MACRO

MACRO – Unemployment

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Lessons Objectives

• The Meaning of Unemployment• The Consequences of Unemployment• Types and Causes of Unemployment

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Youth Unemployment in the EU

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Youth Unemployment

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Largest Employers in the world?

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The unemployed are part of the output gap

Trend output= potential GDP

Output (real GDP)

Time

Actual output

Negative output gaps

Unemployment > natural rate of unemployment

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The Unemployed are part of the Labour Force

ECONOMICALLY INACTIVE

UNEMPLOYED

EMPLOYED

Population of working age/ working population M 16-64, W 16-59.

Labour Force (Economically

Active)Participation rate = The percentage

of the working

population in the labour

force

The unemployed are the part of the working population that are out of work and seeking employment

Includes people in full-time education, raising children, on a training

scheme or in early retirement. People on incapacity benefit are

also considered economically inactive

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Basic information

The level of unemployment = The number of people seeking work who do not have a job.

The rate of unemployment = number of unemployed people x 100 Labour Force

Additions to the level of unemployment include;• People who are made redundant, dismissed or have resigned.• Those who leave government training, university or college without a job.• Those who immigrate without a job arranged.

Subtractions from the level of unemployment include;• Those who retire or retire early• People who are of working age that enter full time education or govt

training • People who emigrate• Discouraged workers (given up looking for employment)

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Activity

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Measuring UnemploymentThe Labour Force Survey (ILO)– Figures based on a household survey – This is an internationally agreed method

of counting unemployment– Must have actively sought work in the last

4 weeks and be available to start immediately.

• The Claimant Count– This counts the number of people in a

country who are registered as unemployed and/or receiving unemployment benefits. These national statistics are dependent on whether the eligibility conditions are satisfied.

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Unemployed people aged 16-59 (women) / 64 (men), seasonally adjusted

Unemployment in the UK Economy

Source: Labour Force Statistics

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10

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Claimant Count

Labour Force Survey

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The advantages and disadvantages of the claimant count and LFS measures.

• The claimant count is easy to collect as it is simply a tally of all those receiving the JSA

• It is also very cheap to obtain, It is a by-product of the admin of JSA• The figure is an accurate measure of those claiming unemployment

related benefit.• It is heavily influenced by entitlement rules• There may be fraudulent claims. Though it is generally accepted the

number of fraudulent claims are outweighed by those who are unemployed who do not claim their entitlement.

• It is not internationally comparable

• It is a wider measure which is thought to give a more accurate reflection of the number of people who are unemployed.

• Other information about the unemployed is collected in the survey.• It is internationally comparable.• It is based on a quarterly survey of c.60,000 households, so samples may

be unrepresentative and subject to response errors.• It is costly.• It takes time to compile, leading to time lags in data.

The Claimant Count

The Labour Force Survey

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The consequences of unemployment

The Costs of unemployment include;

Costs to the unemployed• Fall in income• Loss of self esteem may lead to health/mental health problems• Hysteresis

Costs to society• Increase in social problems, such as crime• The opportunity cost of unemployment is high – lost output• A fall in the general standard of living, due to lower output• A fall in government revenue from taxation

Costs to other economies• Loss of trade, due to likely reduced demand for their exports• Immigration from countries with high levels of unemployment

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There are possible benefits of unemployment;

• It provides an opportunity for the unemployed to search for the most suitable work.

• Firms wishing to expand will be able to draw from a pool of available workers

• Wage inflation is likely to be reduced• A reduction in pay related industrial action could be seen• Possible downward pressure on inflation.

However, It is generally accepted that the costs of unemployment, above a low level, outweigh any possible benefits. This is why low unemployment is

a key macro economic objective pursued by governments.

The benefits of unemployment

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Types and Causes of Unemployment

2 main types:Disequilibrium unemployment

Equilibrium Unemployment

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The Labour Market

• ADL =The total demand for labour in the economy

• ASL= The total supply of labour in the economy. The ASL curve shows the number of people willing to accept jobs at each rate.

• In addition, we have another curve- the ASL F= Total number in the labour force

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Disequilibrium Unemployment

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Disequilibrium Unemployment

• Disequilibrium unemployment occurs when conditions in the market prevent the market from clearingThere are 3 types/ causes of disequilibrium unemploymentDemand Deficient unemploymentReal- wage unemployment (caused by TU and minimum wages sometimes called classical unemployment)Growth of the Labour Supply (eg. Caused by school/ university leavers every summer)

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Disequilibrium unemployment occurs when the wage rate is above WE

Real Wage

Quantity of workers

0

ASL

ADL1

WE

QEQD

Due to wages being ‘sticky downwards’ wages get ‘stuck’ at W1

W1

QS

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The Causes of Unemployment

Demand Deficient/ Cyclical Unemployment

Unemployment arising from a lack of AD

Occurs when the ASL is greater than the ADL at the going real wage rate.

New Keynesian economists believe this may occur in the long run, as labour markets fail to adjust when there is falling aggregate demand within the economy. New Classical economists do not believe this type of unemployment exists in the long run as they believe labour markets clear/adjust.

(New Classical economists believe unemployment is only frictional and structural in the long run.)

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Demand deficient unemployment on a diagram

Real Wage

Quantity of workers

0

ASL

ADL1

W1

Q1Qd

ADL2

Due to wages being ‘sticky downwards’ wages get ‘stuck’ at W1Unempl exists of Qd to Q1

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Illustrate and explain….

• Cyclical/ demand deficient unemployment

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Equilibrium Unemployment

15th May 2012

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Equilibrium Unemployment• Known as Natural Unemployment• Jobs exist, but people are unwilling or

unable to take those jobs• Frictional• Structural• Seasonal

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The labour market is in equilibrium when ADL=ASL

At this wage rate there will be an excess of people looking for work over those actually willing to accept jobsThis is known as the equilibrium level of unemployment also known as the natural level of unemployment

ADL

ALF

ASLReal Wage

Quantity of workers

0

WE

QE QT

Natural rate of unemployment at WE

Equilibrium Unemployment

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The Causes of Unemployment

Frictional Unemployment/ Search Unemployment Short term unemployment occurring when workers are between jobs.

Occurs due to imperfect information in the labour market and can be classified in a number of ways.

Time can be taken for workers to find the right, most appealing, job. Savings, benefits available and personal circumstances influences the length of search.

Those people who work on an occasional basis will be out of work, often between contracts.

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The Causes of Unemployment

Structural UnemploymentUnemployment caused by the decline of certain industries and occupations due to changes to the structure of the economy, caused by changing market conditions.

This type of unemployment can be particularly serious and longer term in nature and can be classified in a number of ways.

Regional Unemployment Is concentrated in a particular geographical area. Caused by the decline of certain industries concentrated in geographical areas.

Technological Unemployment If workers lose their jobs due to technological advances. However, technological advances can lead to growth in other industries requiring labour.

International UnemploymentOutsourcing and loss of competitiveness to international sources of production can be a form of structural unemployment. It can reflect a change in comparative advantage.

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The Causes of Unemployment

Seasonal Unemployment Some workers who are employed in seasonal industries may be unemployed when there are falls in demand for labour at particular times of the year.

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Why do New Keynesian and New Classical economists views differ?

Different economists views of unemployment

New Keynesian economists believe that the economy may not be operating at full employment in the long run. There is a possible imbalance between the demand for and the supply of labour.They believe involuntary unemployment can be significant. The vast majority of the unemployed are unemployed due to a lack of demand and the inability of the labour market to adjust in the long run. Involuntary unemployment exists.

New Classical economists believe that the economy operates at full employment in the long run. Therefore total demand for labour is matched by the supply of labour. In the long run those who are willing and able to work are employed. The unemployed are made up of those between jobs and those who are voluntarily unemployed in the long run. Voluntary unemployment exists.

The difference of opinion is centred on how well markets work, with New Keynesian believing there is a failure of factor markets to adjust (market failure is common). New Classical economists believe markets work well and adjust in the long run.

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OTHER INFO ABOUT UNEMPLOYMENT…

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Hidden Unemployment

Hidden Unemployment This consists of several different groups of people who are no longer counted as unemployed:– Long-term unemployed who have given

up the search for work– Part-time workers who would prefer to

be full-time– Those people working in jobs for which

they are greatly over-qualified

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Distribution of Unemployment

• A national unemployment rate establishes an average for the whole country whereas differences will exist between different groups within society.

– Geographical – this is particularly true when declining industries are located in a particular area. Also differences between the availability of jobs in urban and rural areas exists.

– Age Disparities – Youth unemployment tends to be higher due to the lower level of skills and experience of younger people.

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Distribution of Unemployment

- Ethnic Differences – some ethnic minorities may suffer from higher unemployment rates than the national average. This may be as a result of a difference in the number of educational opportunities and possibly due to attitudes of prejudice of employers.

- Gender Differences – A higher proportion of women tend to be unemployed compared to men which may be as a result of social factors, education differences, discrimination etc.

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Policies to deal with unemployment

• Using the Channel 4 article of unempl from last lesson pick out policies to deal with unempl

• How would they affect the following?• Demand deficient• Frictional• Seasonal• Structural

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Neo Classical policies

• Lower the unemployment related benefit or make it more difficult to claim

• Reduce the power of the trade unions• Cut income tax rates• Remove any unnecessary labour market regulations• Reduce, or remove, the national minimum wage

Policies to reduce unemployment

New Keynesian policies

• Use work related benefits to increase income from work• Increase spending on education and health• Use regional policies to increase work opportunities in

deprived areas• Provide advice centres for the unemployed with compulsory

interviews for those claiming unemployment benefit• Introduce government funded investment projects to provide

jobs

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Essay2. (a) Explain the following different types of unemployment: • frictional unemployment • structural unemployment • cyclical/demand-deficient unemployment • real wage/classical unemployment. [10 marks] (b) Evaluate the effectiveness of the different measures available to

governments to deal with the types of unemployment in (a). [15 marks]