Unemployment

Question 1

Full unemployment

Answer 1

Where 3% or less of the labour force are unemployed or where the number of workers willing to work at a certain wage rate match the number of workers needed by firms.

Question 2

The real wage theory of unemployment

Answer 2

The theory that unemployment is caused by real wages becoming stuck at a level that is higher than the natural equilibrium in the market. If this happens, there is an excess supply of workers compared to the demand for workers by employers. This excess supply of labour is unemployment

Question 3

Free market vs reality

Answer 3

In the free market, the market should self correct. Rather than workers remaining unemployed, people will work for less than the going wage rate until equilibrium is restored. In reality, factors such as national minimum/ living wage may stop the wage rate from falling.

Question 4

Natural rate of unemployment

Answer 4

Frictional and structural unemployment add to a natural level of/equilibrium unemployment. It will always be present due to the economy being dynamic.

Question 5

Natural rate of unemployment graph explained

Answer 5

At (E1-Efe), workers would be willing to work at the market wage rate but are not currently working due to frictional and structural unemployment (the natural level of unemployment).

Question 6

Disequilibrium unemployment

Answer 6

This happens because the labour market is out of equilibrium. There are 2 main types:
-Real wage unemployment
-Cyclical unemployment

Question 7

Cyclical unemployment

Answer 7

Unemployment due to a drop in aggregate demand and the consequent fall in demand fall labour.