Topic 4.7.1 Employment/Unemployment

Types of Unemployment:

Frictional Unemployment:

Frictional unemployment is when a period of time when person is unemployed after switching between jobs. If a person leaves their previous job for another job, they may start work a few months after they leave.

Not a big problem:

Seasonal Unemployment:

When a person's job is only in demand in a certain season, they will eventually become unemployed when the season passes. This period of unemployment is known as seasonal unemployment.

Types of Unemployment:

Huge problem:

Cyclical Unemployment/Demand Deficient Unemployment:

Cyclical unemployment occurs when there is too little aggregate demand for goods and services in an economy during a recession.

Structural Unemployment/Technological Unemployment:

Changes in a structure of an economy such as technologies replacing certain jobs would leave workers unemployed as there is little/no demand for their skills anymore

Key Terms

The working population of an economy. This consists of individuals that are of age who are able and willing to work (legally). (Consists of employed and unemployed)

People that are not counted as part of the labour force. This consists of elderly, disabled people, children/students, prisoners, stay at home parents.

Dependent Population:

Labour Force:

Labour Force Participation Rate:

Labour force participation rate is the percentage of those in the working population that are working or looking for for work, therefore able to produce goods and services.

Full Employment:

The optimal level of employment in an economy. This does not mean ZERO unemployment as there will always be natural unemployment (frictional unemployment).

Costs of Unemployment:

Personal and Social Cost:

Lower Standard of Living - Unemployed = Unable to meet financial requirements

Personal Problems - Unemployment can lead to health issues, mental illnesses and depression.

Hysteresis - Giving up on looking for a job entirely. This will cause them to lose skills, human capital and future earning potential.

Rioting and Crime - High level of unemployment can cause civil unrest.

Fiscal Cost:

Loss of unemployment benefits/welfare payments - Unemployment benefits could have been used to pay for other goods and services

Burden on Taxpayers - Taxpayers have to support the unemployed by paying for their welfare payments.

Cost to the Economy:

Waste of Resources - High unemployment total output and income will be low. Thus potential GDP will be lost.

Less Income tax Revenue - High unemployment results in less income tax revenue. This may compromise govt. budget and result in less govt. spending.

Causes of Unemployment

  1. Powerful trade unions
  1. High unemployment benefits

High unemployment benefits may disincentivise people to seek employment, thus choosing to stay unemployed.

  1. Employment Costs

Employment costs may reduce the demand of labour. Thus firms will choose to employ less people.

  1. Lack of Information

Lack of info on employment opportunities in an economy may lead to more people being unable to find jobs. Thus leaving them unemployed.

  1. Minimum Wages

If minimum wages are too high, there will be a reduction in demand for labour (mostly for low skill workers). Thus more unskilled workers are unemployed

  1. Labour Immobility

Occupational and Geographical Immobility can paralyse workers and limit their ability to switch between jobs.

Trade unions may attempt to increase wages of their members without increasing their productivity.