Unemployment
Measurements
Labour Force participation rate
natural unemployment
Unemployment rate
Number unemployed/ labour force x100%
labour force/ working age population x100%
frictional unemployment + strucural unemployment
Types & Causes
Cyclical unemployment
Seasonal unemployment
Structural unemployment
Real wage unemployment
Frictional unemployment
When people leave their jobs, either voluntarily or they are sacked & New entrants join the labour market
Information is imperfect. Example: Fresh graduate
Mismatch of skills & jobs due to change in the structure of economy. Skills of labour force do not match the available jobs.
Change in demand
Change in conditions of supply
Regional unemployment
Technological unemployment
Movement of certain industries to different location
Associated with the business cycle. (Alternating booms and slumps in economic activity)
Deficiency of a effective demand. During economic recession
Results from seasonal fluctuations in the level of economic activity
Traditions and customs
Annual weather cycle
Occurs when real wages for jobs are forced above market clearing level
Consequences on the economy
Econmic impact
Loss of outputs of goods & services (welfare loss)
Fiscal cost to government
Social impact
Decline in physical and mental health.
Waste of scarce economics resources. Reduce LR potential growth of economy. Loss in production. Loss of output that could have been produced by the unemployed means that welfare is not maximised. Hence, welfare loss to society represented by the output forgone due to unemployment
If prolonged, people may choose to leave the market permanently as they lost the motivation to search to work, negative effect on LRAS & damaging economy's growth potential
Loss of productivity capacity
Few people working = fall in tax revenue. Government increases spending on unemployment benefits. may run into budget deficit. Increase the risk government will have to raise tax/ scale back plans for spending on public & merit goods
Wastes some of scarce resources used in training workers. Workers may face erosion of skills with time, reduces their chances of gaining employment in the future -> not only to adverse impact on SR economic growth but affecting potential growth as quality of workforce worsens
May cause workers to exit from the labour force, resulting in future decrease in productive capacity
Policies
Suffer from ageing potential workforce, making them less attractive for investment locations
Structural unemployment
Frictional unemployment
Cyclical unemployment
Minimised by better job information & improvements in employment exchange services. Labour exchange can be established.
Improvement in industrial relations
Reduce number of laid-off workers from strikes & lock-outs or voluntary resignations due to poor staff management
Supply-side policies (Upgrading skills of workforce/ using subsidies to manage change in economic structure)
Government may provide incentives (grants & subsidies) for skills upgrading
Encourage growing industries to move into depressed areas via tax incentives and subsidies
Declining industry may be supported with funds from governements
Industrial innovation and changes may be accepted but an agreement must be reached to continue to employ workers who would otherwise be made abundant by the new technology
Supply management policies can be used alongside demand management policies to help.
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Using appropriate demand management policies to increase AD. Such as expansionary monetary & fiscal policies
Reduce structural rigidities (recommending wage cuts)
Seasonal unemployment
Real wage unemployment
Work sharing programme can be implemented
Rearranging the production process in such a manner that production is spread evenly throughout the year.
Other lines of production can be added to allow workers to remain employed
Pricing system.
Wages should be set at a more realistic level, reflecting demand and supply conditions
Restricting power of trade unions & reducing/ removing the legal minimum wage.