Principles of Economics 8.1 - Unemployment and the Labour Market*

Question 1

Describe the 2 categories of unemployment

Answer 1

• The long-run problem: The natural rate of unemployment
• The short-run problem: The cyclical rate of unemployment

Question 2

What does unemployment need to be?

Answer 2

◦ Carefully defined.
◦ Measured.
◦ Explored in terms of how long people are out of work
◦ Divided into fictional and structural types

Question 3

Define ‘unemployment’

Answer 3

Someone who does not have a job and is willing and available for
work at the going rate

Question 4

How is unemployment rate expressed?

Answer 4

As a percentage of the labour force

Question 5

What’s labour force?

Answer 5

The total number of people in work plus those who
are unemployed

Question 6

What’s ‘the total number of people in work plus those who
are unemployed’?

Answer 6

Labour Force

Question 7

What are the 2 ways of measuring unemployment?

Answer 7

◦ The claimant count
◦ A monthly survey of households – the Labour Force Survey in
the UK

Question 8

Describe & explain the key source of data for unemployment

Answer 8

The ONS (Office for National Statistics) is the key organisation in Economics for making the data available to people who want to study the macroeconomy – it’s the key reliable source that’s freely available

Question 9

What are ‘economically inactive people’?

Answer 9

People who are not in employment or unemployed due to reasons such as being in full-time education, being full-time carers and raising families

Question 10

What’s the name for ‘people who are not in employment or unemployed due to
reasons such as being in full-time education, being full-time carers and raising families’?

Answer 10

Economically inactive people

Question 11

Describe how unemployment is measured

Answer 11

• Each adult is placed into one of three categories:
  ◦ Employed
  ◦ Unemployed
  ◦ Not in the labour force
• The labour force is the total number of workers, including both
  the employed and the unemployed
• The unemployment rate is calculated as the
  percentage of the labour force that is unemployed:
  Unemployment Rate = (Number of unemployed divided by Labour force) x 100
• The labour force participation rate is the percentage of the adult population that is in the labour force:
  Labour force participation rate = (Labour force divded by Adult population) x 100

Question 12

Describe & explain why there are always unemployed people

Answer 12

• In an ideal labour market…..
  o Wages would adjust so that the quantity of labour supplied
  and the quantity of labour demanded would be equal.
  o At equilibrium, therefore, there is no unemployment.
  o Changes in the supply of and demand for labour would create
  surpluses and shortages in the labour market and the adjustment of the wage rate would ensure that all workers are always fully employed.
• Then why are there always people unemployed?
  o Labour markets do not clear instantly. One reason for this is that people can’t just drop in and out of jobs easily

Question 13

Describe & explain ‘Frictional Unemployment’

Answer 13

• Frictional unemployment refers to the unemployment that results from the time that it takes to match workers with jobs.
  o It takes time for workers to search for the jobs that best suit their tastes and skills.
  o Search unemployment is inevitable because the economy is always changing.
  o Job search means there must always be some unemployment

Question 14

What’s the name for ‘unemployment that results from the time that it takes to match workers with jobs’?

Answer 14

Frictional Unemployment

Question 14

What’s the name for ‘unemployement Where people choose to remain unemployed rather than take jobs which are available’?

Answer 14

Voluntary Unemployment

Question 14

What’s ‘voluntary unemployment’?

Answer 14

Where people choose to remain unemployed rather than take jobs which are available

Question 15

What’s ‘involuntary unemployment’?

Answer 15

Where people want work at
going market wage rates but cannot find employment

Question 16

What’s the name for ‘unemployment where people want work at going market wage rates but cannot find employment’?

Answer 16

Involuntary Unemployment

Question 17

Describe & explain ‘Structural Unemployment’

Answer 17

• Structural unemployment occurs because the number of jobs available in some labour markets is insufficient to provide a job for
  everyone who wants one.
• Three possible reasons for an above equilibrium wage are minimum wage
  laws, unions, and efficiency wages.
• Workers who lose their jobs in one industry may find that jobs that
  are available:
  o Require skills and experience they do not possess = occupational
  immobility.
  o Are not in the immediate region where they live = geographic immobility
• Technological Change
  o The losers are those whose knowledge, skills and experience are now redundant.
  o As a result, they have to seek new employment.
• Structural change in the Economy
  o Over time structural changes affect the make-up of economies.
  o Structural change can be caused by competition from abroad or by changes in technology and changes in
  societal norms and trends

Question 18

Describe & explain the Labour Market Imperfection of wages being too high

Answer 18

• Unemployment can be caused by wages being above the market equilibrium.
• Imperfections in the labour market prevent the wage rate
  from adjusting to equate the demand and supply of labour.
  When the wage is above the equilibrium level.
  o The quantity of labour supplied exceeds the quantity of
  labour demanded.
  o Workers are unemployed because they are waiting for jobs to open up
• When the minimum wage is set above the level that balances supply and demand, it creates unemployment.
• Minimum wages are binding most often for the least skilled and least experienced members of the labour force, such as
  teenagers

Question 19

Describe & explain the Labour Market Imperfection of unions and collective bargaining

Answer 19

• Unions and collective bargaining is another labour market
  imperfection.
• A union is a worker association that bargains with employers over wages and working conditions.
• In the early 1980s over half of the UK labour force was unionized but this figure fell rapidly over a few years to a union density of 23.5% in 2019.
• A union is a type of cartel attempting to exert its market
  power
• The process by which unions and firms agree on the terms of employment is called collective bargaining.
  o Economists have found that union workers typically earn significantly more than similar workers who do not belong to
  unions.
• A strike may be organized if the union and the firm cannot
  reach an agreement.
  o A strike refers to when the union organizes a withdrawal of labour from the firm
• Critics argue that unions cause the allocation of labour to be
  inefficient and inequitable.
  o Wages above the competitive level reduce the quantity of labour demanded and cause unemployment.
  o Some workers benefit at the expense of other workers
• Advocates of unions contend that unions are a necessary
  antidote to the market power of firms that hire workers.
  o They claim that unions are important for helping firms respond
  efficiently to workers’ concerns