Unemployment

Question 1

define full employment

Answer 1

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

Question 2

link efficiency to unemployment

Answer 2

if economy operates at full employment, it is productively efficient and producing on its PPC curve as all its FOP are being fully utilise

Question 3

equilibrium UE

Answer 3

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

Question 4

why does equilibrium UE exist?

Answer 4

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!!!!

Question 5

what happens to the ASL as the wage rate rises?

Answer 5

converges to the ALF as more people make themselves available for work

Question 6

define disequilibrium UE

Answer 6

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

Question 7

explain cyclical UE

Answer 7

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

Question 7

explain real wage UE

Answer 7

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

Question 8

why are wages sticky downwards?

Answer 8

TU will resist pay cuts especially during recession or inflation

Question 9

voluntary vs involuntary unemployment

Answer 9

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

Question 10

evaluate the idea of voluntary vs involuntary UE

Answer 10

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

Question 11

what is the natural rate of unemployment?

Answer 11

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

Question 12

what factors determine the NRU?

Answer 12

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

Question 13

policies to reduce the NRU

Answer 13

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

Question 14

define hysteresis

Answer 14

unemployment due to workers becoming demotivated and losing skills and human capital when they are out of work for a long time

Question 15

define LT unemployed

Answer 15

people who have been unemployed for a year or longer

Question 16

labour mobility

Answer 16

either geographic ability of workers to change where they work or occcupational ability to change the job they do

Question 17

trends in employment

Answer 17

• tertiary sector
• women
• self-employed
• part-time
• insecure employment like gig
• public/private sector
• formal/informal economy

Question 18

factors affecting occupational mobility

Answer 18

• quality of education/training
• info availability
• barriers to entry (closed shop) or exit (notice periods)
• time (to gain necessarys quals and search for job)

Question 19

factors affecting geographical mobility

Answer 19

• info available
• pay relative to housing and living costs
• family ties
• immigration controls
• language and culture barriers

Question 20

policies to reduce cyclical UE

Answer 20

expansionary fiscal/monetary policy

BE SPECIFIC e.g. direct taxation, corporate tax, govt spending, lower ER

Question 21

eval the use of fiscal/monetary policy to reduce cyclical UE

Answer 21

• general eval for effectiveness
• AD may rise but if firms expand capacity by purchasing more capital then may not increase employment

Question 22

examples of policies to reduce occupational labour immobility

Answer 22

• education/training improvements - curriculum reform
• information provision/jobseeker agencies
• reduce barrier to entry and exit e.g. legal requirement for shorter notice periods

Question 23

examples of policies to reduce geo immobility

Answer 23

• better, faster, cheaper transport links
• info provision/agencies
• subsidised state provision of housing in some areas

Question 24

evaluate use of SSP to reduce NRU

Answer 24

• 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

Question 25

impact of unemployment depends on

Answer 25

• rate
• duration - hysteresis!
• type
• which demographic group most affected - e.g. youth at particular risk of hysteresis