Unemployment Flashcards
define unemployment
unemployment consists of those of working age who are willing and able to work, actively seeking a job, but who do not have a job
what is working age
16 - 64
what is the labour force survey
a massive survey conducted by the ONS, from the survey the ONS can work out the number of employed and unemployed people
maning of inactive ppl
people who are of working age but are not willing to work
unemployment rate equation
unemployed/ econmically active x 100
what is the claimant count
the total number of people claiming unemployment benefits
issues with the claimant count
- Exclusion of Certain Unemployed Individuals
The Claimant Count is a measure of unemployment based on the number of people claiming unemployment-related benefits, like Jobseeker’s Allowance → However, this measure excludes people who are not claiming benefits, such as individuals who have exhausted their benefits or those who are ineligible → As a result, the Claimant Count may understate the actual number of unemployed individuals in the economy. - Not Accounting for People Not Actively Seeking Work
The Claimant Count is typically only based on those actively seeking employment, but some individuals who are unemployed may not be actively claiming benefits or seeking work → For example, people who are discouraged workers (those who have given up looking for work) or people involved in informal work may not be counted → This leads to a misrepresentation of the true level of unemployment. - Incentive to “Game” the System
In some cases, individuals may not claim unemployment benefits even when they are eligible because they prefer not to go through the process or because they feel they may receive less support compared to alternative benefits → On the other hand, individuals may falsely claim unemployment benefits despite having a job or income → This leads to inaccuracies in the measurement, making the Claimant Count less reliable as a measure of unemployment. - Does Not Account for Underemployment
The Claimant Count focuses only on people who are unemployed and claiming benefits, yet it fails to account for underemployment, such as individuals who are working part-time or in temporary jobs but still want full-time employment → These people are effectively underutilized and their contribution to the economy is not fully measured by the Claimant Count → This creates a gap in the understanding of labor market conditions. - Not Reflective of Regional Differences
The Claimant Count often overlooks regional variations in unemployment, especially in areas where there may be greater reliance on benefits due to local economic conditions → In some areas, such as regions with high unemployment, more people may be eligible to claim benefits → This can result in regional misrepresentations, where the national claimant count may not reflect the true disparities in unemployment rates across the country.
issues with the labour force survey
Small Sample Size
- The survey only includes about 40,000 individuals out of a working-age population of 40 million.
- A small sample size may not adequately represent the diverse regional, demographic, and occupational characteristics of the workforce.
- The results might be skewed, leading to inaccuracies in measuring unemployment or other labor market trends.’
High Cost
- Conducting the survey and collecting data is expensive.
- Large-scale surveys require significant resources for interviews, analysis, and administration, limiting the frequency or scope of data collection.
- Budgetary constraints might restrict updates or improvements to the survey, potentially compromising the quality of insights.
Discouraged Workers (“Hidden Unemployed”)
- Individuals who stop seeking jobs due to long-term unemployment are not counted as unemployed.
- These discouraged workers, though willing to work, are categorized as economically inactive rather than unemployed under the survey definitions.
- Unemployment figures might underestimate the true level of labor market slack, painting an overly optimistic picture of the economy.
Exclusion of Certain Inactive Groups
- People like carers or those reliant on spousal income, though of working age, are excluded if they do not meet the formal definition of unemployment.
- These groups may still be economically significant or willing to work under certain conditions but are not reflected in unemployment data.
- The LFS may overlook structural issues in the labor market, such as the lack of support for carers or barriers to entry for certain demographics.
Margin of Error
Point: The unemployment rate has a margin of error of 1-3%.
Analysis: This variability can make small changes in unemployment figures statistically insignificant or misleading.
Impact: Policymakers and analysts might misinterpret trends or overreact to data that is within the margin of error
what is the margin of error for unemployment
plus it minus 3%
what are monetary policies
a demand side policy which involves changes to the interest rates, money supply and exchange rate by the central bank in order to change AD
what is expansionary monetary policy
attempts to use monetary policy to boost AD, eg by lowering interest rates
what is contractionary monetary policy
attempts to use monetary policy to reduce AD
why would central banks use expansionary monetary policy
- to boost AD and raise demand pull inflation and hitting all macroeconomic targets
- increase growth
- reduce unemployment
why would central banks use contractionary monetary policy
- to hit inflation target, eg if inflation is beyond the target and making macroeconomic stability
- to prevent excessive house prices and to prevent credit bubbles
- reducing excess debt and promoting savings
-reduce current account deficit, AD falls, growth falls, income falls, lowering amount spent on imports
interest rates will feed through a transmission mechanism, what does this mean
an interest rate cut by the central bank will work through various channels, affecting a variety of variables in the AD equation as it hits the real economy
chain of analysis for expansionary monetary policies
Lowering Interest Rates
- decreases the cost of borrowing,incentivizes households and firms to take on loans for consumption and investment.
- boosts (AD), leading to higher economic growth and employment. Lower IR also discourage saving, further increasing spending.
- However, if the economy is close to full capacity, increased AD may lead to demand-pull inflation, reducing the real value of money.
Quantitative Easing (QE)
- Central banks purchase financial assets, increasing liquidity in the banking system and encouraging lending to businesses and consumers.
- This raises AD, stimulates economic activity, and supports price stability, especially during periods of low inflation or deflation risks.
- However, excessive QE can inflate asset prices, create bubbles, and widen wealth inequality, as wealthier individuals disproportionately benefit from rising financial asset values.
- Lowering Reserve Requirements
- Reducing the proportion of deposits banks must hold in reserve allows them to lend more money to consumers and businesses.
- This expands credit availability, leading to higher investment, consumption, and economic growth.
- However, it may increase the risk of financial instability if banks overextend credit to less creditworthy borrowers.
Weaker Exchange Rates
- Expansionary monetary policy often leads to depreciation of the currency, making exports cheaper and imports more expensive.
This improves net exports, contributing to AD growth and helping domestic industries.
- However, it risks retaliation in the form of currency wars, where other nations may devalue their currencies to maintain competitiveness.
what are the types of unemployment which fall under disequilibrium unemployment
- cyclical unemployment (demand deficient unemployment) which is unemployment in a recession due to lack of AD
- real wage unemployment (classical unemployment)
how would a fall in AD lead to higher cyclical unemployment
- labours demand comes from the demand of goods and services
- lower demand of goods and services = lower demand for labour
- this increases unemployment
- less AD , firms are not selling as much output, lower revenue
- to keep profit margins at a decent level, firms will look to cut costs, cutting labour costs involve sacking workers
what is real wage unemployment
where wages are forced above equilibrium in the labour market, creating an excess supply of labour
- higher wage rate means firms are less willing and able to employ, so there is a contraction of labour demand but workers are very willing to work at higher wages
how can real wage unemployment happen
- if governments increase minimum wage
- having strong trade unions that push wages up
- occurs when the real wage rate in the labor market is kept above the equilibrium wage rate, leading to a situation where there is an excess supply of labor (unemployment) compared to the demand for labor by employers.
examples of equilibrium unemployment
- this is unemployment that can occur when the labour market is in equilibrium
- structural unemployment
- frictional unemployment
- seasonal unemployment
what is structural unemployment
- immobility of labour due to a long term change in the structure of the industry
- immobility of labour can include occupational and geographical immobility
what is frictional unemployment
- in between jobs, when a worker has quit their job and is in the process of looking for a better one
what is seasonal unemployment
- when there is a temporary fall in demand for workers eg because of a seasonal change
what is occupational immobility of labour
where there is a skills mismatch between skills a worker has and the jobs they are able to find with those skills
what is geographical immobility of labour
when workers are not willing/able to move to where jobs exist, maybe because of personal preference, housing issues etc
how might structural unemployment happen
- Technological Advancements and Automation
As industries adopt new technologies or automation, certain job roles may become obsolete → For instance, machinery or AI may replace human labor in manufacturing, retail, or even service sectors → Workers who previously performed these roles may find their skills are no longer in demand, creating a mismatch between their existing skills and the new requirements of the labor market → This results in structural unemployment as workers are unable to find new employment without retraining or gaining new skills. - Shifts in Consumer Preferences
Changes in consumer tastes and preferences can also lead to structural unemployment → For example, if consumers shift their demand away from traditional products, such as printed newspapers, and toward digital media, industries that rely on producing the outdated product may face a decline in demand → Workers in these sectors might struggle to transition to new industries if they lack the relevant skills or experience, creating a structural shift in the labor market. - Globalization and Outsourcing
Globalization can result in industries in developed countries outsourcing jobs to regions with lower labor costs, such as manufacturing moving to Asia → As a result, workers in higher-cost countries may find that their jobs have been moved overseas, particularly in sectors like textiles, electronics, or customer service → This shift creates a mismatch between available skills in one location and job opportunities in another, contributing to structural unemployment in the original country. - Decline in Certain Industries or Sectors
Structural unemployment can occur when certain industries experience long-term decline → For instance, if coal mining becomes less economically viable due to environmental concerns or competition from renewable energy sources, workers in that industry may face significant job losses → If workers do not have transferable skills, or if retraining is not accessible, this sectoral decline leads to a structural imbalance between workers’ skills and job openings. - Geographical Mismatch
In some cases, structural unemployment can be driven by a geographical mismatch between where jobs are available and where workers live → For example, a decline in mining jobs in a specific region might leave workers unemployed, while at the same time, new opportunities emerge in other regions for renewable energy or technology → If workers are unwilling or unable to relocate, the mismatch between labor supply and demand causes structural unemployment in the areas facing decline.
what is comparative advantage
when a company can produce a good at a lower opportunity cost compared to a similar industry abroad
what is the natural rate of unemployment
- unemployment that occurs when the labour market is in equilibrium
- consists of structural, frictional and seasonal unemployment
wage price spiral explained
- Rising Wages
The process often begins with an increase in wages. This can occur for various reasons, such as strong labor unions negotiating for higher pay, or increased demand for labor due to economic growth → As workers receive higher wages, they have more disposable income to spend on goods and services, which increases aggregate demand. - Increased Demand and Higher Costs for Firms
As workers’ incomes rise, they spend more on goods and services, which pushes up aggregate demand → Companies, in turn, face higher demand for their products and services → To meet this demand, firms might need to increase production and may face higher costs due to the increased demand for raw materials, energy, and labor → This increase in production costs causes firms to raise their prices to maintain profit margins. - Inflationary Pressure
The increase in firms’ prices due to higher costs of production leads to inflation → As prices rise, workers feel the effect of higher costs of living → To maintain their standard of living, workers may then demand further wage increases, expecting to keep up with the rising prices of goods and services. - Wage Demands Lead to Further Price Increases
When workers receive the wage increases they demand, this boosts their purchasing power once again → As workers spend more, aggregate demand continues to rise, putting pressure on firms to raise prices even further to cover their higher costs → This creates a feedback loop where wage increases lead to higher prices, which in turn lead to further wage demands. - Cycle Continues and Escalates
This process repeats itself in a vicious cycle, often referred to as the wage-price spiral → The cycle of increasing wages and prices can lead to inflationary pressures in the economy, which can be difficult to control if not addressed by monetary policy or government intervention → This cycle can escalate if the inflation becomes entrenched, leading to persistent inflation that can reduce purchasing power and economic stability.
