Unemployment

Question 1

Unemployment

Answer 1

Refers to people who are in the workforce, actively seeking employment but unable to find any

Question 2

Unemployment Rate

Answer 2

Number of unemployed / Labor (Work) force x 100

Question 3

Workforce

Answer 3

Refers to those who are willing and able to work.

exclude - children, retirees, parental leaves, students, disabled, etc

Question 4

The Labour Market

Answer 4

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.

Question 5

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)

Answer 5

a) I only
b) II only
c) III only
d) I and II

Question 6

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

Answer 6

a) A general rise in government spending

Question 7

Hidden unemployment

Answer 7

Unemployed individuals not counted in official statistics due to reporting methods

Question 8

Underemployment

Answer 8

Workers are employed part-time or in jobs that do not match their skills or economic needs

Question 9

Voluntary unemployment

Answer 9

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.

Question 10

Involuntary unemployment

Answer 10

When a person is willing to work at the prevailing wage yet is unemployed

Question 11

Voluntary redundancy

Answer 11

voluntary enemployment = voluntary redundancy

Agreed to be redundant, you removing yourself from work

Question 12

Involuntary redundancy

Answer 12

Involuntary redundancy = involuntary employment

Workers are redundant by firms, againsts what they want = involuntary

Question 13

What are the costs of unemployment?

Answer 13

• 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

Question 14

Types of unemployment - Equilibrium (natural) unemployment

Answer 14

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

Question 15

Type of unemployment - seasonal enemployment

Answer 15

Unemployment that comes and goes with seasons - depends on demand for particular jobs

• E.g. fruit pickers, ski instructors, rafting instructors, summer worker

Question 16

Type of Equilibrium unemployment - Frictional unemployment

Answer 16

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

Question 17

Type of Equilibrium unemployment - Structural unemployment

Answer 17

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

Question 18

Types of Disequilibrium unemployment - Cyclical or Demand-deficit unemployment

Answer 18

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

Question 19

Types of Disequilibrium unemployment - Classical (real wage) unemployment

Answer 19

The “real wage” is driven up above the equilibrium level (minimum wage is being pushed up) –> surplus of labor (unemployment increase)

Question 20

Solutions to Seasonal unemployment

Answer 20

• 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

Question 21

Solutions to Frictional unemployment

Answer 21

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

Question 22

Solution to Structural unemployment

Answer 22

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

Question 23

Solutions to Cyclical/Demand-deficit unemployment

Answer 23

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

Question 24

Solutions to Classical (real wage) unemployment

Answer 24

Remove labor market regidities:

• Decrease power of trade unions
• Remove minimum wage legislation
• Raise wages via mandatory pensions; cut social insurance

Question 25

Solutions to Natural unemployment

Answer 25

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

Question 26

Short Run Philips Curve

Answer 26

Shows the relationship between unemployment and (wage) inflation

Question 27

Long Run Phillips Curve

Answer 27

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