Macro Unit 4- Unemployment

Question 1

Unemployment definition

Answer 1

The unemployed are those registered as able, available and willing to work at the going wage rate in any suitable job who cannot find employment.

Government target is less than 3%

Question 2

What’s the difference between the level and rate of unemployment?

Answer 2

Level- the number of people who are looking for a job but cannot find one

Rate- the number of people out of work as a % of the labour force

Question 3

What is the difference between economically active and inactive?

Answer 3

Economically active- the fraction of a population that is either employed or actively seeking employment

Economically inactive- inactive individuals are not actively looking for work due to:

• The need to look after elderly or informed relatives
• Parents who are full-time carers for their children
• The retired

Question 4

Why is full employment good?

Answer 4

• Better standard of living
• Economic growth
• More income tax and less benefits

Question 5

What are the 2 measures of unemployment?

Answer 5

1. The claimant count measure

2. The labour force survey

Question 6

What is the claimant count measure?

Benefits/ cons of this measure

Answer 6

• The number of people claiming the jobseekers’ allowance- does not include over 60’s and those on government training schemes.
• This data is easy to obtain and there’s no cost in collecting it as it already exists
• Updated monthly
• However doesn’t count those who choose to not claim

Question 7

What is the labour force survey?

Answer 7

• Takes a sample of people who are not working and asks if they are actively seeking work within past 4 weeks and available to start immediately.
• Those people who answer yes are added up to produce the international labour unemployment account. Internationally agreed as a measure of unemployment so easy to compare.
• More accurate then the claimant count although also less up to date than claimant count measure
• Because the LFS measure is a survey there could always be a sampling error in the data.

Question 8

Who does unemployment statistics not fully consider?

Answer 8

1. Discouraged workers- those who have stopped applying for jobs
2. Economically inactive
3. Under-employed- those who want full-time work but have to settle for a part-time job.

Question 9

What is real wage rate unemployment?

Answer 9

• The result of real wages being pushed above the equilibrium level of employment
• Caused by price floors creating artificial equilibrium
• Trade Unions negotiating for higher wages
• Introduction of the NMW

Question 10

What does the NMW diagram look like?

Answer 10

Look at notes

Question 11

What are the types of unemployment?

Answer 11

1. Structural
2. Cyclical
3. Frictional
4. Technological
5. Casual/seasonal
6. Voluntary and involuntary

Question 12

Define structural unemployment?

Answer 12

unemployment resulting from industrial reorganization, typically due to technological change, rather than fluctuations in supply or demand.

Question 13

Define cyclical unemployment?

Answer 13

Cyclical unemployment is unemployment that results when the overall demand for goods and services in an economy cannot support full employment. It occurs during periods of slow economic growth or during periods of economic contraction.

The business cycle: slump, recovery, boom and recession.

Question 14

Define frictional unemployment?

Answer 14

the unemployment which exists in any economy due to people being in the process of moving from one job to another.

Question 15

Define technological unemployment?

Answer 15

Technological unemployment is the loss of jobs caused by technological change. It is a key type of structural unemployment. Technological change typically includes the introduction of labour-saving “mechanical-muscle” machines or more efficient “mechanical-mind” processes (automation).

Question 16

Define casual/seasonal unemployment?

Answer 16

Seasonal unemployment occurs when people are unemployed at particular times of the year when demand for labour is lower than usual. E.g. Christmas

Question 17

Define voluntary/involuntary?

Answer 17

Voluntary unemployment is defined as a situation where the unemployed choose not to accept a job at the going wage rate.

Question 18

What is supply side unemployment?

Answer 18

The natural rate of unemployment- supply of labour is the willingness of employees to offer themselves for work in the labour force.

Question 19

What factors is supply side unemployment driven by?

Answer 19

1. Occupational immobility
2. Geographical inflexibility
3. Lack of incentives to work
4. Classical/real wage rate unemployment

Question 20

What does occupational immobility mean?

Answer 20

Occupational immobility occurs when there are barriers to the mobility of factors of production between different sectors of the economy leading to these factors remaining unemployed, or being used in ways that are not efficient.

Question 21

What supply side policy can correct occupational immobility?

Answer 21

Firms providing education schemes to their employees where they will be able to learn all of the skills necessary for them to perform to the best of their ability in their current job as well as making them more desirable to other firms and businesses

Question 22

What does geographical immobility mean?

Answer 22

Geographical immobility refers to barriers people moving from one area to another to find work. There are good reasons why geographical immobility might exist e.g. the high cost of rent in London

Question 23

What supply side policy can correct geographical immobility?

Answer 23

Providing reforms to the housing market which are designed to improve the supply and revive the price of rented properties and to increase the supply of affordable properties.

Question 24

What is demand side unemployment?

Answer 24

(Unemployment caused by lack of aggregate demand in the economy). In recessions, we can expect demand deficient unemployment (sometimes called cyclical unemployment) to increase significantly.

Question 25

What government policy can improve demand side unemployment?

Answer 25

Fiscal policy can decrease unemployment by helping increase AD and the rate of economic growth. The government will need to pursue expansionary fiscal policy- this involves cutting taxes and increasing government spending.

Question 26

What is the Keynesian view on fighting unemployment?

Answer 26

• Intervention- they argue the problem may be a lack of AD in the economy. As labour demand is derived from products demand, more consumption and AD would encourage businesses to demand more workers.
• The government could use expansionary fiscal policy to lower tax rates e.g. corporate taxes. This would decreases costs for firms and so they are able to employ more workers so demand shifts out

Question 27

Classical view on fighting unemployment?

Answer 27

Any unemployment that occurs in the labour market should be considered voluntary unemployment. Voluntary unemployed workers are unemployed because they refuse to accept lower wages.

Question 28

How could voluntary unemployment be stopped?

Answer 28

1. National minimum wage- if workers were willing to work at a lower wage rate then they would still have a job.
2. Trade unions- if the labour force had been willing to work at a lower wage rate level, the trade unions would not have intervened and there would still have been the same level of employment.
3. Sticky wages- when sticky wages had originally occurred, employees were asking for higher wages and a wage price spiral occurred. If employees didn’t ask for this they would still have a job.

Question 29

Summarise Iceland’s recovery from recession

Answer 29

It’s banks had run up debts of $86bn, an impossible sum for an economy with a GDP of $13bn in 2009. Iceland did the only thing it could do under the circumstances and it let its banks go bust.

However, competitiveness was regained and unemployment decreased

Question 30

Costs of unemployment ?

Answer 30

1. Economy operating below maximum output it could achieve- spare capacity due to unemployment- increase spending on unemployment benefits from government and less income, corporate tax and VAT
2. Falling real income- less disposable income due to lower incomes- less confidence and purchasing power- shift AD inwards
3. Redundancies waste resources invested in training and education- spent money on improving the productive potential of their firm instead of focusing on number of employees they can afford. Thus redundancies occurred as money was invested into training and education so sacrificed of employees. Movement of PPF inwards- less output produced and so firms may need to increase prices
4. Social problems e.g. crime, poverty
5. Financial worries contribute to poor mental/physical health
6. Fall in living standards

Question 31

Challenged U.K. government faces when trying to achieve objective of full employment?

Answer 31

1. High levels of structural unemployment in the U.K. due to industrial reorganisation in 1970s and 80s and continued globalisation- paying other countries to manufacture goods-
2. Technological improvements
3. Disincentive to work in U.K. is strong- benefits and low paid work
4. Many people are underemployed and stuck in part time jobs
5. Skills shortages in certain areas- UK= engineers
6. Variations in educational outcomes between rich and poor- high levels of income inequality

Question 33

What do supply side policies aim to do?

Answer 33

Increase the volume of workers willing to work in the labour market. Such as occupational and geographical immobility/ lack of incentives to work/ classical and real wage unemployment

Question 34

Demand side policies aim to improve employment through shifting AD outwards.

Give examples

Answer 34

1. Low interest rates and improving credit supply to businesses-Propensity to spend> propensity to save
2. Depreciation in the exchange rate- WIDEC- goods and services are cheaper
3. Infrastructure investment projects- fiscal policy
4. Reductions in the rate of national insurance contributions
5. Financial support for apprenticeships/ paid internships
6. Extra funding for regional policy- special economic zones
7. Reductions in corporation tax (to increase investment)
8. Tax incentives for research/ innovative spending
9. Enterprise policies to encourage new business start-ups

Question 35

Supply side policies aim to improve employment through shifting AD outwards.

Give examples

Answer 35

1. Better funding for and more effective work training
2. Teaching new skills e.gZ coding for games
3. An expansion of apprenticeship/ internship programmes
4. Rise in house-building will help to keep property prices lower and encourage more affordable housing rents.- house prices will lower e.g. London
5. Active regional policy to improve transport infrastructure
6. Higher minimum wage (now regraded as a living wage)
7. Increased tax free allowance of £11500 from 2016
8. Welfare reforms to help reduce the risk of poverty trap

Question 36

What are unemployment policies designed to do?

Answer 36

1. Improve skills/ human capital to make people more flexible in the workplace
2. Provides stronger incentives to look for and accept work
3. Increase the occupational and geographical mobility of labour
4. Maintain a sufficiently high level of demand to create enough new jobs
5. Encourage entrepreneurship and innovation as a way of creating new products and market demand which will generate new employment opportunities

Question 37

A04 counterargument- on unemployment policies

Answer 37

1. Full-employment does not mean zero unemployment. There will always be some unemployment
2. Time lag- don’t know the true impact until a later date
3. Always cyclical fluctuations in employment- boom and bust cycles.
4. There are always changes in the pattern of demand for different jobs
5. Demand and supply-side policies need to work in tandem for unemployment to fall. Simply boosting demand if the cause of unemployment is structural is an ineffective way of tackling the problem. If demand is stimulated too much, the main risk is rising inflation- AD shifting

Question 38

What do demand side policies aim to do?

Answer 38

Improve demand of labour available through shift outwards if AD causing increase in output meaning firms demand more workers e.g. improving cyclical unemployment