Unemployment Flashcards
Define unemployment
People of working age without a job who are willing and able to work and actively seeking a job
What is the claimant count, when was it used and what criteria do people need to fulfil to be eligible
- official measure of u/e until 1997
- measures the number of claimants who satisfy its criteria to get unemployment benefits: the JSA
Criteria:
- 18-65
- not in education
- work less than 16 hrs a week
- less than £16000 in savings
- actively seeking work
What is the Labour Force Survey (ILO Count)
- measure undertaken by the ILO, used across the world, e.g., in the US, Japan, Sweden.
- telephone and paper-based survey
- covers 60k across the UK
What is the criteria for the ILO Count
- those not in paid work
- able to start work within two weeks
- have looked for work in the past month
What are the advantages/disadvantages of the ILO Count
Advantages:
- politically independent
- directly comparable with other countries
- seen as a more inclusive and accurate way of measuring unemployment, because the criteria for receiving unemployment benefits, thus informing the claimant count, are constantly changing and quite difficult to meet
Disadvantages:
- difficult to get accurate distribution of population
- based off a sample and then extrapolated so prone to a degree of statistical error
- time lag - quarterly measure
Explain the SRPC?
- Keynesian economist Alban Philips plotted data which became known as the Short run Phillips Curve
- it shows the trade-off between inflation and unemployment
- according to the model, there is an inverse relationship between unemployment and inflation. A decrease in the unemployment level will lead to an increase in inflation
- this can be explained using AS/AD analysis
- demand led economic growth causes an increase in the general price level, and an increase in real output
- due to this increase in real output, firms will hire more workers to satisfy its increased demand, meaning that there is increased derived demand for labour
- higher wages, lower unemployment
- in particular, as unemployment falls, there is greater scarcity of workers, giving them greater bargaining power of their wages
- this increases the cost of production of firms, leading to inflation
Explain the LRPC
(Expectations Augmented Phillips Curve is useful to show why the LRPC is a straight line)
- monetarists deviate from the SRPC model
- Friedman and other monetarist economists came up with the model for the Expectations Augmented Phillips Curve
- initial equilibrium is the intersection between LRAS, SRAS and AD
- if the authorities implement an expansionary demand side policy, for example by reducing interest rates to make credit cheaper, then there will be a rightward shift in AD, causing an increase in the price level, and adding to real output
- the voluntarily unemployed become attracted to work at higher nominal wage rates being offered by firms due to the shortage in supply of labour and the need to satisfy greater demand
- however, as they adapt their expectations, they realise that these expansionary fiscal policies create an upwards pressure on price, meaning that their real wages haven’t actually increased
- therefore they will seek even higher wages, or leave the labour market
- increased CoP for firms
- leftward shift in supply back to LRAS equilibrium, but with higher inflation
- shows how there is a natural rate of unemployment
What are the causes of unemployment?
Cyclical unemployment
- changes depending on where an economy is in its economic cycle
- occurs when there is lower than normal aggregate demand, meaning firms have lower derived demand for labour
Structural unemployment
- as the structure of the economy changes, some workers may become structurally unemployed because the industry they work in is declining
- for instance, due to deindustrialisation, workers in the manufacturing sector, which is in decline, may lose their jobs, while more jobs might be available in industries which are growing, such as IT/Tech industries
Frictional unemployment
- this is when workers temporarily are out of employment because they might be looking for better, higher-skilled jobs, which require a bit of time to train for
- frictional unemployment is a sign of labour market flexibility, as workers are moving around
Seasonal unemployment
- there may be greater demand for certain jobs at certain points of the year. For instance, retail shops will have more staff around christmas, or the tourism industries during the holidays.
Real-wage unemployment
- real-wages are nominal wages which have been adjusted for inflation.
- RW u/e can be shown diagrammatically using a labour market diagram. Wages for y-axis, quantity of labour for x-axis. Completely elastic curve above the equilibrium point represents the national minimum wage.
- where this curve intersects the demand of labour and the supply of labour, there is excess supply, known as unemployment.
Causes of RW u/e:
- national minimum wage - creates excess supply of L
- trade unions - sticky wages prevent the real wage from falling to the market clearing level
- expectations of inflation lead workers to be reluctant to accept lower wages
What are the costs of unemployment?
Lost output for the economy
- currently 1.3 million people are unemployed as of December 2022, according to the ONS. Although this is a record low, being an unemployment rate of 3.7%, if we consider workers’ average output being £27000, then unemployment costs the UK £35.1bn a year - forgone output which can never be recovered.
taxes and benefits
- each extra person who becomes unemployed stops contributing to tax receipts, and starts receiving unemployment benefits.
- a smaller number of tax payers are having to pay for a larger number of unemployed people’s unemployment benefits
A negative multiplier effect
- when someone becomes unemployed, this lowers their disposable income, and reduces their likely consumption solely to necessities
- this will lower the derived demand for labour and also reduce revenue for firms, which can cause unemployment to rise further
- these successive falls in secondary spending rounds lead to falling real output, economic contraction, and deflation
Loss of international competitiveness
- if there are high levels of unemployment, this creates a downward pressure on wage rates, because of the availability of labour, which gives firms leverage in giving lower wages.
- therefore, rather than investing in capital equipment which is more efficient, and would thus imprive export competitiveness, firms may prefer to hire lots of cheap labour over expensive capital investments, even if they will be more profitable in the long run.
Personal effects on employee that lost their job
- lower standards of living
- greater strain on healthcare services as unemployment can cause mental health problems
- falling skill levels - not actively retraining, therefore not picking up new skill sets either.
What are the demand side solutions to unemployment?
Demand side solutions to U/E:
- when a negative output gap exists in the economy, governments can use fiscal and monetary policy to increase the level of aggregate demand in the economy
- for instance, reducing interest rates
10 marker
Explain why some economists believe that it is possible to reduce the NRU/NAIRU, but not possible to reduce unemployment below the NRU/NAIRU
Possible to reduce the NAIRU in the economy:
- supply side policies
- labour market reforms which successfully reduce the rate of frictional and structural u/e can reduce the NAIRU by improving the occupational mobility of labour
- e.g., trade union reforms, banning picket lines, wild cat strikes
- education and training schemes - improve occupational mobility of labour - increase productivity of labour - decrease CoP for firms - decrease in wage inflation
Not possible to reduce unemployment below the NAIRU
- milton freidman’s argument (see LRPC explanation)
- Expectations Augmented Phillips Curve argument
- expansionary demand side policies, such as lowering interest rates, arguably cant reduce unemployment below the NAIRU, but only contribute towards inflation
10 marker
Explain two factors which might determine the natural rate of unemployment
One factor: labour market flexibility
- decline in TUs influence makes labour markets more flexible.
- if labour market is more flexible, easier for firms to hire and fire workers
- decreased CoP for firms, as firms have greater leverage over their employees wages
- increased productivity
- firms more likely to hire more workers
- more jobs available
- if many jobs available, then wage inflation mitigated as there are unoccupied jobs in the market
- greater incentive to work as inflation expectations are low
- show diagrammatically, NRU falls from NRU1 to NRU2 (LRPC shifts inwards)
- due to lower inflation expectations and greater incentive to work
Factor 2: immigration
- as immigration increases, more workers in the workforce
- firms are able to pay each worker less, decreasing CoP
- firms also have greater choice of workers, therefore productivity increases
- so firms are more willing to employ workers, meaning that more jobs are available
- little wage inflation as no scarcity of workers
- again, leads to low expectations of inflation, incentivising employment
- LRAS shifts right
- YFE equivalent to NRU
10 marker
Explain how demand side and supply side shocks might increase unemployment in an economy
Demand side shock:
- coronavirus pandemic
- leads to greater demand-deficient/cyclical unemployment
- this is because due to decreased consumer and business confidence, this lowered the rate of consumption and investment in the economy
- inwards shift in AD
- negative output gap
- not all factors of production being fully utilised
- as a consequence of decreased AD, with firms making less revenue, there will be a reduced derived demand for labour, as firms will be producing less so will need fewer workers. If they don’t offload workers then they will be narrowing profit margins further.
SS shock:
- increase in the price of rents or cost of living where someone works may cause them to become geographically immobile, as they can’t afford to work in that place anymore
- the decline in certain industries, such as the manufacturing sector, can cause structural unemployment
- an industry may decline if it becomes less competitive with similar industries abroad, and will cause workers in their country to become structurally unemployed
- more significant can demand-deficient unemployment, which is more variable, because it is difficult to transfer their fixed skill set and look for a different job.
10 marker
Explain the different types of unemployment that might afflict an economy [10]
To gain full knowledge marks (AO1) , mention broadly the different types of u/e: structural, cyclical, seasonal, real wage
Cyclical unemployment
- AD inwards shift diagram
- demand side shock might be caused by the pandemic for instance
- lower levels of consumption and investment due to higher levels of uncertainty
- decreased derived demand for labour as firms are making less revenue, considering that demand for their goods and services are lower
- therefore there are forced to offload workers as they don’t need as many, and keeping excess workers will only reduce profit margins
RW u/e:
- labour markets diagram with price above the equilibrium
- TUs and national minimum wage
- prevents the real wage from falling to the market clearing level for the certain labour market.
20 marker
Demand-side tools are better at reducing unemployment than supply-side policies. Evaluate this statement [20]
- Demand-side > supply-side as can tackle cyclical unemployment during deep recessions. When economy is operating well below Yfe (Keynesian portion of LRAS), supply-side policies are likely to be ineffective at tackling unemployment as it is being driven by weak demand. The supply-side policies here that will have the biggest impact on unemployment are those which have a demand-side (fiscal) aspect to them!
- Demand-side > supply-side because more immediate impact on macroeconomy. Supply-side requires knowledge of specific issues and then might take a long time to have an impact (e.g. training schemes).
- Supply-side > demand-side as demand-side policies are only able to deal with weak demand across the economy, rather than addressing structural issues that might be present within labour markets. An analysis of how supply-side policies can address a number of issues would be relevant here (students should link back to how demand-side policies aren’t able to do this….!)
- Demand-side tools are blunt in nature, meaning knowledge of specific issues within labour markets is not needed (this could be good or bad…).
- Unintended consequences of policies (demand-side inflationary vs supply-side disinflationary) – whether one is better than the other will depend on the other macroeconomic objectives an economy is trying to achieve. With high inflation and weak growth in the UK right now, demand-side tools feel more appropriate as they have less negative downsides on these other core objectives.
