week 8 Flashcards
what is the definition of unemployment ?
people seeking work who can not get employed
why is the unemployment rate a key indicator?
often can show implications for economic output and that the labour market may not be in equilibrium
what is the labour force?
Those holding a job or registered as being willing and available for work
Labour Force = Employed + Unemployed
unemployment is consistenly higher for those who are?
▶ Male
▶ Young
▶ Non-white
▶ Without qualifications
▶ Trained in semiskilled or unskilled occupations
▶ Living in the North-East, Northern Ireland, and Scotland
what is involuntary unemployment?
exists when a worker is willing to accept a job at the current
market wage but cannot get a job offer
Exists when there is excess supply in the labour market and the real wage fails to restore
equilibrium
what is voluntary unemployment?
exists when a worker chooses not to work at the current
market wage
▶ Exists because the market wage is below the worker’s reservation wage i.e. minimum
acceptance wage
▶ The individual maximises his utility by choosing not to work
what is classical unemployment?
▶ Involuntary unemployment
▶ Occurs when the real wage W
P
is deliberately maintained above the market clearing level
▶ Exists due to imperfections in the market system
what is Keynesian unemployment
▶ Involuntary unemployment
▶ Demand-deficient or cyclical
▶ Occurs when output is below full capacity
▶ Exists in the transitional period before wages and prices have fully adjusted to economic
shocks
what is equilibrium unemployment?
▶ Voluntary unemployment
▶ Exists when a worker chooses not to work at the current market wage
▶ Exists because the market wage is below the worker’s reservation wage i.e. minimum
acceptance wage
what is search unemployment?
Search unemployment
▶ Voluntary unemployment
▶ Arises as workers search for suitable jobs and firms search for suitable workers
▶ It is the irreducible minimum level of unemployment in a dynamic society
what is structural unemployment
▶ Voluntary unemployment
▶ Arising from a mismatch of skills and job opportunities when the pattern of demand and
production changes
▶ Regarded as long-term and chronic unemployment
unemployment graphs
why may wages not reach equilibrium
minimum wage laws
▶ Legally binding wage floor
▶ Impacts on least skilled
- Trade unions
▶ Negotiate with employers over employment and pay by threat of strike action which reduces
production and profits - Efficiency wages
▶ Firms pay higher than market clearing wage since it creates incentives that increase efficiency
and hence productivity
what are some of the private benefits of being unemployed?
▶ Opportunity cost of wages forgone less than any benefits received e.g. JSA
▶ The value of leisure time
▶ Probability of getting a better job in the future
what are some of the costs of being unemployed?
▶ These costs increase with the duration of unemployment
▶ They include the depreciation of human capital i.e. loss of skills
▶ Loss of self-esteem
▶ Stress and depression
what benefits can come from being unemployed
▶ A generous unemployment benefit scheme may encourage individuals to remain unemployed
what is the relationship with output and unemployment?
▶ We have a negative relationship between output and unemployment
▶ When unemployment is higher than usual, output is lower than usual
- When unemployment is involuntary, these
costs are larger due to loss of output
how can unemployment be decomposed into different components?
can be split into equilibrium unemployment where the natural rate of unemployment and also keynesian unemployment where the additional unemployment arising from deviations in output around potential output
what are some supply side policies to increase unemployment?
- Trade union reform
▶ Reducing the power of trade unions may limit distortions in the labour market
▶ Training and retraining measures e.g. Work Programme
▶ Improving the efficiency of the labour market e.g. Job Centre Plus
▶ Reducing the welfare dependency i.e. welfare reform
▶ Higher investment into education may increase the quality of labour and hence affect labour
supply
what are some other policies to decrease unemployment?
- Policies to improve accessibility and quality of information available in the labour market
▶ Job advertisements - Public employment schemes to tackle involuntary demand-deficient unemployment
▶ Direct intervention by the government to create jobs - Wage subsidies for efficiency wage motivations
