Unemployment

What are the effects of unemployment on firms?

• reduced demand

• easier to recruit workers

• decreased productivity

What are the effects of unemployment on the government?

• higher taxpayer costs

• decreased VAT

• higher benefit costs

What are the effects of unemployment on individuals and communities?

• higher crime and violence

• decreased standard of living

• increased leisure time

What are the effects of unemployment on the economy as a whole?

• lower GDP

• negative output gap

• negative multiplier effect

What counts as long term unemployed?

Those who are out of work but actively seeking it for over a year.

What us hysteresis?

A lagging effect

What is labour market hysteresis?

When the long term unemployed may give up searching for a job and completely withdraw from the labour force.

Diagram for labour market hysteresis

Point A- the economy is in equilibrium at full employment

Point B- a recession has caused demand to fall

Point C- fall in demand may lead to a permanent fall in supply

What us frictional unemployment?

Individuals moving between jobs

What is regional unemployment?

When certain areas are heavily reliant upon particular firms and industries and that firm closes this can create a particular regional problem.

What is voluntary unemployment?

Some people register as unemployed and do not want to work at the current wage rate.

What is technological unemployment?

When improvements in technology reduce the demand for labour.

What is real wage/cyclical unemployment?

Created by imposing a minimum wage which creates an excess supply of labour.

What is seasonal unemployment?

Some jobs are dependent upon the weather and the seasons.

What is demand deficient/cyclical unemployment?

When the actual level of GDP is below the full unemployment level of GDP, usually during a recession.

What is structural unemployment?

Results from a change in the industrial structure of the economy, the decline of one and the eventual rise of another due to changes in demand etc.

What policies can be used to reduce frictional unemployment?

Supply-side policies are used:

• reduce benefits, creating an incentive to work faster

• improve spending on job search services

What policies can be used to reduce seasonal unemployment?

• Improve training and education for people in those specific industries

What policies can be used to reduce structural unemployment?

• Retraining, subsidised training schemes, government provision of training schemes.

What policies can be used to reduce regional unemployment?

• Subsidies for firms to encourage relocation to depressed areas

• subsidise training schemes for unemployed workers in depressed areas

• housing grants, low cost loans to help workers relocate

What policies can be used to reduce technological unemployment?

• Improve education provision to increase skills

• training schemes for those who have lost jobs to tech

Why might technological unemployment be a myth?

• Jobs which require more compassion, creativity or social intelligence more likely to continue being run by humans

• better education/training means lower chances of being unemployed

• ‘compensation effect’ often tech creates jobs

What policies can be used to reduce voluntary unemployment?

Carrots:

• higher minimum wages

• in work benefits/tax credits

Sticks:

• reduce welfare benefits

Diagram for the natural rate of unemployment

There is a difference between the registered labour force (A) and the actual supply of labour (E).

What policies can be used

What policies can be used to reduce demand deficient unemployment?

• higher gov spending and lower taxes

• reduction in interest rates

Why might uncertainty be a limitation to policy solutions?

• knowledge of the multiplier is based on past data

• the level of AD at full employment is just an estimate

What is crowding out?

• Gov increases AD using expansionary fiscal policy

• may experience a budget deficit

• will then borrow money so interest rates will rise to convince the private sector to take on debt

• will reduce C and I.

Why might crowding out be a limitation to policy solution?

Government spending will now be a larger proportion of AS which is not as efficient as private sector spending due to lack of a profit incentive.

Why might debt be a limitation to policy solutions?

In the future the gov will have higher interest payments so therefore there is an opportunity cost.