Unemployment Flashcards

Question

what is frictional unemployment

Answer 1

- in between jobs, when a worker has quit their job and is in the process of looking for a better one

Answer 2

- when there is a temporary fall in demand for workers eg because of a seasonal change

Answer 3

where there is a skills mismatch between skills a worker has and the jobs they are able to find with those skills

Answer 4

when workers are not willing/able to move to where jobs exist, maybe because of personal preference, housing issues etc

Answer 5

1. 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. 2. 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from traditional products, such as printed newspapers, and toward digital media, industries that rely on producing the outdated product may face a decline in demand → Workers in these sectors might struggle to transition to new industries if they lack the relevant skills or experience,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. 3. 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. 4. 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. 5. 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.

Answer 6

when a company can produce a good at a lower opportunity cost compared to a similar industry abroad

Answer 7

- unemployment that occurs when the labour market is in equilibrium - consists of structural, frictional and seasonal unemployment

Answer 8

1. 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. 2. 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. 3. 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. 4. 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. 5. 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.

Answer 9

1️⃣ Cyclical Unemployment → Fall in Aggregate Demand (AD) → Firms Cut Output → Lower Demand for Labour → Unemployment Rises If consumer and business confidence falls, spending and investment decline. This reduces demand for goods and services, leading to lower revenues for firms. In response, firms cut production, requiring fewer workers. Mass layoffs occur, increasing cyclical unemployment, especially in recessions. 📌 Example: 2008 Global Financial Crisis – Businesses cut costs, leading to job losses in construction, banking, and retail. 2️⃣ Structural Unemployment → Industry Decline → Jobs Become Obsolete → Mismatch of Skills → Long-Term Unemployment If industries decline due to technological change or global competition, certain jobs disappear. Workers lack the skills for new industries, creating a skills mismatch. These workers struggle to find employment in different sectors, increasing long-term unemployment. Without retraining, they may remain unemployed for years, reducing labour market participation. 📌 Example: Automation replacing manufacturing jobs in the UK led to long-term unemployment in industrial regions. 3️⃣ Frictional Unemployment → People Switching Jobs → Short-Term Joblessness → Time Lag in Finding New Employment When people leave jobs voluntarily (e.g., for better opportunities), they experience temporary unemployment. Searching for a new job takes time, leading to frictional unemployment. The more information gaps about job vacancies, the longer it takes to find work. This is a natural form of unemployment that always exists in an economy. 📌 Example: A software engineer leaving a job to find a better-paid role may be unemployed for a few months. 4️⃣ Seasonal Unemployment → Demand Fluctuates by Season → Temporary Layoffs → Unemployment Rises in Off-Peak Periods Some industries experience higher demand in certain seasons (e.g., tourism, agriculture, retail). During off-peak seasons, firms reduce their workforce, causing temporary unemployment. Workers struggle to find alternative employment, increasing short-term unemployment. This occurs yearly in affected industries, making it a recurring issue. 📌 Example: Ski resorts lay off workers after winter, and retail stores reduce staff after Christmas. 5️⃣ Real Wage Unemployment → Wages Set Above Equilibrium → Excess Labour Supply → Firms Hire Fewer Workers If minimum wages or trade unions push wages above market equilibrium, firms face higher costs. This reduces the number of workers they can afford to hire, leading to excess labour supply. Unemployment rises, as more people want to work at higher wages, but firms cannot afford to employ them. This is common in industries with strong union influence or rigid wage structures. 📌 Example: A government setting a high minimum wage may lead to job losses in low-skilled sectors.

Answer 10

1️⃣ Lower Incomes → Falling Consumption → Lower Aggregate Demand (AD) → Economic Decline Unemployed workers lose income, reducing their ability to spend on goods and services. Lower spending causes firms to experience reduced revenue, forcing them to cut costs or lay off more workers. This lowers aggregate demand (AD), further weakening economic growth. If widespread, it can cause a negative multiplier effect, deepening recessions. 📌 Example: High unemployment in Spain post-2008 led to falling consumer spending, worsening the economic downturn. 2️⃣ Loss of Skills (Hysteresis) → Reduced Employability → Long-Term Unemployment → Lower Productive Capacity Long-term unemployed workers lose skills, experience, and confidence, making it harder to find a job. This reduces the quality of the labour force, lowering labour market efficiency. Firms may struggle to find suitably skilled workers, reducing potential output (LRAS shifts left). The economy becomes less productive, limiting long-term economic growth. 📌 Example: Post-industrial decline in the UK left many manufacturing workers unemployed for years, reducing their employability. 3️⃣ Increased Government Spending on Welfare → Higher Budget Deficit → Risk of Future Tax Increases More unemployed people claim benefits, increasing government spending on welfare (e.g., Jobseeker’s Allowance). At the same time, tax revenues fall, as fewer people are earning and paying income tax. This worsens the budget deficit, forcing the government to borrow more or raise taxes in the future. If unsustainable, it may lead to spending cuts in other areas like healthcare and education. 📌 Example: Greece’s high unemployment led to unsustainable welfare costs, contributing to the 2010 sovereign debt crisis. 4️⃣ Lower Business Confidence → Lower Investment → Slower Growth & Innovation High unemployment reduces consumer demand, making firms less confident about future sales. This discourages businesses from investing in new projects, slowing capital accumulation. Lower investment in technology and training reduces long-term productivity and innovation. This leads to a weaker economic recovery, making it harder to generate future job opportunities. 📌 Example: During the COVID-19 pandemic, high unemployment discouraged business investment, delaying recovery.

Answer 11

1️⃣ Expansionary Fiscal Policy → Higher AD → Increased Demand for Labour → Lower Unemployment Government increases spending on infrastructure, education, or public services, creating new jobs. Higher government spending raises aggregate demand (AD), leading to higher output and sales. Firms need more workers to meet increased demand, leading to higher employment. This reduces cyclical unemployment, especially in a recession. 📌 Example: The US stimulus package after the 2008 financial crisis helped lower unemployment by boosting demand. 📌 Evaluation: If the economy is close to full capacity, extra spending could cause inflation rather than job creation. 2️⃣ Expansionary Monetary Policy → Lower Interest Rates → Increased Investment & Consumption → Job Creation The central bank lowers interest rates, making borrowing cheaper for businesses and consumers. Firms invest more, expanding production and hiring new workers. Consumers borrow and spend more, increasing demand for goods and services. This reduces demand-deficient (cyclical) unemployment. 📌 Example: The Bank of England cut interest rates after COVID-19 to support economic recovery. 📌 Evaluation: If businesses and consumers lack confidence, they may not borrow or invest, limiting the effectiveness of the policy. 3️⃣ Supply-Side Policies → Increased Labour Market Flexibility → More Job Creation & Lower Structural Unemployment Improving education and vocational training increases workers' skills, making them employable in growing industries. Reducing trade union power allows wages to adjust flexibly, reducing real wage unemployment. Encouraging self-employment and entrepreneurship helps create new businesses and job opportunities. This helps reduce structural and frictional unemployment in the long run. 📌 Example: Germany’s investment in vocational training helps workers transition into high-skilled jobs. 📌 Evaluation: These policies take time to show results and require government funding, which may not always be available. 4️⃣ Lowering Employment Taxes & Reducing Red Tape → Lower Business Costs → More Hiring Cutting payroll taxes makes it cheaper for firms to hire workers, encouraging job creation. Reducing regulations (e.g., simplifying hiring and firing laws) increases labour market flexibility. This encourages businesses to expand and hire more workers, reducing structural unemployment. Helps small businesses and startups create jobs more easily. 📌 Example: Some Eastern European countries, like Estonia, have low employment taxes to encourage hiring. 📌 Evaluation: Can lead to lower job security and exploitation if worker protections are weakened. 5️⃣ Regional & Sector-Specific Policies → Tackling Geographical & Structural Unemployment Investment in deprived areas (e.g., transport infrastructure, tax breaks) attracts businesses and creates jobs. Encouraging workers to move (e.g., housing subsidies, relocation grants) helps reduce geographical immobility. Government-funded retraining schemes help unemployed workers shift into high-demand industries. This reduces structural unemployment caused by declining industries. 📌 Example: UK government incentives to encourage businesses to invest in Northern England to reduce regional disparities. 📌 Evaluation: High costs and uncertain success – firms may not move even with incentives.