Unemployment

Question 1

What is Unemployment?

Answer 1

Unemployment is the situation where those who are capable of and willing to work but are unable to find suitable employment

Question 2

What is the Labour Force?

Answer 2

The Labour Force refers to all people within a country who are economically active, they include those who are working and actively seeking employment

Question 3

What is the Unemployment Rate formula?

Answer 3

Unemployment rate =
(number of unemployed/labour force) x 100%

Question 4

What are the three major types of unemployment?

Answer 4

1) Demand deficient (cyclical) unemployment
2) Structural unemployment
3) Frictional unemployment

Question 5

What is Full employment?

Answer 5

Full employment occurs when the economy is operating at the full employment output and there is no demand deficit (or cyclical) unemployment

Question 6

What is Demand-deficient unemployment?

Answer 6

Demand-deficient unemployment is caused by the fall in or lack of AD in the economy

Question 7

What is Structural unemployment?

Answer 7

Structural unemployment is caused by a mismatch of skills when the skills of the unemployed do not match the skills demanded by the employers

Question 8

Note:
Many of such displaced workers may not be easily and readily be absorbed into other industries as they may not have the skills demanded by these industries (occupational immobility), thus, due to the skills mismatch and the inability to acquire the new skills required by other industries, they remain unemployed. This phenomenon is termed as structural unemployment.

Question 9

What is Occupational Immobility?

Answer 9

Occupational immobility refers to the situation where people are unable to take up jobs in another industry or occupation because they lack relevant skills or education.

Question 10

What are some possible causes of occupational immobility?

Answer 10

-Employers are often reluctant to provide training for fear of workers moving to
another firm.
- They are also reluctant to train older workers as the number of years they have
left to work for the firm is shorter than that of a younger worker.
- Workers may also be reluctant to take up training because they are unable to
afford the direct training costs and the opportunity costs incurred due to the
income forgone while they are being trained.
- Structural unemployment could occur as a result of a depletion of mineral
deposits or forest reserves.

Question 11

What is Frictional unemployment?

Answer 11

Frictional unemployment occurs during the time required to match qualified job seekers with available job openings

Question 12

What are the effects of unemployment on producers?

Answer 12

a) Lower wage costs
b) Larger pool of labour
c) Lower demand for goods and services
d) Increase in demand for inferior goods
e) Higher training costs

Question 13

What are the effects of unemployment on consumers?

Answer 13

Lower SOL
▪ Non-material aspect –
Individuals who lose their jobs consequently have no income and sense of
security. There will be increase in stress level which will worsen the quality of life
for the unemployed, This could lead to a decrease in happiness index of the
country. Also, associated with unemployment is a loss of self-esteem and other
negative effects including heart diseases, suicide, and mental illnesses. This may
lower life expectancy, which reduces HDI. The deterioration of quality of life would
also lead to a lower non-material standard of living.
▪ Material aspect –
When unemployment rate increases, more individuals will not have an income.
With the loss in income, purchasing power falls, and thus, consumption falls.
Savings also fall, which may lead firms to be pessimistic about investments. This
may hinder future economic growth and hence future material SOL of consumers.

Question 14

What are the effects of unemployment on the Government?

Answer 14

a) Reduces actual and potential growth
b) Worsens the budget balance
c) Lower social stability
d) Inefficient use of scarce resources

Question 15

Note:
The use of indirect taxes, as opposed to direct taxes, will NOT affect AD as it affects COP and therefore SRAS (affects producers directly, paid for by tax payers indirectly)

Question 16

Note:
Demand-deficient unemployment is the only type of unemployment that can be accurately reflected on an AD/AS diagram

Question 17

Note:
While demand-management policies can generally be used to correct demand-deficient unemployment, supply-side policies can generally be used to correct structural and frictional unemployment

Question 18

Note:
AD/AS framework cannot be used to explain SS policies to address frictional and structural unemployment

Question 19

How does the government reduce Frictional unemployment?

Answer 19

The government may reduce frictional unemployment by improving information
infrastructure, such as the creation of job agencies to facilitate movement and transition between jobs, it can reduce frictional unemployment by shortening the time taken for workers to transit to the next job.

In addition, in countries where geographical mobility may be an issue that has resulted
in higher rates of frictional unemployment, the government may spend on infrastructure
to build up facilities in more remote places and improve connections between cities to
encourage more people to move.

Question 20

How does the government reduce structural unemployment?

Answer 20

The government may engage in interventionist supply-side policies by increasing its expenditure in the areas of education and training/re-training programmes to reduce structural unemployment by bridging the gap between the skills of the workforce and the economy’s needs.

Question 21

Note:
While supply-side policies can help correct frictional unemployment, it cannot entirely eliminate frictional employment.

AD-AS framework cannot be used to explain supply side policies to address frictional and structural unemployment.

Question 22

Note: For the purpose of discussion in examinations, assess the advantages and
disadvantage for each policy specific to the given context of the question. Make an overall evaluation that is a reasoned stand relevant to the question.

Question 23

Note:
supply-side policy can often be used in conjunction with demand management
policy (Fiscal and/or Monetary Policy) to deal with the problem at hand. It is important to note that the increase in AD must move in tandem with the increase in AS.