Unemployment

• Negative effects for firms?

  Lower demand, revenue and profit, some firms may go out of business, increased redundencies.

  Firms selling price elastic goods will be hit the hardest (YED)

  Retained profits may fall, possibly reducing funds for investment
• Positive effects for firms?

  Less competition for labour, it is easier for firms to recruit so lower recruitment costs

  Productivity may increase as workers want to keep their job

  Firms producing inferior goods may benefit
• Negative effect on individuals and communities?

  Increases in crime, low consumer confidence, less spending, lower living standards, increase in health issues

  Increased black market activity, negative multiplier
• Effect on government?


  Increased spending on unemployment benefits and schemes to create employment- creates opportunity cost

  Tax revenues fall (income, corporation tax, duty and VAT,) increases budget deficit.

  Increases political pressures to reduce unemployment, redcues approval rating
• Negative effect on economy as a whole?

  Negative multiplier effect, decreases in GDP, negative economic growth, recession.

  Hysteresis- leftward shift of LRAS- causes inflation
• Positive effect on economy as a whole?

  Less spending on imports- improvement in current account deficit

  Falling inflation rate as AD falls
• Hysteresis?


  Occurs when yhe long term unemployed give up searching for a job and completely withdraw from the labour market.

  Often due to discouraged workers, linked to sectoral decline/ structural unemployment as workers lack necessary skills.
• Hysteresis on graph?


  LRAS diagram. A recession occurs decreasing AD, creating new equilibrium. Normally expect a return to original AD but hysteresis reduces the quantity of labour so LRAS shifts left.

  Creates reduced output and inflation after recession.

  A demand -side cause of unemployment requires a supply-side solution
• Frictional unemployment?


  Short term.

  Caused by individuals moving between jobs and the 'search time' involved.

  Higher unemployment benefits and redundency pay can increase this. Decreased by improved job centres.

  Can increase national productivity as workers become more suited to jobs
• Policies for frictional unemployment?

  Supply-side policies:

  Reduce benefits- creates incentive to find work

  Improve spending on job 'search' services
• Seasonal unemployment?


  Jobs that are dependent on the weather, seasons, growing seasons (farms), tourism.

  Unemployment figures are adjusted to take into account seasonal unemployment.

  Little worry
• Policies for seasonal unemployment?

  Difficult to reduce but the government could improve training and education for people in industries to enable them to seek work elsewhere.

  A supply-side policy
• Structural unemployment?


  Occurs due to a change in the industrial structure of the economy, due to the decline of one industry and growth of another eg deindustrialisation process

  Also known as sectoral unemployment and has links to regional unemployment,

  Due to labour immobility which occurs due to a mismatch of skills
• policies for structural unemployment?

  Retraining- subsidised training schemes, government provision

  A supply-side policy

  Typically focussed on the younger generation
• Regional unemployment?


  When areas are particularly reliant upon particular firms and industries, their decline can cause a regional problem eg in the North East
• Policies for regional unemployment?

  Subsidies/ grants for firms to encourage relocation to depressed areas,

  training schemes for unemployed workers in depressed areas

  housing grants and low cost loans to relocate

  Supply-side policies and regional policy
• Technological unemployment?


  Occurs when improvements in technology reduce the demand for labour eg machines. However, it tends to create more jobs than destroyed but individuals need to be reskilled for the new jobs.
• Policies for technological unemployment?

  Supply side: improve education provison to give people to skills new industries require.

  Retrainign schemes for those who lost their jobs.
• Voluntary unemployment?


  Those who register as unemployed but do not want to work as the current real wage rate due to the high levels of beenfits. This means there is a difference betwen the registered labour force and the actual supply of labour
• Policies for voluntary unemployment?

  carrots and sticks

  higher minimum wages, in work benefits, higher personal allowances, lower income tax rates

  reduced welfare benefits, making claimants compete community service
• Natural rate of unemployment?

  There will always be some unemployment even at full GDP due to frictional, seasonal, structural and voluntary unemployment

  The percentage of the labour force who are unable or unwilling to work as the current wage rate also known as equilibrium unemployment

  The S and N curves converge as higher wages reduce the voluntary unemployment
• Policies for natural rate of unemployment?

  the same policies used to reduce frictional, structural, voluntary and real wage unemployment
• Real wage unemployment?


  Unemployment created by imposing a minimum wage- creates a disequibirium and excess supply

  Only occurs if minimum wage is above the equilibrium wage.

  May be reduced if higher wages cause a boost in AD through consumption so an icnreased demand for labour
• policies for classical (real wage) unemployment?

  Reduce or remove the MW

  Control the power of trade unions who demand minimum wages

  Supply side policies
• Keynsian demand deficient/ cyclical unemployment?

  Occurs when AD is below full employment such as during a recession as lower AD means less demand and lower demand for labour
• Policies for demand deficient unemployment?

  Expansionary fiscal and monetary policies- discuss both

  Causes an increase in AD and a positive multiplier effect
• Policy issue- uncertainty?


  Knowledge of the multiplier and AD is an estimate so may cause undershooting or overshooting, especially as the real world is not ceteris paribus.

  Can cause inflation if overshooting
• Polucy limitation- crowding out?

  Fiscal policy is used to increaase AD meaning the government experiences a budget deficit so the government must borrow more money. The government raises interest rates to convinve the private sector to lend which is the passed onto firms and consumers.

  Thsi reduced consumtion and investment.
• Policy limitations- debt?


  Increasing borrowing means national debt will rise so the future government will have higher interest payments so will have less to spend on public services which is an opportunity cost
• policy limitations- time lags?

  Takes time for the givernment to recognise the need for expansionary policies, and collect statistics on national outpiut. Monetary polict take times as the interest rate only changes every 6 weeks.

  The multiplier process takes time, and other events could cause AD changes and may cause inflationary pressures and reinforce booms and slumps
• Demand deficient/ cyclical unemployment (Classical)?

  AD shifts left (recession) so the economy moved down the SRAS curve and prices fall. Decreasing AD creates a negative multiplier effect and higher unemployment, creating a disequilibrium in the labour market which reduces the wage rate.

  SRAS shifts right with reduced costs so returns back to full employment

  This is a short run problem so does not require policies