Unemployment Flashcards
define full employment
when all who wish to and are able to work have found jobs at the going wage rate, excluding frictional and structural unemployment contributing to the NRU (full form)
for the UK this is achieved at around 3-5% unemployment
link efficiency to unemployment
if economy operates at full employment, it is productively efficient and producing on its PPC curve as all its FOP are being fully utilise
equilibrium UE
exists when the AD for labour equals the AS for labour but not the aggregate labour force - the labour market is in equilibrium, but some people part of the labour force will not have a job
why does equilibrium UE exist?
BECAUSE OF VOLUNTARY, FRICTIONAL AND STRUCTURAL REASONS
- not willing to work at current wage rate
- lack skills and quals needed to work
- are in between jobs
- lack info on job vacancies
- are geographically immobile
these are FRICTIONAL AND STRUCTURAL CAUSES!!!!
what happens to the ASL as the wage rate rises?
converges to the ALF as more people make themselves available for work
define disequilibrium UE
unemployment caused when the supply of labour exceeds the demand for labour at the current wage rate, and can be either cyclical UE or real wage UE
explain cyclical UE
occurs during the recession phase of the economic cycle, when AD falls due to (housing market crash reducing wealth effect for e.g.) and reduces the derived demand for labour, leading to workers being laid off to save production costs. Creates an ouput gap
may be LT if wages are sticky downwards (period of uncertainty)
DRAW AD/AS diagram
ALWAYS give specific example of a factor than might reduce/increase AD in these kinds of explanations
explain real wage UE
occurs when wages are above the equilibrium wage in the labour market due to intervention by TUs or the government setting a minimum wage
will cause excess supply of labour as demand contracts to save costs, thus causing UE
tends to be long term as wages are sticky downwards and the risk of downward AD and employment spiral
why are wages sticky downwards?
TU will resist pay cuts especially during recession or inflation
voluntary vs involuntary unemployment
voluntary - workers choose not to work at current wage rate; mainly frictional
involuntary - workers willing to work at current wage rate but can’t find a job; is mainly structural and cylical
evaluate the idea of voluntary vs involuntary UE
hard to distinguish between the 2 as those unemployed and receiving welfare will likely not admit if they are able to find work
also, the idea that people of a certain skilled profession like a lawyer would not want to take up just any job available if not as skilled, e.g. street cleaner
what is the natural rate of unemployment?
the rate of UE that exists when AD for labour equals the AS for labour at a current wage rate and price level, to which neo-classical economists think the economy will return to in the LR
what factors determine the NRU?
SUPPLY SIDE!!! VOLUNTARY, FRICTIONAL AND STRUCTURAL FACTORS
- value of UE benefits relative to low pay
- NMW
- quality of ed and training
- hysterisis effects
- labour mobility (geo and occu) including info availability to both firms and workers
policies to reduce the NRU
SUPPLY SIDE POLICIES
- improve education and training for hysteresis
- tax and benefit reform
- remove NMW
- TU reform
- info provision (firms and workers)
- improve occ and geo labour mobility
define hysteresis
unemployment due to workers becoming demotivated and losing skills and human capital when they are out of work for a long time
define LT unemployed
people who have been unemployed for a year or longer
labour mobility
either geographic ability of workers to change where they work or occcupational ability to change the job they do
trends in employment
- tertiary sector
- women
- self-employed
- part-time
- insecure employment like gig
- public/private sector
- formal/informal economy
factors affecting occupational mobility
- quality of education/training
- info availability
- barriers to entry (closed shop) or exit (notice periods)
- time (to gain necessarys quals and search for job)
factors affecting geographical mobility
- info available
- pay relative to housing and living costs
- family ties
- immigration controls
- language and culture barriers
policies to reduce cyclical UE
expansionary fiscal/monetary policy
BE SPECIFIC e.g. direct taxation, corporate tax, govt spending, lower ER
eval the use of fiscal/monetary policy to reduce cyclical UE
- general eval for effectiveness
- AD may rise but if firms expand capacity by purchasing more capital then may not increase employment
examples of policies to reduce occupational labour immobility
- education/training improvements - curriculum reform
- information provision/jobseeker agencies
- reduce barrier to entry and exit e.g. legal requirement for shorter notice periods
examples of policies to reduce geo immobility
- better, faster, cheaper transport links
- info provision/agencies
- subsidised state provision of housing in some areas
evaluate use of SSP to reduce NRU
- time lags
- workers may not participate in training
- no guarantee workers will have the desired incentive change (tax/benefit reform)
- may be lack of vacancies in the first place
- if UE is cyclical, e.g. lack of vacancies, then SSP by cutting UE benefit will reduce consumption and worsen UE
THEREFORE MUST ID ROOT OF PROBLEM
impact of unemployment depends on
- rate
- duration - hysteresis!
- type
- which demographic group most affected - e.g. youth at particular risk of hysteresis
