19 Low unemployment

What is unemployment

Unemployment: “people of working age who are without work, available for work, and actively seeking employment

Unemployment rate

(Number of unemployed // Total labour force) x 100

who is not counted in labour force

• people outside of working age, children and retired

• students attending school

• parents at home who are looking after children

• choose not to/can’t work

Difficulties in measuring unemployment

• inaccuracies

• incentive to register as unemployed depends on unemployment benefits

• alternatives in how countries measure unemployment

  • those registered as unemployed

  • those receiving unemployment benefits

“Hidden unemployment“ - different groups of people

• unemployed for long, given up search

• people who have part-time work, or temporary contracts

• people working jobs they are over qualified for

Typical disparities amongst groups of people

• geographical location: varies across regions

• Age disparities: higher unemployment rate for those under 25 generally

• ethnic differences: minorities often suffer more

• gender disparities: women generally

Unemployment effect on people themselves

• receive less income, assuming they get benefits

• lower living standard

• costs worsen the longer the unemployment

  • cause mental health problems

Cost of unemployment on society

• areas of increased unemployment

  • poverty, homelessness, increase criminal activity, increased gang activities

Cost of unemployment on economy

• if actual output less than potential due to unemployment, economy producing under ppc

• gov erans less in tax - spend more on solving social problems

What is the flow concept

relationship between becoming unemployed while others gain employment

Labour market diagrams

• y-axis, price of labour, average real wage rate

  • average level of wages adjusted for inflation

• x-axis, quantity/number of worker

AD for labour

• labour for whole economy

• demand for labour at every wage

Types of unemployment

1. cyclical (demand-deficient)

2. structural

3. frictional

4. seasonal

Cyclical unemployment

• Cyclical downturns in economy

• slower growth, AD decreases as consumers spend less

  • fall in spending, less demand for labour

What is wage stickiness

less likely that wages fall

• firms realise if they lower wage, less motivation

• Can’t - labour contracts and trade union power

• AS for labour greater than AD

Cure cyclical - fiscal/monetary

Since AD is low, G intervenes

Fiscal - AD increase, increase G spending/lower tax rates

Monetary - lower interest rates or increase money supply

What casues for structural unemployment generally and the two types

changing structure of economy, two forms

1. permanent fall in D for a particular type of labour

2. change in institutional framework

Permanent fall in D for particular labour type

• natural in growing economy, new types of jobs, others dissapear

• long term unemployment - those who lose job do not have the skills for the new job

  • lack occupational mobility

What is occupational mobility

ability to change jobs

Causes of structural unemployment - type 1, change in d for labour

• technological changes

• Globalisation made possible for companies. Set up in cheaper countries

• Change in consumer taste, decreases demand for particular labour

  • people increasingly concerned about effects of coal for example. Less coal miners needed

Change in institutional framework

• laws governing labour market

  • law which states firms may not fire without lengthy documentation of malpractice

    • prevent firms from hiring workers, costs of dismissing not worth it

  • min wage legislation

    • increase COP

    • creates price floor graph

  • laws governing trade union

    • union contribute to unemployment

Interventionist policies for structural unemployment

• long term- education system that trains more occupationally flexible. People in more developed economies change jobs

• improve occupational mobility - spend on adult upskilling or retraining

• subsidies to firms who provide training

• job in other parts of countries, provide subsidies or tax breaks to encourage people to move

• gov support apprenticeship programmes

• job centres providing info about job vacancies, training opportunities and interview-training

Disadvantages in intervensionist policies for structural

1. involves increased opportunity costs, forego spending on other areas

2. only effective in long run

Market based policies for structural and their problem

• lower unemployment benefits. encourage unemployed to take available jobs

  • PROBLEM: people who lose benefits have lower living standard, increase inequity

• Felt that gov intervention, reduces “labour market flexibility” and discourages firms from hiring

  • argue un favour of deregulation of labour market

  • PROBLEM: worsen working conditions

Frictional unemployment

• short term unemployment when people are between jobs or left education and are waiting for job

how to reduce frictional unemployment

• decrease unemployment benefits

• improve flow of information from employers to people searching for jobs

Seasonal unemployment

workers who are employed on a seasonal basis

reduce seasonal unemployment

encourage peopel to take other jobs in off season

Natural rate of unemployment

encourage people to look for jobs off season

Natural rate of unemployment

some types of unemployment occur even when labour market is in eq.

What is the same when the labour market is at equilibrium

number of job vacancies is same as n of people looking for work

what is natural unemployment greater than

greater than eq. level of unemployment, which is known as equilibrium level of output

what does natural rate of unemployment consist of

• structural, frictional, seasonal

• natural rate = Structural + frictional + seasonal

What do demand side policies do in unemployment

manipulate interest rates, narrow business cycle fluctuations and reduce output gaps

What do supply side policies do in unemployment

ensure labour suitably skilled and flexible to adapt to changing economic conditions. LRAS shifts right

What is crowding out

when government runs a budget deficit to stimulate economy and decrease unemployment, potential problem - crowding out

What must gov do to run budget deficit and what do they aim to do

• must borrow money

  • sell bonds to financial institutions who sell them on

  • increases demand for saving

    

How does crowding out look on a diagram and the effects it has

Effect of crowding out on investment

By G spending increasing, AD increases- higher interest rates cause interest sensitive private investments to fall. Final Ad depends on size of spending

Keynesian VS New classical - crowding out

• keynesian: will not occur if economy producing at less than full employment

• new classical: opposed. to demand side policies. argue crowding out is a problem

  • extreme: Supply loanable funds is fixes. Increase in gov spending, leads to increase IR, but none in total borrowing