Employment and Unemployment

Unemployment - definition

The no. of people looking for work but who cannot find a job at a point in time - they are willing and able to work.

2 main measures of unemployment

1. The Claimant count

2. Labour Force Survey

Claimant Count - definition and evaluation

The number of people claiming job seekers allowance, they have to prove that they’re actively looking for work.

Generally an underestimate: not every unemployed person is eligible for, or bothers claiming JSA. Those with partners on high incomes are ineligible for the benefit, even though they’re unemployed.

Labour force survey - definition and explanation

Taken by the International Labour Organisation, a quarterly survey asking around 60k households if they've been out of work for 4 weeks and can start within 2 weeks.

\includes part time unemployed individuals, who are unlikely to claim JSA, so higher figures.

Is Labour Force Survey better than Claimant Count?

Yes: Internationally recognised, picks up trends in sectors, more accurate, data can be analysed.

No: Costly, subject to sampling errors.

The significance of changes in the rates of unemployment on: Consumers

If consumers are unemployed, they have less disposable income and living standards may fall as a result.

There are also psychological consequences of losing a job, affecting mental health.

The significance of changes in the rates of unemployment on: Firms

Higher unemployment = greater supply of labour = wages fall = reduced costs.

However, consumers have lower disposable income, so spending falls and firms may lose profits.

Reduced productivity and less incentive to invest.

Producers selling inferior goods may however see a rise in sales.

The significance of changes in the rates of unemployment on: Workers

Unemployment is a waste of workers’ resources, they may also lose existing skills if they’re not fully utilised.

The significance of changes in the rates of unemployment on: The government

Will have to spend more on JSA, which incurs an opportunity cost as that could have been invested elsewhere.

Will also receive less revenue from income tax, as less employed, and also less indirect taxes like VAT, as disposable incomes fall

The significance of changes in the rates of unemployment on: Economy

Wastage of resources, so economy will be within the PPF, at point E.

AD will shift leftwards, due to lower consumption, due to lower incomes.

The significance of changes in the rates of unemployment on: Society

Opportunity cost, as workers could’ve produced goods and services if they were emplyed.

Could also be negative externalities like crime and vandalism.

What is economic inavticity? What groups are part of this?

Those who are not actively looking for jobs, e.g. retirees, children, disabled people, carers for the elderly.

Some workers are discouraged from the labour market since they have been out of work for so long that they have stopped looking for work.

6 Causes of unemployment

1. Structural

2. Frictional

3. Seasonal

4. Cyclical

5. Technological

6. Regional

Structural unemployment - explanation

Occurs with a long term decline in demand for the goods and services in an industry, which cost jobs.

Examples in UK: car manufacturing, decline of coal and ship building

Technological unemployment - explanation

Links to structural and the car building industry, where improved capital which may be more productive and efficient than labour, replaces labour as a factor of production

Regional unemployment - explanation

Links to structural, occurs when unemployment is specific to particular regions.

Often due to a local area specialising in a certain industry which is now uncompetitive internationally due to globalisation and cheap labour abroad.

Frictional unemployment - explanation

Occurs as workers move between jobs. Always going to be some frictional unemployment, it isn’t particularly damaging, as only temporary.

Occurs as people are always moving between jobs, and have imperfect info about job opportunities available to them.

Seasonal unemployment - definition

Occurs when workers are unemployed at different times of the year.

During summer more employed in tourist industry

During winter more employed in retail sectors.

Some figures are adjusted to smooth out these fluctuations.

Cyclical unemployment - explanation

Occurs when there’s a negative output gap in the economic cycle, where demand is very low, during periods of decline/recessions.

Firms are forced to either close or make workers redundant, as profits are falling due to decreased consumer spending, so need to cut costs, this leads to a fall in output.

This can be caused by an increase in productivity, meaning each worker can produce a higher output, and therefore fewer workers are required.

Voluntary/involuntary unemployment: Keynesian or classical?

Voluntary: Classical

Involuntary: Keynesian

Voluntary unemployment - definition 

When workers choose not to work at the current equilibrium rate 

Why may voluntary unemployment occur?

1. Excessively generous welfare benefits

2. High rates of income tax

3. Workers seeking better employment conditions

4. The equilibrium wage rate is insufficient in encouraging individuals to supply their labour

Involuntary unemployment- definition

When there’s insufficient demand in an economy, so jobs simply aren’t there.

Real wage unemployment - definition 

A situation in which wages are set above the equilibrium level, resulting in an excess supply of labour or unemployment

Real wage unemployment: graph

There exists excess supply of labour as minimum wage is above the equilibrium wage rate.

Supply of labour > demand for labour

Types of intereference that may cause real wage unemployment

Trade unions - through collective bargaining, they negotiate higher wages for their members

Minimum wage - workers supply their labour more readily as a result

Opposing views on real wage unemployment

Classical economists advocate against labour market interventions, but others argue this erodes standards of living and job security

Natural rate of unemployment - definition

Frictional and structural unemployment will always exist, so always a degree of unemployment in an economy. So labour market can be in equilibrium even when a degree of natural unemployment remains.

Natural rate of unemployment: Graph

D1S1 is equilibrium point, even when quantity is less than labour force.`

Which type of factors determine the natural rate of unemployment?

Both frictional and structural

Frictional causes of natural unemployment

Availability of job information

Looser employment legislation/ weaker trade unions will increase flexibility and reduce the natural rate of unemployment.

Structural causes of natural unemployment

Skills and education: if improves, structural unemployment will decline

Occupational and geographical mobility

Hysteresis - workers become deskilled the longer they are unemployed, making it harder to find a new job when economy improves

Effect of natural rate of unemployment on individuals

• Lower living standards

• De-skilling

• Health implications

• Social issues

• Unemployment trap

• Longer term unemployability

Effect of natural rate of unemployment on Economy

• Worsened government finances

• Lost output

• Reduced intl. competitiveness

• Inequality

• Lower consumer spending

• Loss of resource invested in training

Demand deficient unemployment: other name?

Cyclical (caused by negative output gap)

Cyclical unemployment - graph

What types of unemployment are supply side?

Frictional, structural and seasonal

Supply side unemployment: Graph

If supply side of economy improves or worsens, this will shift LRAS left or right and thus decrease or increase unemployment