Download 17 Unemployment - Mr. Davidson`s IB Economics Page

Low Unemployment
IB Economics
What is unemployment?
The labour force is essentially the
economically active population
Legal ages to start work and to retire vary
with countries
Those not part of the work force
 children
 Students
 Stay at home parents
 Retired people
 Those who choose not to work
 Those who cannot work (e.g. disabled)
It is surprisingly difficult to measure the size
of the labour force and the unemployed
Every country has its own system
Information is gathered from national
censuses and surveys as well as
unemployment insurance records and social
security information
Unemployment –
people of working age
who are without work,
available for work and
actively seeking
employment
Unemployment rate
– number of people
unemployed
expressed as a
percentage of the
total labour force
Hidden unemployment
One reason for the difficulty in
measurement is hidden
unemployment
Examples
 People who have been
unemployed for a long time
and given up
 People who have part time
work but would like to be
working full time
 People who are working in
jobs for which they are
greatly over qualified
If the unemployment rate is
low it would appear that this
economy is doing well but there
could still be room for
improvement
Distribution of
unemployment
The national unemployment
rate is only the average for the
whole country
It does not show inequalities
among different groups within
an economy
Geographical – UK higher in
the north
Age disparities – youth very
high in Europe
Ethnic disparities due to lack
of opportunities or prejudice
Gender disparities –
unemployment among women
tends to be higher in many
industrialised countries
Cost of unemployment
The reason that unemployment is such an
important macro objective is that it poses a great
cost (mainly with long term unemployment)
Costs to the people themselves
 low income (benefits) means a lower
standard of living for them and their families
 High levels of stress, anxiety and
depression
 High levels of divorce and suicide
Costs to society
 High levels of unemployment in particular
areas can be seen in the forms of poverty,
homelessness, high rates of crime and
increased gang activities
Costs to the economy as a whole
 Operating at a point within the production
possibility curve
 Opportunity cost of government benefits
 Less income tax, less consumption, less
indirect tax
 More government spending on fixing social
problems
Movements in and
out of the pool of
unemployment affect
the supply of labour
in an economy at
any time. This, and
the demand for
labour will determine
the level of
employment and
unemployment in an
economy
The labour market
Remember that demand for labour
in an economy is dependent on
demand for goods and services
(aggregate demand)
ASL - The aggregate supply for
labour – the total number of an
economy’s workers that are willing
and able to work in the economy at
every given average wage rate
Slopes upwards because as wages
increase workers will be willing to work
ADL - The aggregate demand
for labour – the total demand
for labour (by all firms in the
economy) at every given
average wage rate
Slopes downwards because as wages
decrease firms will be demand more
Causes of unemployment –
Disequilibrium
unemployment
This happens when there are
any conditions that prevent the
labour market from clearing
(reaching equilibrium
Real Wage Unemployment –
trade unions negotiate or
government implements
minimum wage - this pushes up
wage rates and interfering with
the labour market
Unemployment is Q2-Q1 or a-b
At the higher wage more people
are willing and able to supply
themselves to the labour market
but less firms are willing and able
to demand – there is surplus of
labour (unemployment)
Solutions to real wage
unemployment
By making changes to legislation
government could reduce the power of
trade unions
If the minimum wage is preventing
the market from clearing then it should
be reduced
Evaluation
 It is difficult to reduce union
power
 This may harm the poorest
workers
 High income workers don’t
receive the minimum wage
 Reducing the living standards of
low income workers – inequitable
(unfair)
Causes of unemployment – Demand deficient or cyclical
unemployment (also called Keynesian unemployment)
As the economy moves into a period of slower or negative growth AD
falls (AD1 shifts to AD2)
Less goods and services are demanded (Y1 to Y2)
Labour is a derived demand
Less labour is required to make the goods and services (ADL to ADL1 )
Wages should reduce to W1 but wages are ‘sticky downwards’
The aggregate supply of labour at We is higher than aggregate demand
leading to unemployment of a-b (or Qe-Q1)
unemployment
Solutions to demand
deficient unemployment
This is caused by low AD
Need to increase AD
Any policy that increases AD should
solve the problem (Keynesian demand
management policies)
 Monetary policy – reduce interest
rates or increase money supply
 Fiscal policy – Government spends
more or reduces income tax or
indirect taxation
Evaluation
 All of these things take time
 Unemployment is a lagging
indicator
Causes of unemployment –
Equilibrium unemployment
(natural unemployment)
Theoretically the labour market
may be in equilibrium with no
demand deficient or real wage
unemployment but there is still
unemployment
This is voluntary unemployment
There may be jobs available but
people are not willing to take them
They may not have the skills
They may not want to accept the
wage
They may not be aware of the
jobs
They are either unable or
unwilling to take the available jobs
At higher wages the gap
becomes smaller (more people are
willing to take the jobs)
unemployment
Types of natural employment –
Frictional unemployment
This is when people are between
jobs or they have left education and
are waiting for their first job
It is not normally seen as a serious
problem
Solutions
 Unemployment benefits should
not be at a level that removes
the incentive to work
If unemployment benefits
were reduced unemployed
workers might become more
willing to work (shift the
aggregate supply of labour
to the right)
 Improve awareness of
available jobs
Types of natural
employment –
Seasonal
unemployment
Demand for certain
workers falls at certain
times of the year
Examples
 Tourism industry
 Farming
Solutions?
 Encourage people
to take different
jobs in their off
season
 Reduce
unemployment
benefits
 Greater flow of
information
Types of natural employment –
Structural unemployment
This is the worst type of equilibrium
unemployment
It happens due to the changing structure
of an economy
One reason why it is so harmful is that it
tends to result in long term unemployment
 People who lose their jobs in one
area lack the necessary skills to
take on the newly created jobs –
occupational immobility
 If there are other jobs in other parts
of the country but people are not
willing or able to move this is
geographical immobility
Different causes
 New technologies replace humans
 Demand for a particular type of
labour - lower cost labour in other
countries
 Changes in consumer tastes – e.g.
environmentally friendly types of
energy
Structural unemployment
occurs when there is a
permanent fall in demand for
a particular type of labour e.g.
coal mining
Solutions – Structural unemployment –
interventionist policies
The key is to increase occupational
mobility (allow workers to move from job
to job)
 An education system that trains
people to be more occupationally
flexible
 Adult retraining programmes
 Government gives subsidies to firms
that provide training for workers
 Enhance geographic mobility by
building affordable housing or give
subsidies/tax breaks
 Set up apprenticeship programmes
to allow people to gain skills
Disadvantages
 Involve a high opportunity cost
 These policies are only effective in
the long term
Solutions – Structural unemployment –
market based/free market supply side
policies
Reduce unemployment benefits to give
unemployed people to take available jobs
Reduce labour market regulations which
increase labour market flexibility
 E.g. regulations about hiring and firing
– if it is difficult for a firm to get rid of
labourers that do not work well they will
not take on people
Evaluation
 People that lose benefits will have
lower living standards (increasing
inequity)
 Labour market regulations are in place
to protect workers from unfair treatment
and guarantee working conditions
 Unemployment might fall but there may
be a high cost to the workers
themselves.
Are demand-side policies or supply side
policies more effective in reducing
unemployment?
The answer is …it depends on what type of
unemployment
If it is demand deficient then demand side
policies will be required
Create demand and firms will demand
more labour
Evaluation - There are concerns with
using these policies
 Expansionary fiscal policy - means
spending more or taxing less
 Either may mean running a budget deficit
(spending more than taking in from
revenues)
 This may not be a problem in the short run
but could be in the longer run
 When lowering tax there is no guarantee
that people will spend their additional
disposable income if confidence is low
Are demand-side policies or supply side
policies more effective in reducing
unemployment?
More evaluation
Even if the reduction in taxes worked there
would be a lag before it came into effect
By the time it worked the economy could
have recovered and the extra AD would be
inflationary
With structural unemployment supply side
policies may be better such as making sure
labour is suitably skilled and flexible
In practice it is difficult to distinguish
between different types of unemployment
The economy will likely be suffering from
different types at the same time
Governments are likely to need a
combination of both
Fiscal policy – discretionary policy
versus automatic stabilizers
 Stabilisers automatically increase
when the economy is going into a
recession
 Stabilisers automatically fall when
national income begins to rise
(recovery/boom)
 Government spending and taxation
are both automatic stabilisers
 When the economy goes into
recession unemployment will rise
 Government spending (on benefits)
increases
 Disposable income is not affected so
much and AD falls less than it would
have done
 Tax revenues fall at a higher rate
than the fall in income (tax rates
tend to be higher on marginal
income than on average income)
Discretionary fiscal policy is
when the government
deliberately manipulates AD
Automatic or built-in
stabilisers – mechanisms which
reduce the impact of changes in
the economy on national income
Automatic stabilisers
 An example to show you how the
tax falls at a faster rate than the fall
in income
 A worker paid on commission sells
less in a recession
 Her tax rate might fall from 40% to
20%
 If household spending has to be cut
then it is more likely to be on
consumer durables taxed at 20%
VAT than zero rated goods such as
food
 With the government collecting les
tax disposable incomes are higher
and consumption is at a higher level
that it would be without the stabiliser
Automatic or built-in
stabilisers – mechanisms
which reduce the impact of
changes in the economy on
national income
Automatic stabilisers
 When the economy goes into a boom
unemployment decreases
 Government spending falls as the
benefits fall automatically
 Tax revenue increases at a faster rate
than income
 An unemployed person will pay very
little tax
 Once they get jobs they start to pay
substantial amounts of direct and
indirect tax
 AD is lower than it would otherwise be
with these automatic stabilisers
 Automatic stabilisers are seen as
important measure so controlling
fluctuating economic activity
 Since they automatically operate to
increase AD when there is a
slowdown they are not influenced by
political decision making
 They are also not subject to time lags
Automatic or built-in
stabilisers – mechanisms
which reduce the impact of
changes in the economy on
national income
Crowding out
 Some economists say that there is a problem with government running budget deficits
called ‘crowding out’
 To spend government has to borrow
 They sell bonds to financial institutions who then sell them on to people who want to
save their money
 By borrowing they push up the interest rates
 When interest rates increase investment (I) falls
 There is plenty of argument for and against
 Keynesians say that it will not occur if the economy is producing at less than full
employment
 New classical economists (who are against demand management policies) say it is a
significant problem.
Time for you to do some work!!
Plan Q 1 a and b on page 220
Next lesson to write under
timed conditions
Research unemployment in
your allocated country
Memory Challenge
What’s Macro
all about?
Several key terms will
appear
They will disappear after
30 seconds (do not write
anything in this time)
Your task:
(1)List the terms + (2)
Define them
(8 mins to get as many as
possible)
Disposable
income
Balance of
payments surplus
Trend Growth
Over to you!
Draw diagrams for
Disequilibrium/Real
Wage unemployment
What causes it?
How can it be
fixed?
Demand Deficient
unemployment
What causes it?
How can it be
fixed?
Wages
Do you remember what you
learned last time?
Do you remember what you
learned last time?
unemployment
Wages
Draw a diagram for
 Natural unemployment
 What are the different
types?
 Frictional, seasonal,
structural
 How can it be fixed?
 Are demand side or supply
side policies better to fix
unemployment?
 What is the difference
between an interventionist
policy and a market based
policy?