Principles of Economics 8.1 - Unemployment and the Labour Market* Flashcards
Describe the 2 categories of unemployment
- The long-run problem: The natural rate of unemployment
- The short-run problem: The cyclical rate of unemployment
What does unemployment need to be?
◦ Carefully defined.
◦ Measured.
◦ Explored in terms of how long people are out of work
◦ Divided into fictional and structural types
Define ‘unemployment’
Someone who does not have a job and is willing and available for
work at the going rate
How is unemployment rate expressed?
As a percentage of the labour force
What’s labour force?
The total number of people in work plus those who
are unemployed
What’s ‘the total number of people in work plus those who
are unemployed’?
Labour Force
What are the 2 ways of measuring unemployment?
◦ The claimant count
◦ A monthly survey of households – the Labour Force Survey in
the UK
Describe & explain the key source of data for unemployment
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
What are ‘economically inactive people’?
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
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’?
Economically inactive people
Describe how unemployment is measured
- 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
Describe & explain why there are always unemployed people
- 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
Describe & explain ‘Frictional Unemployment’
- 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
What’s the name for ‘unemployment that results from the time that it takes to match workers with jobs’?
Frictional Unemployment
What’s the name for ‘unemployement Where people choose to remain unemployed rather than take jobs which are available’?
Voluntary Unemployment
What’s ‘voluntary unemployment’?
Where people choose to remain unemployed rather than take jobs which are available
What’s ‘involuntary unemployment’?
Where people want work at
going market wage rates but cannot find employment
What’s the name for ‘unemployment where people want work at going market wage rates but cannot find employment’?
Involuntary Unemployment
Describe & explain ‘Structural Unemployment’
- 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
Describe & explain the Labour Market Imperfection of wages being too high
- 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
Describe & explain the Labour Market Imperfection of unions and collective bargaining
- 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
