Download Unemployment

Areej Aslam Khan 201002380
(business Administration)
NooraAl-musailem
200700066
(Finance)
ASSE2111 SEC: 201
Rationale
Lucius Annaeus Seneca, a Roman philosopher and playwright, once said, “Economy is
too late when you are at the bottom of your purse” (Proverbia, 2012). It clearly shows that one
should have complete knowledge of economy before it is too late. One needs to understand the
importance of learning about the economy as any activity that takes place depends on economy.
One’s decision is greatly influenced by economy and that study of economics.
Researches state that, “economics is about the world around us; it’s current; it’s always
changing; it’s always interesting. It’s the subject that allows you study Tesco’s and ASDA’s
methods of competition one day, and learn about the environment and pollution permits the next.
It’s about the modern world; it’s about how we behave, how businesses behave and how the
government behaves” (McCullagh, 2012). This shows that students need prospects to be able to
understand how the world works. It tells us how important it is to learn economics to be able to
understand the current world’s dealings and how to compete in the business world.
This book is aimed at the high school students who intend to have a major in economics
in their undergraduate life who are trying to learn the basics of economy. The Goals that this
book aims to achieve based on this are:
1. To help create awareness to students about the economy they live in.
2. To help them understand how the economy works.
3. To help them relate their live with economics.
4. Help them understand the difference between macro economics and micro economics.
5. To influence focused learners about the importance of world economy.
To make these goals attainable, the objectives mentioned latter are to be met:
1. Students will be able to identify and explain economic concepts and theories related
to the behavior of economic agents, markets, industry and firm structures, legal
institutions, social norms, and government policies.
2. Students will be able to identify the determinants of various macroeconomic
aggregates such as output, unemployment, inflation, productivity and the major
challenges associated with the measurement of these aggregates.
3. Students will be able to formally represent economic relationships using graphical
and mathematical tools and provide meaningful verbal interpretations of these
representations.
4. Students will attain deeper understanding by focusing on economic growth full
employment price stability and economic freedom
The content in this book is carefully designed to make students understand the economy
from the basics till the complicated concepts of economics that would give strong foundation to
the students and enable them to have strong basics for their professional life.
References
Bamford, C. (2003). Economics. London: University of cambridge.
McCullagh, J. (2012). Why study economics. Retrieved from
http://whystudyeconomics.ac.uk/why-study-economics-2/
Proverbia. (2012, may 8). Economy. Retrieved from
http://webcache.googleusercontent.com/search?q=cache:lCMmFlUf1okJ:en.prove
rbia.net/citastema.asp?tematica=374 importance of economics
quotes&cd=4&hl=en&ct=clnk
WIZIQ. (n.d.). Economics. Retrieved fromhttp://www.wiziq.com/tutorial/38600Meaning-and-Definitions-of-Economics
2012
ECONOMICS
AREEJASLAM & NOOR AL-MUSAILEM
Table of Contents
Introduction
UNIT 1: Central Concepts
Chapter 1: The Basic Concepts of Economics
Chapter 2: The Mixed Economy; Modern Times
Chapter 3: The Key Elements; Demand and Supply
UNIT 2: Microeconomics
Chapter 4: Demand and Supply
Chapter 5: Elasticity and Application
Chapter 6: Production and Business Organization
Chapter 7: Cost Analysis
Chapter 8: Analysis of Markets
UNIT 3: Factor Markets
Chapter 9: How Markets Determine Factor’s Incomes
Chapter 10: The Market of Labor
Chapter 11: Land and Natural Resources; Environment
Chapter 12: Entrepreneurship
UNIT 4: Macroeconomics
Chapter 13: Basics of Macroeconomic
Chapter 14: Measuring Economic Activity
Chapter 15: Consumption and Investment
Chapter 16: Aggregate Demand and Supply
Chapter 17: Monetary Policy
UNIT 5: Macroeconomic Problems
Chapter 18: Economic Growth
Chapter 19: Challenges of Economic Development
Chapter 20: Unemployment
Unemployment
Difficulties in measuring Unemployment
The causes and types of unemployment
Relationship between inflation and Unemployment
Chapter 21: Inflation
INTRODUCTION
According to J.E Cairns, “Economics deals with the phenomenon of wealth” (WIZIQ).
This shows that Economics teaches us how to deal with wealth. It is also a medium to understand
the way of making decisions as it basically is the study of social science that deals with solving
the problem of scarcity, that is, how to deal with deciding what resources and their amount to use
to produce goods and services as there are limited resources available in the world.
This book acts like a ladder to the students that would enable them to understand the
world and economics from the very basics so that it would help them in their future career and
undergraduate studies. This book provides information that meets with the intellectual level of
the high school students and provides them basis to the economic world and gives them clear
ideas that would also train them in making decisions in their life, not necessarily relating to
business but those decisions that would effect their lives.
In this book, each unit has about 4 to 5 chapters that are divided according to particular
topics. In each chapter, there are sufficient activities, objectives, summaries and definitions that
would make the learning process for the students easier and makes them realize how much they
themselves have understood the topic and can assess their standing in the course. This book
provides enough information that would gives a start to eht students that would enable to build a
strong base to their professional studies.
20
Unemployment
On completion of this section you should know:
1.
2.
3.
4.
5.
What are the macroeconomic problems
How to define unemployment and its measurement problems
Types of unemployment
Main causes of unemployment
Relationship of unemployment with other macroeconomic problems
UNEMPLOYMENT
out on training and work experience. There is
People are unemployed when they are
able and willing to work but they cannot find
also increasing evidence of a link between levels
of unemployment and crime.
jobs. Unemployment can bring with it serious
problems both for those who are unemployed
and for the country. With some people being
out of work the country’s output will be below
its potential level, tax revenue will be lower and
more state benefits will have to be paid out.
The unemployed, in addition to having lower
incomes, may experience higher rate of mental
and physical illness and divorce and will miss
Economists measure not only the level
of unemployment but also the rate of
unemployment. The level refers to the number
of people who are unemployed; whereas the
rate of unemployment the rate of
unemployment is the number of people
unemployed as the percentage of the number
of people in the labor force (i.e. the employed
and the unemployed).
Full employment is often considered to
be achieved when employment falls to 2 to 3%.
This may appear to be somewhat surprising as
you might have expected it to be 0%
While monetarist argue that the natural
rate of unemployment cannot be reduced, in
the long run, by expansionary monitory or
fiscal policies, it can change over time. The
factors which do determine the natural rate of
unemployment may fall as the results of:
unemployed. However, in practice, at any

An increase in the mobility of labor,
particular time some people may be

An improvement in the education and
experiencing a period of unemployment as they
move from one job to another job.
training levels of workers,

practices,
The natural rate of unemployment,
which can also be referred to as the non-

level of unemployment which exists when the
aggregate demand for labor equals the
A reduction in state unemployment
benefits,
accelerating inflation rate of unemployment
(Nairu), is largely a monetarist concept. It is the
A reduction in paid union restrictive

A cut in income tax.
DIFFICULTIES IN MEASUREING
UNEMPLOYMENT
aggregate supply of labor at the current wage
There are two main methods most
rate and so there is no upper pressure of the
governments use to measure unemployment.
wage rate and the price level. The inflation rate
One is to measure the number of people in
is constant, with the actual inflation rate
receipt of unemployment – related benefits ;
equaling the expected one.
this is called the claimant count. It has the
advantage that it is relatively cheap and quick
calculate as it is based on information which the
government collects as it pays out benefits.
work, but who are available for work in the next
However the figure obtained may not be
two weeks and who are seeking paid
entirely accurate. This is because it may include
employment. This measure picks up some of
some people who are genuinely unemployed.
the group not included in the first measure. It
Some of those receiving unemployment
also has the advantage that as it is based on
benefits may not be actively seeking
internationally agreed concepts and definitions.
employment (the voluntary unemployed) and
It makes international comparisons easier.
some maybe working and so claiming benefit
However, the data are more expensive and time
illegally. On the other hand there maybe a
consuming to collect than the unemployment
number of groups who are actively seeking
benefit measure. Also as they are based on a
employment but who do not appear in the
sample survey they are subject to sampling
official figures. These groups may include the
error.
elderly, those below a certain age, those on
THE CAUSES AND TYPES OF UNEMPLOYEMENT
government training schemes, married women
looking to return to work and those who chose
not to claim benefits. As this measure is based
on those receiving benefits, it changes every
time there is a change in the criteria for
qualifying a benefit.
Monetarists believe that even at the natural
rate of unemployment, when the labor market
is in equilibrium, some people will still be
unemployed. These are the people who are not
able or willing to work at the current wage rate.
This equilibrium unemployment can be divided
The other main measure involves a labor force
survey using the international labor
organization a definition of unemployment. This
includes as unemployed all people of working
age who, in a specified period, are without
into two main categories, Frictional and
Structural. Frictional unemployment is
unemployment which arises when workers are
between jobs. One form of frictional
unemployment is search unemployment. This
unemployment can be divided into a number of
arises when workers do not accept the first job
forms. One is the technological unemployment.
or jobs on offer but spend some time looking
In this case people out of work due to the
for a better paid job and when employers hold
introduction of labor - saving techniques. In
out in the hope of recruiting more – productive
many European countries a high number of
workers. Casual and seasonal unemployment
banking staff have lost their jobs in recent years
are two other forms of frictional
with the introduction of phone and internet
unemployment. Casual unemployment refers to
banking. When the declining industries are
workers who are out of work between periods
concentrated in particular areas of the country,
of employment including, for example, actors,
the unemployment is sometime referred to as
TV script writers and roof repairers. In the case
regional unemployment. Another form of
of seasonal unemployment, demand for
structural unemployment is international
workers fluctuates according to the time of the
unemployment. This is when workers lose their
year. During periods of the year, people
jobs because demand switches from their
working in, for example, the tourist, building
industries to more competitive foreign
and farming industries maybe out of work.
industries.
Unemployment can also arise due to changes in
Keynesians, however, think that, in addition to
the structure of the economy. Overtime the
these causes of unemployment, people can be
pattern of demand and supply will change.
without work because of lack of aggregate
Some industries will be expanding and some
demand. This will affect the whole economy
will be contracting. Because of the immobility
and is referred to as cyclical, demand –
labor, workers may not move smoothly
deficient or disequilibrium unemployment.Fig.
between industries, so structural
20.1 shows the labor market initially in
unemployment may arise. Structural
equilibrium at a wage rate of W. then, as a
result of a fall in aggregate demand, firms
1.
reduce their output and aggregate demand for
UK workers experience according to the report?
labor shifts to AD1. If workers resist wage cuts,
2.
disequilibrium unemployment of XQ will exist.
governments pending would reduce such
Even if wage rates fall, disequilibrium
unemployment may persist. This is because a
cut in wages would reduce demand for goods
What type of unemployment may some
Discuss whether an increase in the
unemployment.
RELATIONSHIP BETWEEN INFLATION
AND UNEMPLOYMENT
and services, which would cause firms to cut
Economists have devoted considerable
back their output further and make more
attention to the relationship between inflation
workers redundant.
and unemployment. The most famous study on
Self – assessment tasks
read the short article below and then tackle the
exercises that follow.
A report by the UK department of trade and
industry and development agencies for wales
and London published in feb 2001 predicted
that the British call center industry, an
important provider of jobs in many depressed
areas, may lose a significant number of jobs to
India.
The author of the report, Mike Havard, said,
“India is building some of the highest quality
call centers in the world, supported by state of
the art technology and staffed by skilled,
English speaking workforce. Many of the
facilities are better than the best the UK can
offer.”
He argued British operators to improve the
quality of their service for e.g. By reducing the
time callers have to wait for an operator, if
they do not want to lose business.
the relationship was carried out by Bill Philips, a
Newzeland economist based at the London
school of economics. He analyzed the
relationship between changes in money wages
and unemployment in the UK over the period
1861 to 1957. He found an inverse relationship
as show in figure 20.2.
A fall in unemployment may cause
higher inflation due to the extra aggregate
demand generated and the possible upward
pressure on wages.
This traditional Philips curve suggests
that a government can select its optimum
combination of inflation and unemployment
their outputs and more people are attracted
and can trade off the two. For e.g. if the current
into the labor force as a result of higher wages.
unemployment rate is 8% and its inflation rate
However when firms realize that their costs
is 4%, the government may seek lower
have risen and their real profits are unchanged.
unemployment to 5% by increasing its
They will cut back and their output and some
expenditure while accepting this improvement
workers, recognizing that real wages have not
may have to be bought at the cost of higher
risen, will leave the labor force. Unemployment
inflation.
returns to 8% in the long run but inflation of 5%
However this interpretation is
questioned by the monetarist. They argue that
while there may be a short run trade of, in the
long run expansionary fiscal or monetary
policies will have no impact on unemployment
but will succeed in raising the inflation rate. To
illustrate this view Milton Friedman developed
the expectations - augmented Philips curve
(also known as the long run Philips Curve) as
shown by the vertical line Fig. 20.3. the position
of this line is determined by the natural rate of
unemployment. The diagram shows that an
increase in the aggregate demand does succeed
in reducing unemployment from 8% to 4% but
creates inflation of 5% and moves the economy
to a higher short run Philips curve. Firms expand
has now been built into the system. Firms and
workers will presume that inflation will
continue at 5% when deciding on their prices
and putting in their wage claims.