3.2 - low unemployment

employment \[term\]

the use of labour in an economy to produce goods and services

unemployment \[term\]

occurs when workers are able and willing to work at the current wage rates are unable to find employment

full employment

* occurs when an economy is using most of its workers to produce output
* does not mean that every single worker is employed, there will always be someone between jobs → frictional unemployment
* Defined as the level of employment where there is no cyclical unemployment caused by where the economy is in the economic cycle 
* It will always be above 0% as some people will face other types of unemployment e.g. frictional and seasonal

when will full employment occur

when there are high levels of economic activity with a high rate of economic growth 

what will occur at full employment

* High confidence in the economy 
* Significant spending on capital equipment 
* Workers will be in high demand 
* There will be shortages of skilled labor 
* The wage rate will be increased as the demand outstrips supply of labor 
* This will lead to inflationary pressure 

how is employment measured

* the number of people employed
* the number of jobs
* some people may have multiple jobs, so figures may vary

what condition must be met to be considered employed

People are employed if they have worked at least one hour in the last week being measured.  

how to calculate rate of unemployment

Rate of unemployment = unemployed/labor force x 100  

claimant count

* The number of people claiming Job Seekers Allowance (JSA)  
* Self-employed workers who are temporarily unemployed tend not to claim.  
* Under 18s and over 60s don't count.  
* Some people who claim JSA aren't actively seeking work.  
* Some have jobs in the black economy but continue to claim benefits.  

main types of unemployment

* cyclical
* frictional
* seasonal
* structural

cyclical unemployment

* This is heavily linked to the economic cycle and occurs when economic growth is below its trend or average rate.  


* It indicates that demand is low


* If the economy is in a recession firms do not need to employ as many workers because they do not need to produce as many goods because demand is fallen.  
* As the economy recovers cyclical unemployment will reduce.  
* Government will often try to alleviate problems by stimulating aggregate demand.  

frictional unemployment

* Unemployment that occurs as workers move between jobs, mainly through career moves or geographical changes.  
* Typically short-term, and often exists because workers do not have perfect and immediate information about every job opportunity that may be available to them.  
* It is assumed that there is always likely to be some frictional unemployment that persists in an economy.  

seasonal unemployment

o   This occurs when workers are unemployed at different times of year.  

o   This tends to happen in seasonal industries such as leisure, tourism and farming.  

o   It can also apply in retail industries as more workers are employed over busy periods, such as Christmas.   

structural unemployment

* This occurs when long term shifts in the structure of the economy impact upon the job market.  
* For example, in the UK there has been an increasing shift towards tertiary sector employment and away from primary and secondary sector employment due to low wage economies in Eastern Europe and the Far East.  
* As a consequence, large pools of highly skilled workers may find themselves unable to find work as there is limited demand for their labour because production and supply has been moved to other countries.  
* Structural unemployment tends to increase in line with the pace of globalisation.  
* These workers will therefore need to re-train and gain new skills in order to find employment – this will take time and may be costly.  

labour immobility can occur as a result of

* geographical immobility
* occupational immobility
* technological advances
* real wage inflexibility

geographical immobility

* where workers in an economy find it difficult to move from one region to another 
* This may occur due to: 
* The cost of moving e.g. housing costs in London 
* Imperfect information e.g. not being aware of jobs 
* Not wanting to move away from family and friends 

occupational immobility

* Workers are not equipped for different types if work e.g. a coal miner cannot easily transfer to become an accountant 
* This exists when there is a skills shortage 

labour immobility due to technological advances

* This occurs when improved capital, which may be more productive and efficient than labour, replaces labour as a factor of production 
* Technological progress means that workers are constantly being replaced 

labour immobility due to real wage inflexibility

* Real wage rates are above the equilibrium wage rate 
* This causes the supply of labour to be greater than the demand for labour 
* Workers will supply more of their services at higher wage rates 
* However, firms will demand less workers as the wage rate is too high 
* In a free labour market real wage rates would fall in these circumstances and the market would return to equilibrium 

To the labour market such as the national minimum wage and trade union power can maintain real wage rates above their equilibrium 

benefits of unemployment

* The economy needs to have some frictional unemployment as workers move between jobs e.g. sometimes the demand for some products will fall and so fewer workers will be needed to produce them 


* On the other hand the demand for other products rises and the economy will need workers to be available to move into these expanding sectors 
* For a period of time these workers will be frictionally unemployed and it is necessary while the change in production takes place 
* %%If there is a lot of unemployment wage rates will remain down%% – this can be a disadvantage to the workers but for firms it can be seen as a benefit as they do not have to raise the wage rate in order to attract new employees 
* As wage rates are kept down this %%makes costs lower and firms more competitive%% → this may help them to compete with firms producing in other countries 

consequences of unemployment

* Lost output. If there is unemployment, this represents a significant wastage of economic resources 
* Increased government spending on JSA and employment programmes 
* Lost tax revenue through lower income tax receipts. There is also likely to be lower consumption, so VAT receipts will also fall 
* Reduced demand for goods/services 
* Reduced productivity 
* Reduced profitability 
* Less incentive to invest 
* Reduced morale and productivity of remaining workforce who are perhaps concerned over future potential job losses 

cost of unemployment for individuals

* Lower living standards 
* Loss of status and self esteem 
* Excluded workers – some workers are unemployed for such a long time that they become unemployable and employers are reluctant to give these people a job as they have no recent experience 
* Cost to the tax payer 

cost of unemployment to the government

* %%have to pay more from taxes, make more taxes as less people are working%%
* Labour resources are wasted 
* When labour is unemployed this means that the economy could produce more goods and services that it is producing 
* The economy is not at full capacity as it is not using all of its factors of production. Therefore this is a waste labour resources. 


* Unemployment leads to more unemployment 
* This is cyclical unemployment 
* It is a major problem for an economy and it is associated with the recession 
* Total spending in the economy falls -> demand for workers falls and unemployment continues to rise 
* The government will have to introduce policies to break this cycle 
* will lead to budget deficit

government policies to reduce unemployment

* fiscal policies
* This will lead to increased spending to stimulate the economy 
* Reduced taxes will provide greater incentives for individuals to go back to work 
* monetary policies
* Lower interest rates will see more borrowing 
* Saving becomes less attractive 
* supply side policies
* budget deficit

unemployment is often spread unevenly throughout the country

* Some areas tend to suffer much higher rates of unemployment than others 
* These areas may become depressed areas where unemployment is well above the national average 
* This mat encourage people to move away from that area and it becomes even more depressed as the loval population declines 
* Homeowners may find that the value of their property falls 
* This will often lead to an increase in social problems as well as a rise in crime rate