Unemployment approaches Flashcards
types of approaches ?
Classical approach orthodox keynesian approach monetarist approach new classical approach new keynesian approach
What does real wage mean ?
this is the money wage divided by the price index
what is the price index ?
the amount of goods and services that a money wage can buy
What is the classical approach ?
This is an approach which states that as long as money wages and prices were flexible and free to adjust, the labour market would always tend to clear at full employment equilibrium
What is say’s law ?
This guarantees that aggregate demand would be sufficient to absorb the full employment level of output produced.
According to this law, supply creates its own demand in that the act of production yields income that will be sufficient to purchase whatever level of output is produced.
What is the only type of unemployment that would exist in a classical approach ?
Voluntary unemployment
When does classical unemployment occur ?
Real wage unemployment occurs when the real wage rate is kept too high, resulting in excess supply of labour .
What are the three types of unemployment in the orthodox keynesian approach?
- frictional unemployment
- structural unemployment
- demand-deficient unemployment
What is frictional unemployment?
This is when people are moving between jobs. They are newly unemployed and they are searching for new employment (search unemployment)
How is frictional unemployment cured ?
improving the provision of info. about employment opportunities. E.g. job centres
What is structural unemployment ?
This is when technology advancements of changes take place which puts people out of work. Also known as mismatch unemployment
What is demand-deficient unemployment ?
This is also referred to as cyclical unemployment and it means when aggregate demand is insufficient to provide employment for everyone who wants to work at the real wage.
What is aggregate demand ?
The total planned expenditures of all buyers of final goods and services
What is the sum for aggregate demand ?
AD = Consumer expenditure + investment expenditure + government expenditure + (Expenditure on net exports
what is the main determiner of consumer expenditure in the orthodox keynesian approach ?
The main determinant is the level of national income - the higher the level of national income, the higher the level of total consumer expenditure undertaken
What is the consumption function ?
The relationship between aggregate consumption and aggregate income
What is the equation for the relationship between aggregate consumer expenditure and national income?
C = æ + ßY
What is autonomous expenditure ?
Expenditure that does not depend on the level of national income
What does marginal propensity to consume mean ?
This is the change in consumption expenditure resulting from an additional unit of income
What are the main determinants of investment expenditure ?
- firms past and current sale s
- expectations about future sales and factor prices
- the cost of of capital expenditure
- the rate of interest
What are the determinants of government expenditure ?
They are mainly the same as the determinants of investment expenditure
What are the determinants of net exports ?
- income
- relative prices
- non-price factors such as tastes
what does marginal propensity to import mean ?
This means the change in import expenditure resulting from an additional unit of income
What does fiscal policy mean?
this entails measures that alter the level and composition ofmgovernment expenditure and taxation
What is monetary policy :
measures that alter the money supply and or interest rates
What is the natural rate of unemployment?
This is the rate of unemployment that exists when the labour market clears and is in equilibrium, composed if frictional and structural unemployment
what approach does the natural rate of unemployment refer to
the monetarist approach
What does the new classical approach refer to ?
That the labour market continuously clears
Theories referring to the new keynesian approach ?
- efficiency wage model - labour turnover model, adverse selection model, shirking model, fairness model
- Insider - outsider model
what is the essence of efficiency wage model theories ??
That the productivity of workers depends positively on the real wage rate workers are paid.
What does the labour turnover model suggest ?
That quit rates are a decreasing function of the real wage rate paid to workers. This means that firms have an incentive to pay an efficient wage to reduce the labour turnover rate
What does the adverse selection model suggest ?
That firms offer that offer higher wages will attract the best or most productive applicants for a job.
what does the shirking model suggwst ?
In many jobs, workers can exercise considerable discretion with respect to how well they perform their job and that there is a real possibility that some workers will shirk their work effort.
What does the fairness model suggest ?
That workers productivity or effort is closely connectyed to their morale, which is in turn linked to the notion of being treated fairly with respect to [ay.
What does the insider-outsider model suggest ?
the so-called insiders are the incumbent employees and the outsiders are the unemployed workers. The power of insiders arises from labour turnover costs.
What is the non-accelerating rate of unemployment ?
This is the rate of unemployment at which inflation is stable
