Download Handout Unemployment - uwcmaastricht-econ

Unemployment
What is it?
ILO and OECD define the unemployed as:
Persons of working age who are without work, available to start within 2 weeks and actively seeking
employment or waiting to take up an appointment.
How is it measured?
Unemployment rate:
The number of unemployed as a percentage of the total labour force.
Labour force
=
Underemployment
Workforce
=
=
Number employed + Number unemployed
I take on a part-time job whereas I want to have a
full-time job.
What affects the level of unemployment?
The level of UE at any point in time depends on the relationship between the number of people who
become unemployed and the number of people who find work:

If more people are becoming unemployed than gaining jobs, then the level of UE will raise

If more jobs are being created so that more people are gaining jobs than losing jobs, the level
of UE will fall
Increase UE
Decrease UE

People who lost their job

People who find jobs

People who have resigned

People who retire

People who have left school but have not

People who go back into education
found work

People who choose to stay at home

People who are trying to return to work

People who emigrate

Immigrants who have not yet found work

People who give up searching

People who pass away
What types of unemployment are there? What to do about them?
Equilibrium and disequilibrium unemployment.
A. Disequilibrium unemployment
Occurs when there are conditions that prevent the labour market from clearing (=reaching the labour
market equilibrium).
There are three possible causes for disequilibrium unemployment:
1. Real wage unemployment (classical unemployment) (Not included in syllabus)
Represents the classical (or neo-classical) view.
Unemployment is caused by trade unions and government minimum wages interfering with
the labour market. As a result, real wages are above the equilibrium level.
ASL
W1
W2
ADL
Q1
Q2
Excessive real wages were blamed by Thatcher and Major governments for the high
unemployment of the 1980s and 1990s.
Solution:
1. Reduce trade union power  Is this feasible?
2. Abolishment or reduction of minimum wages.  Is this fair?
2. Demand-deficient unemployment (cyclical unemployment / Keynesian unemployment).
Associated with cyclical downturns (= recessions) in the economy. As economic growth slows
down or falls, aggregate demand tends to fall as consumers spend less on goods and services.
Firms will cut back on production and they will decrease their demand for labour (fire
workers).
ASL
We
W1
ADL1
ADL2
Q1
Qe
However, wages are “sticky downwards”. Meaning that while wages can easily increase, it is
less likely that real wages will fall.  Unemployment is created.
Solution:
Keynesian policies. Increase AD with fiscal or monetary policies.
B. Equilibrium unemployment (natural unemployment)
There might be labour market equilibrium, no demand-deficient unemployment and no real-wage
unemployment, but still there are unemployed.
When the labour market is in equilibrium, the number of vacancies is equal to the number of people
looking for a job.
This is what we call full employment.
There is a vacancy for everyone looking. However, people are unwilling or unable to take the jobs
that are available.
In the following diagram a new curve is introduced, the total labour force.
ASL
LF
We
ADL
Q1
Qe
Why is the total labour force greater than the aggregate supply of labour?
ASL: people willing and able to work at any given wage rate
Reasons:

Education does not match the job.

Unwilling to take
Three main types of equilibrium unemployment:
1. Frictional unemployment
It is of a short-term nature. Occurs when people leave jobs or come out of education and are
unemployed for a period of time while they are looking for a job. Searching for a job takes
time.
Solution:
Interventionist: Improving flow of information: Internet, newspapers, job centers.
Market-based: reduce UE benefits (shift ASL to the right)
2. Seasonal unemployment
It is natural for some workers to be employed on a seasonal basis.
Demand for certain workers falls at certain times of the year.
Examples: lifeguards, ice creams sellers, boat trips…
Solution: Encouraging people to take jobs in their off-season, by reducing UE benefits and
increasing/improving the flow of information about jobs available in other sectors.
3. Structural unemployment
The worst type of equilibrium unemployment!!!
Occurs as a result of the changing structure of the economy.
When there is a permanent fall for a particular type of labour (example: mining in Wales).
This is natural in a growing economy; there will always be new types of jobs being created
as old ones disappear.
It often results in long term unemployment as people lack the skills and knowledge to take
on the newly created jobs.
Causes:
a) Changes in demand for particular labour skills, as a result of technological change
(more demand for software engineers, less demand for human bank tellers) or
changes in the structure of the economy (less demand for mine workers). Results in
mismatches between labour skills demanded by firms and supplied by workers.
b) Changes in the geographical location of jobs, caused when a large firm or industry
moves to another region. Results in a decrease in D for labour in one region and
increase in another region.
c) Labour market rigidities: factors preventing the forces of S and D from operating in
the labour market (min wage legislation, UE benefits, employment protection laws,
labour union activities). Many economists argue that that they are responsible for
higher UE rates in countries with strong protection systems.
Structural UE can be illustrated using a labour market diagram for a particular industry. In the
following diagram, show an increase in UE caused by the closing of a steel factory.
Labour market for steel workers in the UK
Structural UE due to wages being above equilibrium level can be illustrated using a labour
market diagram (this would be disequilibrium unemployment):
UE caused by minimum wage legislation/labour union
power
Or by a product market diagram where higher labour costs shift the supply curve to the left:
Solution:
A. Interventionist policies : the goal is to enhance the occupational mobility of people so
that they become more able to take available jobs.
1. An education system that trains people to be more occupationally flexible so that
they learn the skills to adapt to changing economic conditions.
2. Retraining programmes to help people acquire the necessary skills to match
available jobs.
3. Government subsidies to firms that provide training for their workers
4. If jobs are available in other parts of the country  provide subsidies or tax
breaks to encourage people to move to these areas.
5. Support apprenticeship programmes.
B. Market-based policies:
a. Reduce UE benefits
b. Reduce labour market rigidities: make it easier/cheaper for firms to fire
workers.