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.
causes of unemployment
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.
effects of unemployment
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.
ways to reduce unemployment
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.
