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Economic macro > Unemployment > Flashcards

Unemployment Flashcards

1
Q

Unemployed

A

These are those able and willing to work but are not employed, they are actively seeking work and are usually looking to start within the next two weeks.

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2
Q

Employed

A

Those with a job

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3
Q

Economic inactivity

A

This occurs when people are not in the labour force, they are neither working nor looking for work. Thic could include categories such as early retirement, long term sickness.
They have to be in the working age.

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4
Q

The labour force

A

This is the number of people of working age who are employed or are looking for employment.

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5
Q

Measuring unemployment

A
  1. Claimant count method
  2. Labour force survey
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6
Q

What is the claimant account

A

This is the offical government method of calculating unemployment, it counts the number of people recieving unemployment benefits. (jobseekers allowance)

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7
Q

Problems with the Claimant account

A
  • Excludes people who might be looking for work, it excludes people over 60 and under 18.
  • Excludes married women looking to return to work.
  • Very stirct rules means you can easily miss out on JSA.
  • Some people may be claiming benefits and working in the black market.
  • Some people on the JSA may not be seeking work.
  • ‘Stigma’ some people are too proud to claim benefits.
  • People on large incomes may not bother to collect JSA.
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8
Q

Pros of Claimant account

A
  • Compiled every month, up to date.
  • Cheap to produce/data straight from job center.
  • No sampling areas as it includes everyone claiming JSA.
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9
Q

The labour force survey

A

This is a survey asking 60,000 people whether they were unemployed and whether they were looking for a job. This includes some people not elegible for benefits but still meet the criteria for unemployment.
- It asks whether you have been actively seeking work in the last 4 weeks and available to start in the nect two.

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10
Q

Cons of the labour force survey

A
  • People could lie
  • By the time published the survey is 6 weeks out of date.
  • Possible sampling errors and anomolies if you only ask 60,000 people out of the total population.
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11
Q

UC

A

Universal credit
A new benefit system adminstered by the department of work and pesnions.
Claimant account now uses UC and JSA
ISSUES, this is available to people who are in work and on low incomes, not representative.

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12
Q

Pros of the labour force survey

A
  • More inclusive, not a rigid criteria to participate in survey you only need to be over 16.
  • More accurate, UC can be misleading.
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13
Q

More general difficulties with measuring unemployment

A
  • Under-employment, people may be offcially classed as employed, however they may be working fewer hours than they would like. Part time for example.
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14
Q

Causes of unemployment

A
  1. Structural
  2. Frictional
  3. Seasonal
  4. Demand deficient
  5. Real wage inflexibilty
  6. Voluntary unemployment
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15
Q

Frictional unemployment

A

This is caused by people moving between jobs, this is a short term issue yet there will always be SOME frictional unemployment in the economy.
COULD be healthy as its a sign of the economy shifting to where it needs more workers.

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16
Q

Structural unemployment

A

This is long-term unemployment caused by structural changes in the economy, or a mismatch of skills in the market.
E.G
Contraction of manafacturing industries
Shift and expansion in terriary industries such as banking and finance

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17
Q

Structural unemployment - Occupational immobility

A

This refers to the difficulties in learning new skills applicable to a new industry and technological change. For example, a former manual labourer may find it hard to retrain in a new high tech industry.

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18
Q

Structural unemployment - Geographical immobility

A
  • This refers to the difficulty in moving regions to get a job, workers finding it hard to relocate.
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19
Q

Structural unemployment - Globalisation

A

GLOBAL SHIFT manafacturing sectors have moved to areas with lower labour costs, deindustrialisation.

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20
Q

Seasonal unemployment

A

This occurs during certain points of the year, for example more people will be employed in the tourist industry in the summer.

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21
Q

Voluntary unemployment

A

This occurs when people turn down the oppurtunity to work at the going wage rate.
- Its possible that unemployment benefits are so high its not worth going into work.

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22
Q

Demand deficient

A
  • Sometimes referred to as cyclical unemployment, this occurs when a fall in AD as a result of a fall in demand for goods and services.
  • As demand falls, demand for labour will fall.
23
Q

Technological unemployment

A

Caused by the subsitution of labour for capital.
Technological improvements can also cause a rise in productivity and therefore firms need less workers to produce the same output

24
Q

Real wage unemployment

A

Wages are forced above the normal market rate and cause a excess supply for labour. This can be caused by a minimum wage of trade unions. DIAGRAM
- Firms will now demand less and there will be excess supply.
- Concerns that if there is a rise in the minimum wage this will result in unemployment in low paid industries.

25
Q

Incentives to work

A
  • Fall in income tax will give more incentive for people to work and therefore reduce unemployment.
  • High welfare payments may mean that some are not incentivised to work.
26
Q

Solutions - Demand side policies

A
  • This include attempting to increase AD during a period of recession or negative output gap. In order to reduce demand defficient unemployment.
  • These are designed to increase consumer demand.
  • This can be done through monetary and fiscal policy.
  • If AD rises than firms will make more profit, they will neeed to higher more workers to meet the increasing demand.
27
Q

Limitations to demand side solutions

A
  • Governments might have imperfect information about the economy.
  • Fiscal policy may be ineffective due to the signifcant time lag.
  • If interest rates are high than fiscal policy may not be effective.
28
Q

Supply-side policies

A
  • Education and training, subsidies education and spend more on training, encourage people to improve their skills and increases the labour supply.
  • Tax and benefits, reducing icnome tax may incentives people to work, more stringent benefits would make people less likely to take unemployment benefits.
  • Labour market flexibility, reducing the minimum wage will remove real wage unemployment.
  • Governments could try and subsidies relocation and transport networks.
  • Trade union reform, reducing union power will make employing workers easy and increases mobility of labour.
29
Q

Strengths of supply side policies

A
  • They are the only policies to deal with structual unemployment, such as education and training.
30
Q

Issues with supply side policies

A
  • Significant time lags associated with supply-side policies
  • Market based policies such as reducing tax can lead to unequal distribution of wealth.
  • Demand side policies are better at dealing with cyclical unemployment, since they can reduce the size of the output gap and shift the AD curve.
31
Q

Natural Rate of Unemployment (NRU)

A

This is the rate of unemployment when the labour market is in equalibrium, there is enough bos for every worker in the labour force.

This occurs when the economy produces at potential output (full employment) at long run equalibirum, when cyclical unemployment = 0

However this doesnt mean every worker is in a job, there will always be frictional and structural unemployment present, the rate of unemployment at this level is therefore the NRU.

So Natural rate of unemployment = frictional unemployment + structural unemployment + Seasonal unemployment.

32
Q

What does the SRPC show?

A
  • Inverse relationship beween inflation and unemployment, indicitating a trade off between the two. The higher the inflation rate, the lower the unemployment rate.
  • Movements along the SPRC are caused by changes in AD.
33
Q

Why is there a inverse relationship between inflation and unemployment?

A
  • As unemployment falls, there is less supply of labour, this pushes wages upwards, meaning workers now have more disposable income, increasing consumption in the economy and therefore resulting in inflation rising.
34
Q

Relationship between AD/AS and unemployment

A

When ever AD shifts we move along the SRPC, if AD shift out we move up to higher inflation and lower unemployment.

35
Q

SRPC and Stagflation

A

Rise in SRAS as a result in chaning costs of production (external shocks), causing cost push inflation, STAGFLATION. Recession, stagnant demand, high unemployment but high inlfation. Price level and unemployment will rise. Outward shift of the SRPC.

36
Q

LRPC

A

Neo-Classical economists argue that the LRPC is verticle at the natural rate of unemployment, indiciating that in the long run, the level of unemployment is independant of the price level and rate of inflation.

No matter how the SRPC shifts unemployment will always return to the NRU, therefore the LRPC is verticle, in the long run there is no trade of between unemployment and inflation.

37
Q

LRPC and the AD/AS model

A
  • The economy operates at point A on the diagram at the NRU or the natural rate and a inflation rate of 2%.
  • If AD increases on the classical model, it will shift from AD1 to AD2, this results in a movement up the SRPC and forces unemployment below the NRU, wage demands will rise and inflation will increase to 3%.
  • Higher wages mean that firms have higher costs of production, this will mean that the SRAS curve will shift to SRAS 2 and return to equalibrium on the LRAS curve at point C.
  • Higher costs of production means firms are less willing to take on new workers, so unemployment increases, the SRPC shifts OUTWARDS as a result.
  • This means that in the long run unemployment returns back to the NRU and the LRPC at point C, this time at a higher inflation rate of 3%.
38
Q

Inflation expectations and the LRPC

A

If workers expect future inflation, they are more likely to bargain for higher wages to compensate for the increased cost of living. If workers can successfully bargain for higher wages, this will contribute towards inflation. Higher wages:

Increase cost-push inflation (wages increase firms costs)
Increase demand-pull inflation (workers have more disposable income)

39
Q

Costs of unemployment for households

A
  • Loss of income
  • Loss of real living standards, one of the largest causes of poverty in the UK.
  • Homelessness.
  • Increased health issues such as mental health issues, stress, social exclusion.
  • Loss of skills and motiviation, the longer period the unemployment extends the lower the chances of finding new employment.
  • Lost human capital. If people are out of work, they miss out on ‘on the job training’ This is a vital component of human capital and labour skills; high rates of unemployment can reduce labour productivity. If someone is out of work for two years, they miss out on the latest working practices and trends.
40
Q

Costs and benefits of unemployment for firms

A
  • Fall in demand for goods and services
  • Fall in demand for buisness further down the supply chain.

BUT
- Less pressure to pay higher wages, costs could come down.
- larger pool of surplus labour to chose from.
- Less risk of industrial/strike action for firms as there is greater risk of losing their jobs.

41
Q

Costs for the government and the economy

A
  • Increased government borrowing. Higher unemployment will cause a fall in tax revenue because there are fewer people paying income tax and also spending less (hence lower VAT).
  • Also, the government will have to spend more on unemployment and related benefits. The government doesn’t just pay unemployment benefit, but a family who has unemployment will be more likely to receive housing benefit and income support.
  • long term unemployment may result in people leaving the labour force and therefore LRAS may shift in.
  • Lower GDP for the economy. High unemployment indicates the economy is operating below full capacity and is inefficient; this will lead to lower output and incomes. The unemployed are also unable to purchase as many goods, so will contribute to lower spending and lower output. THIS CAN CAUSE A NEGATIVE MULTIPLIER EFFECT
  • Political instability and social unrest, increased crime and vandalism.
42
Q

The negative multiplier effect

A

If the government cut spending, some public sector workers may lose their jobs. This will cause an initial fall in national income. However, with higher unemployment, the unemployed workers will also spend less leading to lower demand elsewhere in the economy

43
Q

Solutions to unemployment

A

Demand side
Supply side

44
Q

Demand side solutions to unemployment

A
  • Cyclical unemployment/demand deficient unemployment can be corrected through such policies, if their is a negative output gap than the government can correct this through monetary and fiscal policy.

EXAMPLE, expansionary fiscal policy will result in a increase in AD, there will be a increase in real GDP, as long as there is spare capacity in the economy, firms produce more, there will be a increase in deamnd for workers and therefore lower demand deficient unemployment.

Stronger growth also means fewer firms will struggle and there will be fewer job losses.

45
Q

EVAL to demand side policies

A
  • Depends on other components of AD, if confidence is low, cutting taxes may not increase spending, because people prefer to save.
  • Fiscal policy may have time lags, take a long time to affect AD.
  • If the economy is close to full capacity then an increase in AD will only cause inflation, expansionary fiscal policy will only reduce unemployment if there isa output gap.
  • Expansionary fiscal policy will rewuire governments to borrow, increasing dept and rising bond yields.
  • In the long run expansioanry fiscal policy may cause crowding out, government increases spending because they borrow from the private sectore.
  • Lower interest rates may not help boost spending if banks are still reluctant to lend.
  • Demand side policies can contribute to reducing demand deficient unemployment e.g. in a recession. However, they cannot reduce supply-side unemployment. Therefore, their effectiveness depends on the type of unemployment that occurs.
46
Q

How do you reduce the NRU and shift the LRPC?

A

Reducing the NRU would need supply side policies that make the labour market more flexible, reduce frictional and structural unemployment.

47
Q

Supply side solutions

A
  • Education and training
  • Reduce the Trade Union Powers
  • Employment subsidies
  • Improve labour market flexibility
  • Stricter benefit requirements
  • Improved geographical mobility
48
Q

Supply side solutions - Education and training

A

The aim of this is to give the long term unemployed new skills which will enable them to find jobs in developing industries.

This can reduce occupational immobility, investment in training schemes, and improving skills.

EVAL, unemployed may be unwilling or unable to learn new skills, very large time lag and it will take several years to reduce unemployment.

49
Q

Supply side solutions - Reduce trade union power

A

If unions can bargain for wages above the market clearing level, they will cause real wage unemployment, in this case reducing the influence of trade unions will help solves this real wage unemployment.

50
Q

Supply side solutions - Employment subsidies

A

Firms could be given tax breaks or subsidies for taking on long-term unemployed. This helps give them new confidence and on the job training. However, it will be quite expensive, and it may encourage firms to just replace current workers with the long-term unemployment to benefit from the tax breaks.

51
Q

Supply side solutions - Improve labour market flexibility

A

The ability for firms to hire workers in the way that suits them, part time work, short term contracts make it easier for firms to hire and fire workers.
The ability to change wages in the labour market, respond to a recession, employ lower wages to avoid laying workers off.

52
Q

Supply side solutions - Stricter benefit requirements

A

Reduces frictional unemployment, encourages people to find a job.

Governments could take a more pro-active role in making the unemployed accept a job or risk losing benefits. After a certain period the government could guarantee a public sector hob.

EVAL it may mean the government end up employing thousands of people in unproductive tasks which is very expensive.
Also, if you make it difficult to claim benefits, you may reduce the claimant count, but not the International Labour force survey.

53
Q

Supply side solutions - Improved geographical mobility

A

Helps improve structural unemployment, subsidising workers to move to areas, or building affordable housing in areas that need work.
The government could give tax breaks to firms who set up in depressed areas.

54
Q

What is the NAIRU

A
  • This is the non accelerating inflation rate of unemployment, this is the lowest rate of unemployment that can exist in the long run without leading to a change in the rate of inflation.
  • FOR EXAMPLE if the NAIRU is 5% then unemployment below this level will lead to increases in inflation, but unemployment above this level will not.

Economic macro (15 decks)

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