Week 9 - Unemployment Flashcards
Define labour force
Labour force are workers and people who want to work
Define unemployment rate
Is the fraction rate of the labour force without work
How does the labour force growth? (3)
- Increased population
- People work to an old age
- Immigrants join the work force
Draw a graph showing a negative output gap
Draw a positive output gap graph
5 Types of unemployment
- Frictional unemployment (employment search)
- Structural unemployment (bad matching)
- Seasonal unemployment
- Demand deficient unemployment (Keynes)
- Classical/real wage in employment (Union power, minimum wage legislation
Define voluntary unemployment
people looking for work who will not yet take a job at the going real wage
Define equilibrium unemployment
Unemployment when the labour market is in equilibrium
Define involuntary unemployment
Where the unemployed would take a job offer at the existing wage
Interpret labour market equilibrium graph (5)
- LD is labour demand which shows that firms higher more workers at a lower real wage
- LF shows how many people join the labour force at each real wage (higher prices increases labour supply)
- AJ (accept a job) shows how many people accept a job at each real wage
- Labour market is in equilibrium where labour demand (LD) = labour supply (AJ) = E
- Horizintal gap between AJ and LF is the voluntary unemployment at each real wage so N1-N* = level of unemployment
When does classical unemployment arise? (4)
- When real wage is kept above the market clearing wage by artificial means such as Union power or minimum wage legislation
- Arguments for less government intervention and increased Union power keeps wages high increasing the level of unemployment
- At W2 B to C workers are voluntarily unemployed whilst A to B workers are now involuntarily unemployed
- So despite wages going up less people are working
What is Keynesian or demand deficient unemployment? (2)
- Is entirely involuntary and arises when wages have not yet adjusted to restore labour market equilibrium
- Argue for activist policy to get rid of unemployment
What is the supply side economist view?
They view that tax cuts will create labour market incentives
Interpret a supply side economist view graph (4)
- Workers who earn W1 wages face an income tax of W1 - W3 (distance between AB)
- They now earn W2 creating N1and voluntary employment of BC
- At this point labour demand (LD) by firms is greater than labour supply: LD > AJ
- By eliminating income tax, the market clears at E so employment increases to N2 and unemployment is smaller EF < BC
