Causes of Unemployment

• Demand deficiency/cyclical unemployment

  • Caused by lack of demand for labour
  • Occurs in Keynesian recession
• Explain demand deficiency

  • Demand decreases (AD)
  • Economy is in recession as it moves down the LRAS curve
  • Ouput of goods and services reduced
  • Less workedrs needed
  • Workers made redundant.
• Keynesian stick wages

  • wages are sticky downwards (they wont fall or fall by VERY little)
  • workers won't accept lower wages
  • to reduce costs businesses have to make workers redundant
• Why are wages "sticky" downwards?

  • NMW law (preventing wages from falling too much)
  • trade unions (constantly demanding higher wages & preventing big wage cuts)
• Solution to demand deficient unemployment


  Boost AD

  • government spendings increasing (factor of AD)
  • reducing income tax (to allow more spending)
  • This will shift AD to the right on the LRAS curve.
• Both Keynesian economist and classical economist believe that unemployment is caused by Disequilibrium (a lack of demand in the labour market).
• Difference between Keynesian and Classical view of unemployment

  Keynesian: Lack of demand + recession stage, sticky wages

  Classical: Inflexible market, voluntary unemployment
• an increase in imports will cause what type of unemployment?

  structural unemployment.

  Demand for this industry of imported goods in the home country will likely become lower than the supply of labour (workers) over time.