Unemployment, poverty and min. wages

Question 1

natural rate of unemployment (NAIRU)

Answer 1

• rate of unemployment when the labour market is in equilibrium
• includes frictional and structural unemployment. Caused by supply side factors, not demand

Question 2

determinants of natural rate of unemployment (6)

Answer 2

1) availability of job information
2) levels of benefits- high benefits, higher unemployment
3) quality of education and retraining schemes
4) degree of labour mobility
5) flexibility of labour market
6) hysteresis

Question 3

reasons for decreasing NAIRU since 1980’s (4)

Answer 3

1) increased labour market flexibility; unions less powerful
2) privatisation helped increase competitiveness leading to more flexible labour markets
3) better education and training
4) changes to benefits system, harder to stay on JSA

Question 4

absolute poverty

Answer 4

measures number of people living below a certain income level which is necessary to be able to afford basic goods and services

Question 5

relative poverty

Answer 5

occurs when the income of a household is low compared to others

Question 6

lorenz curve

Answer 6

measures degree of quality, the further the curve is from the 45º line, the greater the inequality

Question 7

gini coefficient

Answer 7

a measure of inequality based on lorenz curve=A/A+B

the greater area A, the more inequality

Question 8

progressive tax

Answer 8

occurs when those in higher income levels pay a higher % of their income in tax; e.g income tax

Question 9

regressive tax

Answer 9

occurs when an increase in income leads to a smaller % of income going on the tax; e.g VAT

Question 10

causes of relative poverty (7)

Answer 10

1) inequality in wages and earnings growth (low wages)
2) falling relative value of state benefits
3) unemployment
4) regressive taxes
5) reluctance to claim benefits
6) Poverty trap
7) sickness/old age/ disability

Question 11

policies to reduce poverty (6)

Answer 11

1) sustained economic growth- more wealth in society; depends on trickle down
2) reduce unemployment; supply side policies
3) progressive taxes
4) reducing poverty trap; reducing bottom of rate of income tax pushes people to get a job to afford more ket
5) Improving quantity/ quality of training/education
6) increase employment opportunities

Question 12

problems of using tax to redistribute income (3)

Answer 12

1) disincentives of higher tax, leads to less output- substitution effect. but may encourage to work more to keep income level
2) tax evasion
3) distortion effect of putting taxes on goods

Question 13

means tested benefits

Answer 13

government benefits that depend upon the recipient’s income or wealth

Question 14

universal benefits

Answer 14

benefits paid to everyone regardless of income/assets

Question 15

advantages of means tested benefits (2)

Answer 15

1) allow money to be targeted to those who need it most

2) it is cheaper than universal benefits and reduced tax payer burden

Question 16

problems of means tested benefits (5)

Answer 16

1) people dislike being categorised as poor
2) may create disincentive to earn a higher wage as you’ll lose benefits and pay more tax
3) some relatively poor may full just outside qualifying limit
4) not everyone entitled will collect them due to ignorance/ difficulty applying
5) pension reform - very costly because of high numbers of pensioners in UK

Question 17

poverty trap

Answer 17

this occurs when poor people are discouraged from working because any extra income they earn will be taken away in lost benefits and higher taxes

Question 18

benefits of a minimum wage (4)

Answer 18

1) increased wages of lowest paid workers
2) higher wages can increase incentive to work harder and therefore increase productivity
3) increased incentives for the unemployed to get a job- with NMW gap between wages and benefits grows
4) counters monopsony power from driving down wages

Question 19

disadvantages of minimum wage (4)

Answer 19

1) if lab. mkt. is competitive, NMW could cause unemployment
2) can cause cost-push inflation
3) doesn’t affect people who can’t find a job anyway
4) many who earn NMW are second-income earners anyway, so won’t affect household poverty

Question 20

evaluation of NMW (4)

Answer 20

1) effect on unemployment is unpredictable. Depends on structure of the lab mkt and whether increased costs are passed on to consumers
2) empirical evidence from UK and US suggests NMW doesn’t increase unemployment
3) effect on wage differentials is important; workers just above NMW may feel they deserve more
4) may be a good cause for a regional MW to reduce regional income inequality