phillips curve illustrate and what can it indicate
inverse relationship between rate of inflation (PL) and unemployment (U)
the curve is line of best fit between high U rates and low change of money wage rates
provides insight into inflation causes, change in money wage rates key in price change
what can phillips curve demonstrate differing from short to long term
shows what happens when economy adjusting to demand side shock in short term. may change if workers demand pay increase plus inflation
in long term can be shown no trade off between inflation/unemployment if inflation reaches zero no forces affecting price anymore
what is the money illusion and how does it influence phillips curve
economic agents suffer from money illusion if inflation = zero, belief prices are stable when they might not be, inflation may counteract wage increases
long run vertical phillips curve (Milton Friedman, founder of modern monetarism) suggesting workers not suffering from money illusion - curve sometimes called expectations-augmented Phillips curve hypothesis
what is NAIRU
non accelerating inflation rate of unemployment
rate of unemployment sustained without change in inflation rate
what is the Keynesian view of unemployment
Keynesian economists doubt natural rate of unemployment existence because there is the belief it takes very long time for labour markets to clear if there is mass unemployment
