Unemployment Flashcards
Unemployment
Refers to people who are in the workforce, actively seeking employment but unable to find any
Unemployment Rate
Number of unemployed / Labor (Work) force x 100
Workforce
Refers to those who are willing and able to work.
exclude - children, retirees, parental leaves, students, disabled, etc
The Labour Market
Natural rate of unemployment:
Unemployment that exists even when the economy is at full employment and inflation is stable.
Includes people unwilling to work at current wages and cannot be reduced without causing inflation to rise.
The “natural” rate of unemployment can be decreased by:
I. Increasing the money supply (i.e. monetary policy)
II. Reducing taxation (i.e. fiscal policy)
III. Retraining workers (i.e. supply side policy)
a) I only
b) II only
c) III only
d) I and II
Which one of the following is most likely to reduce a country’s natural rate of unemployment?
a) A general rise in government spending
b) Improved training for the labour force
c) The imposition of a national minimum wage
d) The imposition of tariffs and quotas
a) A general rise in government spending
Hidden unemployment
Unemployed individuals not counted in official statistics due to reporting methods
Underemployment
Workers are employed part-time or in jobs that do not match their skills or economic needs
Voluntary unemployment
Person is one who rejects a position while looking for one with better pay or benefits.
Most frictional unemployment is considered voluntary because one is looking for work rather than taking any job one finds.
Involuntary unemployment
When a person is willing to work at the prevailing wage yet is unemployed
Voluntary redundancy
voluntary enemployment = voluntary redundancy
Agreed to be redundant, you removing yourself from work
Involuntary redundancy
Involuntary redundancy = involuntary employment
Workers are redundant by firms, againsts what they want = involuntary
What are the costs of unemployment?
- Very low moral, low confidence in economy, low consumption, lower contribution to economy
- Different age, ethnic group would have different impact
- People are more likely to leave from area with high unemployment level
Types of unemployment - Equilibrium (natural) unemployment
Demand for labor = number of people prepared to supply their labor at the prevailing wage
Natural rate of unempl. = structural + frictional + seasonal unempl.
equilibrium unemployment = voluntary unemployment
Type of unemployment - seasonal enemployment
Unemployment that comes and goes with seasons - depends on demand for particular jobs
- E.g. fruit pickers, ski instructors, rafting instructors, summer worker
Type of Equilibrium unemployment - Frictional unemployment
Movement of people from job to job, in and out of unemployment
Involves time taken for people to move from one job to another
- E.g. graduated school leaver, a temp worker
Type of Equilibrium unemployment - Structural unemployment
Unemployment that arises as a result of structural changes in the economy
- When a goods and services becomes obsolete
- The overall fall in the demand for good –> may lead to regional unemployment (e.g. If coal is suffering from a fall in demand and a town is specialized in making coal)
- A shift of the production abroad
- When human skills are replaced by machines = technological unemployment
Types of Disequilibrium unemployment - Cyclical or Demand-deficit unemployment
Due to changes in business conditions or the economy - primary recessions and depressions
In recessions - businesses cut jobs because people are spending less
Prices and wages are ‘sticky downwards’ - rise easily but hard to go down
Types of Disequilibrium unemployment - Classical (real wage) unemployment
The “real wage” is driven up above the equilibrium level (minimum wage is being pushed up) –> surplus of labor (unemployment increase)
Solutions to Seasonal unemployment
- Job seeking agencies that try to match the winter unemployed with jobs with summer jobs
- Tax spreading legislation - encourage workers to earn a little bit throughout the year rather than earing a chunk in one part of the year
- Subsidize alternative season industries
Solutions to Frictional unemployment
Government needs to encourage workers to find a new job before they quit their current job. Could be done by:
- Encourage workers to submit their leave permit a lot more time before they leave
- Increasing the flow of information between employers and job seekers
- Longer qualifying period before workers can receive welfare benefits if they voluntary leave thier job (e.g. 4 weeks to 6 weeks)
- Reducing unemployment benefits
Solution to Structural unemployment
Increase occupational mobility:
- Retraining workers through government training schemes
- Tax concessions to firms that train employees
- Tax concessions to firms that employ untrained workers with the intention to train them
- Offer university grants to students graduating in areas in which jobs are growing
Increase regional mobility:
- Cut wages in declining industrial towns to incentivize relocation to prosperous areas
- Reduce welfare benefits.
- Provide infrastructure to attract industries to high-unemployment areas
- Offer grants to firms to set up in high-unemployment regions
- Incentivize workers to move to areas with more job opportunities
Solutions to Cyclical/Demand-deficit unemployment
Remove labor market regidities:
- Expansionary fiscal policy to push out output to encourage firms to hire more workers
- AD increase –> increase PL and output –> firms will need to hire more people –> reduce unemployment
Exchange rate policy:
- Devalue or depreciate its exchange rate
- Make exports cheaper for foreign country and imports more expensive
- Switch demand from foreign good to domestic goods
Solutions to Classical (real wage) unemployment
Remove labor market regidities:
- Decrease power of trade unions
- Remove minimum wage legislation
- Raise wages via mandatory pensions; cut social insurance
Solutions to Natural unemployment
Short run:
- Increase AD
- Persuade workers to work for longer hours –> produce more output
- Run down on inventories
Long run:
- Supply side policies
- SSP shift AS to the right –> encourage more individuals to join the workforce –> shift long run AS
Short Run Philips Curve
Shows the relationship between unemployment and (wage) inflation
Long Run Phillips Curve
Long run - full employment, all resrouces are fully employed, including labor
It shows all the combinations of inflation may arise at the natural rate of unemployment
