Macro Objective 1: Unemployment

Question 1

Define unemployment.

Answer 1

the number of people in the labor force who are actively seeking work but cannot find a job

Question 2

Define labor force.

Answer 2

number of people employed plus number of people unemployed

Question 3

Define rate of unemployment.

Answer 3

number of unemployed people expressed as a percentage of the labor force

Question 4

Define underemployment.

Answer 4

occurs when

i) part time workers seeking full time jobs
ii) workers are overqualified for their jobs

Question 5

Define hidden unemployment.

Answer 5

unemployment rate excludes
discouraged workers
underemployed

(people who are not actively seeking work as well as underemployed people)

Question 6

Why is the unemployment rate an inaccurate estimate of true unemployment?

Answer 6

excludes discouraged workers, underemployed, workers in informal sector, no account for variations between gender/ethnic groups

i) doesn’t include discouraged workers who gave up seeking a job
ii) counts underemployed people as employed
iii) excluded workers in informal/unregistered sectors (e.g. street vendors)
iv) measures unemployment as average for whole population, while unemployment rates may actually vary within different age/gender/ethnic groups

Question 7

What are the economics consequences of unemployment?

Answer 7

lower output
lower tax revenues
higher gov. costs for unemployment benefits
income inequality, more poverty

i) loss of real output, few people working to produce output (use PPC to illustrate SR negative growth)
ii) less people earning income, so loss of government income tax revenue
iii) higher cost of unemployment benefits to government budget
iv) loss of income for workers
v) increase inequality in income distribution and poverty, due to loss of income

Question 8

What are the personal and social consequences of unemployment?

Answer 8

crime, stress, poor health, indebtedness, homelessness, family tensions

i) increased crime rates
ii) increased stress levels, leading to poor health
iv) increased indebtedness as people borrow more to make ends meet
v) increased homelessness, as loss of income could force indebted workers into bankruptcy and loss of their homes
vi) strained family tensions due to inability to make ends meet

Question 9

What is cyclical unemployment?

Answer 9

occurs in deflationary gaps, due to insufficient AD

long-term

Question 10

What is natural employment and what is it composed of?

Answer 10

occurs when economy produces at potential output (full employment output) at long-run equilibrium, when cyclical unemployment = 0
NRU = frictional + seasonal + structural unemployment

Question 11

Explain frictional, seasonal and structural unemployment.

Answer 11

frictional - affects workers in between jobs, short-term e.g. fired or leaves job in search of better one
seasonal - affects workers with jobs that change according to season, short-term e.g. tourist industry, winter months
structural - long term, caused by change in demand for labour skills, changes in geographical location of industries, or labour market rigidities

Question 12

Revise policies to tackle unemployment, in mind-maps.

Answer 12

See mindmaps.

Question 13

How do labour market rigidities contribute to structural unemployment?

Answer 13

i) strong labour unions negotiate higher wages which lower the demand for labor and create unemployment
ii) high unemployment benefits reduce workers’ incentive to work
iii) labor protection laws make it difficult/costly to fire workers, firms are reluctant to hire more workers, thus causing unemployment
iv) minimum wage legislation creates excess supply of labor (unemployment) - use diagram to explain!