Unemployment

Question 1

Define unemployment

Answer 1

The % of people in an economy’s labour force who are able, available and willing to work at the going wage rate but cannot find a job despite active search

Question 2

Define labour force

Answer 2

The % of the population that are either in a job or actively seeking one

Question 3

How does unemployment impact standard of living

Answer 3

• Unemployed individuals will be worse off with less disposable income
• They are likely to have less to spend on goods and services to meet their needs and wants therefore standards of living decline
• If this contributes it can negatively impact their pension contribution meaning poverty in old age

Question 4

How does unemployment impact health and well-being?

Answer 4

• Long periods of unemployment causes negative health impacts due to depression
• Lack of regular activity, less access to nutritious food and a sense of fatalism can harm physical health
• Can cause ‘self-medication’ such as drug use

Question 5

How does unemployment cause a loss of skills?

Answer 5

• Long periods of unemployment the individual loses skills and is less employable when paired with gaps in a CV
• Generic work skills may be lost, e.g. the capacity to maintain a routine
• The longer somebody is out of work the more likely it is that they will remain out of work: hysteresis effect

Question 6

How does unemployment cause reduced tax revenue?

Answer 6

• Government has 3 main sources of tax revenue: income tax/ national insurance, sales tax and corporation tax. Unemployment reduces all 3
• Unemployed individuals won’t pay income tax and NIC, less consumption means sales tax decrease thus reducing firm’s profits which reduces corporation tax
• Less tax revenue means the government has to choose to cut public spending or run an increased budget deficit

Question 7

How does unemployment cause increased government spending?

Answer 7

• The government will have additional costs: transfers will increase on job seekers allowance and housing benefit
• Likely to spend more to address social problems associated with high unemployment such as policing or more demand on NHS
• This spending is non-productive meaning it does not produce the return on investment which capital would

Question 8

How does unemployment create a danger of a negative multiplier?

Answer 8

• In a recession, consumption falls, AD shifts in creating cyclical unemployment therefore less demand for goods and services and so less derived demand for labour
• The unemployed will have less to spend so consume less reducing demand further which creates further inward movement (negative multiplier)
• Lack of one persons spending is the lack of income for another person. Firms starved of revenue will lay off workers so unemployment continues
• This is exacerbated by increased precautionary saving which reduces consumption further

Question 9

What is seasonal unemployment?

Answer 9

This occurs in sectors where demand is only high during pre-determined parts of the year

For example: tourism

This is not serious as it is predictable

Question 10

What is frictional unemployment?

Answer 10

This is when people move between jobs, it may take time to find a job that pays enough and matches their skill set

Frictional unemployment is low level and constantly shifting some of it is healthy as it shows a dynamic labour market

Question 11

What is cyclical unemployment?

Answer 11

This is when there is insufficient demand in the economy such as during a recession where demand is low as household income has fallen

Less demand for goods and services means less derived demand for labour so firms faced with reduced revenue will lay off workers

Can trigger a negative multiplier effect and precautionary saging

Question 12

What is structural unemployment?

Answer 12

This is when there is significant decline or disappearance of demand for labour in a specific market - it is permanent

Unemployed workers may lack the skills for a new job (occupational immobility) such as being laid off from primary or secondary sector jobs and not having the skills for tertiary or quaternary jobs

Also might suffer from geographical immobility: jobs are available but they are located far away so can’t commute

Question 13

What is real wage unemployment?

Answer 13

This means that unemployment is caused by not allowing labour markets to operate freely

For example, the government introduces a minimum wage which is above the equilibrium market wage rate so there is a surplus of labour: more workers willing to supply labour but fewer firms demand it creating unemployment

Question 14

What are 4 causes of structural unemployment?

Answer 14

1) Outsourcing = profit maximising firms lower costs by reducing labour costs which may involve moving facilities to low income countries

2) Capital-labour substitution = technological advances means profit maximising firms can reduce costs by replacing labour with capital

3) Losing out to global competition = if a firm in one country can’t compete with a firm in another country in a globalised economy then the firm will go bankrupt

4) Technological replacement = demand for goods disappears because a advanced substitute is introduced for example the decline of CDs