Theme 2 - Unemployment

Question 1

What are the 3 categories of unemployment?

Definitions

Answer 1

Employed: those who are employed by firms or other organisation, includes self-employed.
Unemployment: those who are able, available and willing to work but cannot find a job despite an active search
Economically inactive: all those people in the age range who are not considered to be active, includes students, retired, sick and carer’s. it includes discourages workers.

Question 2

Benefits of high levels of employment for the UK economy:

Answer 2

• high tax revenue
• reduced welfare spending
• increased potential productive capacity
• increase income, higher GDP

Question 3

Problems with high levels of unemployment for the UK economy:

Answer 3

• reduced tax revenue
• increased welfare spending
• reduced AD
• unemployment in the UK is falling but there is a limit to how much it can drop before impacting other macro aims

Question 4

Why the government want to know the level of employment:

Answer 4

• plan welfare spending
• adjust the tax rate to cover the costs of unemployment
• fiscal policy

Question 5

What is full employment?

Answer 5

It is one of the main macroeconomic objectives, the target is to have unemployment at a rate of 4%

Question 6

What are the measurements of unemployment?

Answer 6

Job seekers allowance: the number of people claiming benefits, it excludes those who aren’t eligible.
International labour organisation: those without a job, who want a job, have actively sought work in the last four weeks and are available to start within the next 2 weeks.

Question 7

Problems with the measurements of employment:

Answer 7

• JSA underestimates unemployment levels as it excludes those not eligible.
• ILO over estimates as it is based on a sample and extrapolated up. People may answer the questions inaccurately so it isn’t reliable.
• neither measurement include the under employed.
• much hidden unemployment.

Question 8

Strengths of the measurements of unemployment:

Answer 8

• timely figures in each month
• large sample size
• local/regional data helps policy
• low level of benefit fraud

Question 9

Under-employed:

Answer 9

These workers have jobs but aren’t maximise their potential, so they are either not doing as many hours as desired or in a job that doesn’t utilise their full skill set.

Question 10

What is frictional unemployment?

Answer 10

People out of work temporarily as they transfer from one job to another, can include people made redundant.

Question 11

What is structural unemployment?

Answer 11

Caused by a change in the pattern of the economic activity within an economy. Arise from a mismatch of skills and job opportunities as the pattern of labour demand changes. As one sector is expanding another maybe expanding but the skill sets of the workers don’t match.

Question 12

Cyclical unemployment / demand deficient unemployment:

Answer 12

Arises due to a downturn in the economic cycle. Demand deficient is when the economy is at an equilibrium below full employment, due to a lack of demand.

Question 13

What is seasonal unemployment?

Answer 13

Due to regular seasonal changes in employment, in retail and tourism sectors.

Question 14

What is classical or real wage unemployment?

Answer 14

Minimum wage is set above equilibrium, leading to an excess supply of workers compared to demand for workers.

Question 15

What is voluntary unemployment?

Answer 15

They choose not to work due to the incentive of benefits being too high.

Question 16

Involuntary unemployment?

Answer 16

They cannot find a job.

Question 17

What is search unemployment?

Answer 17

Searching around until they find a suitable job.

Question 18

What is technological unemployment?

Answer 18

They are out of a job because of being replaced by technology.

Question 19

What are the consequences of unemployment for individuals?

Answer 19

• no fixed income
• reduced standard of living
• inability to afford necessities
• mental health issues
• positive: free time, opportunity to do new things

Question 20

What are the consequences of unemployment for firms?

Answer 20

• reduction in the labour force
• lower consumer spending
• less investment
• lower revenue, less profit -> insolvency
• positive: less money paid in wages, potential increase in supply of labour. Demand for inferior goods increases.

Question 21

What are the consequences of unemployment for the economy?

Answer 21

• reduction in the labour force
• little or no economic growth
• likely recession or growth
• economy not working at full capacity
• budget deficit from increased welfare spending

Question 22

Policies to reduce unemployment - labour demand:

Answer 22

• macro stimulus policies: low interest rates, depreciation in the exchange rate, infrastructure investment projects.
• cutting the cost of employing workers: reduction in national insurance, financial support for apprenticeships
• competitiveness policies: reduction in corporation tax, tax incentives for research spending

Question 23

Policies to reduce unemployment - labour supply:

Answer 23

• reducing occupational mobility: better funding for and more effective training, teaching new skills, expansion of apprenticeships.
• improving geographical mobility: rise in house building will help to keep prices low, active regional policy to create new jobs and businesses
• stimulate stronger work incentives: higher minimum wage or a living wage, reductions in income tax/national insurance, welfare reforms to reduce the risk of a poverty trap.