9. Unemployment

• Unemployment: Refers to the people who are willing and able to work but cannot find a job.

  • Can be either voluntary or involuntary
• Unemployment rate: Proportion of labour force who are willing and able to work but, cannot find a job.
• Working age population: Part of the population that is of working age (>15)
• Labour force: The portion of the working age population who are either working or are actively seeking work.
• Participation Rate: Proportion of the working age population who are either working or are actively seeking work.
• Underemployment: People who wish to work more/longer hours but are not given it by their employer.
• Disguised unemployment ==> Underemployment: When people are employed less than they would like to be.
• Hidden unemployment ==> Discouraged workers: Workers who choose not to participate in the labour force because previous efforts to find a job have been frustrated.
• non-accelerating inflation rate of unemployment (NAIRU): Unemployment that can not be reduced by expanding aggregate demand (Full employment).
• Unemployment rate = (number of unemployed / labour force) x 100
• Labour force participation rate = (Labour Force / working age population) x 100
• Working age population: ABLE to work
• Labour force: ABLE and WILING to work
• Limitations of UE measurements:

  • Dose not account for hidden unemployment
  • Dose not account for underemployment
  • Excludes people with disabilities
• Types of Unemployment:

  Cyclical UE:

  • Follows the cyclical movement of the business cycle
  • Derived from the demand for final goods and services and follows fluctuations of the business cycle.
  • CAN reach 0
• Structural UE:

  • When there is a mismatch of available and required skills in a sector of the economy
  • Causes
  • Changes in technology (substitution of machines for labour)
  • Changes in demand for productive factors (more machines and less humans)
  • Changes in the pattern of consumer demand (demand less radios, more AI)
  • Can be long term, especially for older workers and less educated
  • Easier to retrain younger people
  • Their skills are more easily substituted for machines
  • Can't reach 0
• Types of Unemployment:

  Frictional UE:

  • Unemployment that occurs due to the job search that occurs when in transition between different jobs.
  • E.g. After graduating university
  • Looking for better (working conditions, pay), increase productivity
  • Most likely to be short term
  • Higher in a peak, more confident that they can find a job
  • Can't reach 0
• Impacts of UE:

  • Lower levels of aggregate expenditure, investment and business confidence
  • UE indicates that resources are underutilised
  • There is a gap between actual GDP and potential GDP
  • Unemployment means that not all resources are being fully utilised, therefore not operating on the PPC
  • GDP gap in PPF
• Impacts of UE:

  • Higher welfare payments
  • Opportunity cost: Potential expenditure of infrastructure, health or education - merit goods
• Impacts of UE:

  • Increased social problems
  • E.g. Depression, violence, crime
• Impacts on distribution of income:

  • Affects different groups of people differently
  • Dependent on factors including age, health status and geographical location
  • Increases income inequality
• Full Employment:

  • When the economy is at its maximum production capacity
  • Considered to exits when there is zero cyclical unemployment
  • Doesn't mean there is 0% unemployment
  • Shown as a point on the PPF curve
• Natural Rate of Employment:

  • Structural UE + Frictional UE
  • Estimated to be around 4.5% in AUS
  • Changes over time
  • Changes in attitude, change in way of looking for a job,
• NAIRU:

  • Non-accelerating inflation rate of unemployment
  • Is the lowest unemployment rate that can be sustained without causing wage growth and inflation to rise
  • 4.5% in Australia
• • A key indicator of spare capacity in the economy is the difference between the NAIRU and the unemployment rate - sometimes known as the 'unemployment rate gap'
  • There will be spare capacity in an economy when aggregate demand for goods and services is less than the economy's capacity to produce them
• • If the unemployment rate is higher than the NAIRU, the economy would not be at full employment and there would be downward pressure on inflation.
• • If the unemployment rate is lower than the NAIRU, the economy is operating above its full capacity, and there is upward pressure on inflation.
• Relationship between Inflation and Unemployment.

  • Inflation: procyclical variable
  • Unemployment: countercyclical. Cyclical unemployment will fall as the level of economic activity increases
• Relationship between Inflation and Unemployment.

  • Low unemployment is usually correlated with high inflation
  • Low unemployment leads to inflationary pressure due to high levels of demand
• Relationship between Inflation and Unemployment.

  • High unemployment is usually correlated with low inflation
  • Unemployment means that resources are under-utilised and therefore demand is lower
• Relationship between Inflation and Unemployment.

  Achieving the economic targets of low inflation and low unemployment involves a trade-off as the 2 targets contradict each other.
• Phillips Curve:

  • As inflation decreases, unemployment increases
• • At point A, high inflation and low unemployment, but along the curve at point B, as unemployment increases, inflation decreases.

  
• Look at it for 10 seconds.

  
• the difference between potential and actual output when labour resources are not fully employed (unemployed)