Macroeconomic Objectives- Low Unemployment

Employment

refers to the use of factors of production in the production process. The term is usually applied to the use of labour resources.

• It is the governments aim to ensure that everyone who is willing and able to work is able to find employment.

Unemployment

occurs when people are willing and able to work and actively seeking employment but are unable to find work. It exists when the labour market forces of demand and supply are in disequilibrium, so represents the inefficiency as it hinders the economy’s potential output.

Why is low unemployment a key macroeconomic objective?

• Complements economic growth owing to the higher national expenditure associated with higher incomes from employment

• Improves social and economic well-being as well as S.O.L for the average person

• Increases tax revenues, from indirect taxes imposed on incoems as well as indirect taxes from the increased expenditure on goods and services. This enables the government to finance its expenditure on education, healthcare and infrastructure

• Reduces the financial burden on the government as there is less of a need for taxpayers to fund social welfare benefits for the unemployed

• Prevents a ‘brain drain’ from the economy, which is skilled workers leaving the country in pursuit of better employment opportunities

Real wage unemployment

exists when real wages are above their market equilibrium level due to the imposition of a minimum wage by the government

• At the labour market equilibrium, there is a real wage rate of We, where Dl = Sl, there are 15 million people employed in the economy

• The minimum wage rate (Wm) raises labour costs for firms, so reduces Dl to 10 million, although there is a greater incentive for workers to offer their labour services, which increases to Sl to 20 million. Hence, the minimum wage risks causing 10 million to be unemployed due to the excess supply of labour.

• Essentially, any wage rate above the equilibrium causes excess supply

• The minimum wage causes a market disequilibrium. Market inefficiency is shown in area D + E, which represents the loss of welfare to society.

The unemployment rate

measures the number of people who are officially unemployment (those actively looking for employment but cannot find work) as a percentage of the country’s workforce, per time period. Calculated using the formula:

Unemployment rate (Number of unemployed people / Labour force) x 100

So, a country with a workforce of 55 million people, of which 2 million are actively seeking employment but unable to find jobs, has an unemployment rate 2/ 55= 3.63%

The labour force/ work force

consists of all those people in employment plus all those actively seeking employment

labour force= employed + unemployment + self employed

Difficulties of measuring unemployment

• the lack of a universally accepted definition or measure of unemployment of the workforce

• Hidden unemployment

• Voluntary unemployment

• Underemployment

• Disparities

Hidden unemployment

refers to those who are technically unemployed, as they do not have full-time jobs, but are not included in the official measurement of unemployment.

• this includes discouraged workers (people who no longer have any motivation to seek employment as they have been unsuccessful/rejected too many times). Hence, they are not included in the labour force as they are no longer actively looking for a job

Voluntary unemployment

refers to individuals who choose nto to pursue full-time paid employment.

• Examples include parents who choose to not work full-time in order to care for young children, and people who have decided to take early retirement

• These people are classed as being economically inactive rather than being considered as part of the unemployed population

Underemployment

refers to people who are inadequately employed, reflecting the underutilization of the workforce.

• Although these people have a job, they are not able to fully use their skills or abilities, such as involuntary part time workers who cannot secure full-time jobs

Disparities

• Disparities in different regions, ethnic groups, age groups and gender are not accounted for in the measurement of unemployment because it is an average measure for the whole economy at one particular point in time

Causes of unemployment

• Cyclical unemployment (+ Demand deficient unemployment)

• Structural unemployment

• Seasonal unemployment

• Frictional unemployment

Cyclical unemployment (Demand deficient unemployment)

This is unemployment that results from a recession in the business cycle.

• Caused by a lack of AD and therefore results in job losses

• Most severe type of or cause of unemployment as it can affect every industry in the economy

• Can also be shown as a deflationary gap in the economy in a LRAS diagram

Structural unemployment

This occurs when there is a long-term (permanent) decline in the demand for labour in a specific industry.

• It arises from the skills mismatch between the jobs available in the economy and the skils of the available workers in the labour market, such as automation replacing human capital in the production process in certain industries.

• It is usually difficult for those in structural unemployment to find a new job without some assistance and training

Seasonal unemployment

this is unemployment caused by regular and periodical changes in demand for certain goods and services at different times of the year.

• Examples include construction workers during the winter season and ski instructors during the summer, or school bus drivers and teaching assistants during school holidays.

• It is particularly harmful on those on low incomes trying to manage their income and expenditure throughout they ear

Frictional unemployment

This occurs when people are between jobs owing to the time delay from leaving a job and finding or starting a new one

• There is a time lag because it takes time for people to find and apply for the right jobs and for employers to recruit the right people

• The greater the labour market imperfections, the longer this delay will tend to be.

Natural rate of unemployment (NRU)

refers to the equilibrium rate of unemployment, measured by the level of unemployment when the economy operates at its full employment level of national output (Y_fe)

• Sum of structural unemployment, frictional unemployment, and seasonal unemployment

• some unemployment naturally exists at the full employment level of real GDP because various people remain out of a job while searching for alternative employment opportunities.

• Frictional unemployment is always present because it takes time for the labour market to match available jobs with suitable people looking for jobs.

• Simularly, seasonal unemployment naturally occurs during different times of the year

types of costs of unemployment

• personal costs

• social costs

• economic costs

personal costs of unemployment

directly impact the individual who is out of a job

• stress and depression

• low self-esteem

• poverty (incluer hunger, malnutrition and poor health)

• family breakdowns

• bankruptcy and homelessness (long-term unemployment)

social costs of unemployment

affects third parties

• crime and anti-social behaviour (theft, alcoholism and vandalism)

• indebtedness and mass bankruptcies

• social deprivation

economic costs of unemployment

affects the economy as a whole

• a loss of GDP

• loss of tax revenues

• increased cost of unemployment benefits and increased government debts

• widespread poverty in the economy

• greater disparities in the distribution of income and wealth, as women, young adults, ethnic minority groups and those living in rural areas tend to suffer more from prolonged periods of unemployment