Unemployment Flashcards
The Goal of Full Employment
The goal of full employment is the level of unemployment that exists when the government’s economic growth objective is achieved, there is no cyclical unemployment, and the unemployment rate is as low as possible without going below the NAIRU. This is believed to be an unemployment rate of 4.0%
Current unemployment rate is 3.7%, below the goal of 4-4.5%
Summary:
- Goal for Economic Growth is achieved
- No cyclical unemployment
- Above NAIRU
NAIRU
Non-Accelerating Inflation Rate of Unemployment: The lowest unemployment rate possible before inflation begins to accelerate. This is an economy’s ‘natural rate of unemployment’.
Importantly, the natural rate of unemployment (or full employment) is determined by the level of long term unemployment (those unemployed for more than a year), who are mostly made up of those suffering from structural or hard-core unemployment.
The connection between Unemployment and Aggregate Demand
If AD is falling, then businesses will notice that their sales are dropping, and their stock levels are rising. Because of this, businesses’ derived demand for labour falls, and they don’t need as many workers as they did before, leading them to cut staff -> increase unemployment.
Why is our goal of an unemployment rate NOT 0%?
Our goal for full employment is to have an unemployment rate of 4-4.5%, this is because there will always be some natural unemployment, even during times of strong AD. When there is an absence of cyclical unemployment, natural unemployment rises in the economy due to seasonal, frictional, and hard-core factors.
Also having an unemployment rate that is too low, causes inflation. Demand-Pull inflation since everyone has disposable income, but also Cost-push inflation because there are no spare workers thus increasing costs of production.
Frictional Unemployment:
Refers to the time period between jobs when a worker is searching for, or transitioning from one job to another.
Structural Unemployment:
This occurs when there is a mismatch between the skills of the unemployed and the skill required for existing job opportunities.
Cyclical Unemployment:
This occurs when job losses occur due to downturns in the business cycle, such as during recessions.
Seasonal Unemployment:
This is where a person is unemployed because their skills are only demanded during certain times of the year. The most common example is fruit pickers.
Underemployment:
This is a situation in which workers are not employed at their full skill level, or their jobs do not require full time hours.
Hidden Unemployment:
This refers to individuals who are not counted in the labour force despite wanting to work. This is because they’re discouraged about their job prospects and are not actively seeking employment.
Hard-Core Unemployment
This refers to individuals who remain unemployed for a long duration due to mental, physical, or other characteristics that prevent them from getting job offers.
(Such as: criminal records, addictions, disabilities)
Unemployment Rate Definition + Formula:
The unemployment rate represents the percentage of the labor force that is unemployed.
U/E Rate = Unemployed / (Employed + Unemployed)
Labour Force
To be in the labour force, a person must be above 15 years of age, who are either employed or actively seeking employment.
(Employed + Unemployed)
Participation Rate Definition + Formula:
The percentage of total ‘working age’ population who are members of the labour force (either employed or looking for work).
This tells us what proportion of the potential labour force is actually in the labour force.
PR = Labour Force / Working Age Population
Underutilisation Rate
The percentage of people who are either unemployed or underemployed who are members of the labour force.
UR = (Unemployed + Underemployed) / Labour Force
