Unemployment

Question 1

Frictional unemployment

Answer 1

short term transitional unemployment; moving between jobs

Question 2

Structural unemployment

Answer 2

Long term change in market conditions resulting from mismatches between labour supply and the labour demand for differently skilled labour.

Question 3

Cyclical unemployment

Answer 3

insufficient AD within the economy also known as demand deficient unemployment

Question 4

voluntary unemployment

Answer 4

workers choosing not to participate in the labour market at the current equilibrium wage rate

Question 5

Involuntary unemployment

Answer 5

people are unable to work because there’s insufficient jobs available

Question 6

Factors causing voluntary unemployment

Answer 6

• Generous welfare benefits
• Childcare costs
• High rates of income tax
• Workers seeking better working conditions

Question 7

factors causing involuntary unemployment

Answer 7

• Not enough demand in the economy
• Skills don’t match jobs on offer
• Unable to travel to location

Question 8

replacement ratio

Answer 8

Disposable income out of work/ disposable income in work

- If the replacement ratio is too high, the natural rate of unemployment is likely to increase

Question 9

what does a replacement ratio close or above 1 mean?

Answer 9

• A person could earn in benefits as much as they do in employment.
• Reducing the ratio well below one should reduce the incentives to remain unemployed

Question 10

How can the replacement ratio be reduced?

Answer 10

• Less generous benefits
• Minimum wage increases
• Tax credits
• Lower income tax or higher ‘tax free’ allowance

Question 11

Structural factors

Answer 11

• Regional unemployment (due to lack of knowledge in other cities, barriers to moving)
• Unemployed workers may lack appropriate skills for job vacancies.

Question 12

Factors determining the natural rate of unemployment

Answer 12

• Skills and education
• Availability of job information
• Occupational mobility
• Labour market flexibility (Eg.weaker TUs or looser employment legislations)
• Hysteresis (Unemployment increases during recessions lowering human capital)

Question 13

Real wage unemployment

Answer 13

Occurs when wages are above the equilibrium level causing the supply of labour to be greater than demand.
Classical economists argue that wages should fall to reduce real wage unemployment.

Question 14

Factors causing real wage unemployment

Answer 14

• Trade unions
• NMW
• Classical economists argue we should remove anything that distorts the labour market but in reality this may damage living standards, working conditions and job security.

Question 15

Consequences of unemployment to individuals

Answer 15

• Lower living standards
• De-skilling
• Health implications (Stress, Life expectancy)
• Unemployment trap
• Long term employability

Question 16

Consequences of unemployment to the economy

Answer 16

• Government finances
• Lost output
• Lower international competitiveness
• Rising inequality
• Loss of resources invested in training
• Lower consumer spending