Economics Chpt. 17

Incentive to Register Unemployed

A person who is not entitled to any benefits is not likely to register unemployed.

Distribution of Unemployment

National unemployment rate is an average for the whole country and thus is likely to mask inequalities among different groups within an economy.

Seasonal Unemployment

Some workers may be employed on a seasonal basis, meaning the demand for certain workers falls at certain times of the year [particularly temperature climates].

Hidden Unemployment

consists of several groups. 1.) people who have been unemployed for a long period of time and have given up the search for work. 2.) people who have part-time work but would really like to be working full time. 3.) people who are working in jobs for which they are greatly over-qualified.

Costs of unemployment; to the economy

if actual output is less than potential output due to the unemployment of the factor of production, labor, then the economy is foregoing possible output and would operating at a point within its PPC. This loss of output and income to the unemployed has large implications for the economy as whole. e.g. Opportunity cost of the government's spending on unemployment benefits. If unemployed people who have lower incomes pay less tax and spend less money, less tax revenue is generated for the government.The government may have to spend more money to solve the social problems created by unemployment.

Distribution of Unemployment: Geographical Disparities

inner city unemployment might be higher than suburban or rural unemployment.

Fiscal Policy: Automatic Stabilizers

do not require any deliberate change to government policy in order to change the level of AD. These affect government revenue and government expenditure.High unemployment causes tax revenues to fall, it will not take any deliberate action on the part of the government to increase AD by lowering taxes.

Labor Market: Equilibrium

equilibrium is achieved when ADL is equal to the ASL. The equilibrium wage for the economy is established by this interaction of ADL and ASL and is shown on the diagram as We.

Distribution of Unemployment: Ethnic Differences

ethnic minorities often suffer from higher unemployment rates than the national average; may be due to education or attitudes/prejudices of employers.

Labor Market: Aggregate Supply of Labor [ASL]

the ASL illustrates the total number of an economy's workers that are willing and able to work in the economy at every given wage rate. As the average wage rate increases more people are willing to work and so the ASL curve slopes upwards.

Labor Force

the economically active population. Students attending school (not looking for work), stay at home parents, retired persons and the like are not part of the work force because they are not actively seeking employment.

Unemployment Pool

the number of people that are unemployed. It is under constant change as some lose employment and others gain employment. If more people are becoming unemployed than gaining jobs then, unemployment will rise and vice versa, supply and demand of labor.

Frictional Unemployment

the short-term unemployment that occurs when people are in between jobs, or they have left education and are waiting to take up their first job. This is recognized as 'natural' unemployment as it is part of natural process. It is generally not perceived to be a negative outcome in any dynamic economy. If people leave one job the assumption is that they are switching to a job where they will be more productive, allowing them to contribute more to the economy.

Costs of Unemployment; to the society

these costs can most clearly be seen in areas where there are high levels of of unemployment in the form of poverty, homelessness, higher rates of crime and vandalism, increased gang activities etc. It is oversimplification to blame this entirely on unemployment, yet their is a connection.

Solutions to Structural Unemployment: Market-Based/Free Market Supply Side Policies

1.) Governments should reduce unemployment benefits. 2.) Deregulation of the hiring/firing and employment practice process to increase 'labor market flexibility'. The burden of such policies falls on those that lose their unemployment benefits (will have lower living standards, and thus increase economic inequity), and workers (they are no longer equally protected and may be fired with undue cause, or work under unacceptable conditions [time, holiday, safety] which also contributes to higher inequity).

Factors Causing a Fall in Unemployment [Outflows]

1.) people who find jobs 2.) people who retire 3.) people who go (back) into education 4.) people who choose to stay at home to look after children 5.) people who emigrate to other countries 6.) people who give up the search for jobs 7.) people who pass away.

Factors Causing a Rise in Unemployment [Inflows]

1.) those who have lost their jobs. 2.) those who have resigned 3.) people who have left school but have not yet found work 4.) people who are trying to return to work after having left is (e.g. stay-at-home parents returning to the workforce) 5.) people who have immigrated into the country but have not yet found work.

Structural vs. Demand Deficient Unemployment

DD unemployment is caused by an overall and temporary fall in the demand for ALL labor in the economy as a result of a slowdown in economic growth or recession. The expectation would be that once AD picks up, then the Ad for labor should also increase. Structural unemployment is caused by a permanent fall in the demand for ONE type of labor and requires different solutions. However, DD unemployment caused by a lengthy period of economic activity could result in structural unemployment, because as the economy picks up, it is possible that new forms of labour are needed while worker made redundant during the recession do not have the skills needed for the changing economic climate.

Causes of Unemployment

Equilibrium employment and disequilibrium unemployment.

Demand Side vs. Supply Side Policies

If an economy has DD unemployment, demand management policies are more suitable. However, in order to use expansionary fiscal policy, a government may have to run a budget deficit and spend more than it takes in revenues. This may lead to fiscal problems in the long-run. If taxes are reduced there is no guarantee that people will spend their extra disposable income; if consumer confidence is low the saving might be preferred, and AD will remained depressed. If interest rates are lowered there is no guarantee that consumption and/or investment will increase. If consumer confidence is low, then borrowing to finance consumption and investment is unlikely. Even when successful, there will be a lag time until they are effective. It is possible that AD will increase, but by that time the economy may have already recovered causing efforts to be purely inflationary. Furthermore, even when the economy is at full employment, there will be some unemployment. This type of unemployment is natural unemployment and the solutions to these types are best found in supply-side policies. Demand side policies will result in inflationary pressure.

Solutions to Frictional Unemployment

If it is believed that people are remaining unemployed for too long a time government may intervene despite it being 'natural'. Some would argue that people will have little incentive to find a job if the benefits available to them are generous and allow them time for looking. Thus, economist supporting a free market would advocate that the government decrease unemployment benefits to encourage unemployed workers to take the jobs that are available rather than allow them the chance to wait for a better one to come along. If they are reduced then the unemployed workers might become more willing to work, shifting AS of labor to the right. Sometimes those looking for work remain unemployed due to unawareness of existing vacancies. In such a case, frictional unemployment can be reduced by improving the flow of information from potential employers to those looking for employment, this would be more interventionist and could be done through job sites, job centres, newspapers, etc.

Solutions to Real-Wage Unemployment

If the trade unions are preventing market clearance, then the government should reduce the ability of unions to negotiate higher wages. Similarly, if the minimum wage prevents the market from clearing, then the minimum wage should be reduced, or even abolished. Nonetheless, it might be difficult to reduce union power. Second, the effects of such policies will harm poorest workers the most. A reduction in the minimum wage will reduce the income and living standards of those workers who are already earning low wages. Thus such a policy can lead to a worsening distribution of income within an economy - greater inequity.

Disequilibrium Unemployment: Real-Wage [Classical] Unemployment

It represents the view of classical [and new classical] economists that argue that some unemployment is caused by trade unions and government minimum wages interfering with the labor market. Trade unions negotiate wages that are higher than the equilibrium and a minimum wage is set above the equilibrium. As a result of the higher enforced wage (W1) the aggregate supply of labor is greater than the aggregate demand for labor, and unemployment of a-b is created. The trade unions/government are preventing market clearance.

Solutions to Structural Unemployment: Interventionist Policies

Key is to enhance the occupational mobility of people so that they can be more available to take jobs. 1.) a long-term solution involves an education system that trains people in more developed economies to be more occupationally flexible. It is becoming a necessity of rapidly changing economies. 2.) spending on adult retraining programs to help acquire the necessary skills 3.) Give subsidies to firms that provide training for their workers. 4.) If jobs exist in other parts of a country, a government might provide subsidies or tax breaks to encourage people to move to those areas (enhancing their geographic mobility). 5.) Governments can support apprenticeship programs, so that potential workers can acquire the skills needed in the labor force. Two main disadvantages to such policies are that they are likely to involve high opportunity cost, and that they are only effective in the long run.

Solutions to Seasonal Unemployment

Reduction can occur by encouraging people to take different jobs in their 'off' season. Reduced unemployment benefits and greater flow of information are appropriate as well.

Costs of Unemployment

The costs of unemployment increase the longer people are unemployed.

Solution to Demand Deficient Unemployment

The government can intervene to bring about an increase in AD through the use of fiscal or monetary policies. The government can use Keynesian demand management policies. Increased government spending could increase AD, or it could lower indirect and direct taxes to indirectly increase consumption by households and firms, since the gist of the problem lies in a low level of AD. The central bank could use monetary policy to decrease interest rate or increase money supply.

Equilibrium Unemployment [Natural Unemployment]

The labor market may be in equilibrium but there might still be unemployed people.When the l-market is in equilibrium the number job vacancies equals the number of people looking for work. This is full employment where there is no disequilibrium unemployment. Jobs exist, but people are either unwilling or unable to take the jobs that are available. The LF curve - a measure of the total labor force - is greater than the ASL because at any given wage rate there will be more people looking for jobs than those who are actually willing and/or able to take the jobs, causing unemployment to exist.That there is no disequilibrium means that there are jobs available but people are either not willing or not able to take the jobs, due to lack of qualification, unawareness, or unwillingness. As wage rates increase the gap decreases. There are three main types of equilibrium unemployment: frictional, structural and seasonal.

Labor Market: Aggregate Demand of Labor [ADL]

The y-axis represents the price of labor, as measured by the average real wage rate. This shows the average level of wages adjusted for inflation. The labor market represents the demand and supply for all labor in the economy. Thus the demand for labor is called the Aggregate Demand for labor ADL, as it includes the demand for all labor that is involved in producing an economy's goods and services (e.g. teachers, sales people, pizza deliverers). The AD curve shows the total demand demand for labor at every given average wage rate; it slopes downwards because at a lower wage level, producers are able and willing to take on more labor (producer's demand for workers increase). As wage level increases firms attempt to reduce the amount the amount of labor they then use, perhaps by using more capital-sensitive production methods. ADL is dependent upon the AD of an economy. If AD increases, and more output is produced, it may be assumed that that more labor is demanded to produce the extra output, if AD falls the opposite occurs.

Structural Unemployment

Worst type of equilibrium unemployment as it is the result of the changing structure of an economy. It occurs when there is a permanent fall in the demand for a particular type of labor. This is natural in a growing economy where new jobs are created (e.g. software engineers) while others disappear (e.g. coal mining), making people unemployed. It tends to result in long-term unemployment as people who lose their jobs in one are lack the necessary skills to take on the newly-created jobs (occupational mobility) or that they may be living in a region other than where the jobs are being created (geographic mobility). Causes of structural unemployment are: new technologies reducing the need for labor (technological unemployment), lower cost labor in foreign countries, changes in consumer taste. Institutional framework may also cause structural unemployment [trade unions, laws governing the l-market, cultural traditions (role of women in the workforce)] - such as lengthy documentation and proof for firing someone depriving someone else from work. Deregulation would cause give firms more incentive to increase their demand for labor.

Fiscal Policy: Discretionary Fiscal Policy

a deliberate change to a government policy in order to manage aggregate demand (e.g. a decision to increase spending on infrastructure to expand the economy or to reduce spending on health care as a means of deflating the economy).

Unemployment

a low level of unemployment is a macroeconomic goal, and a low/or falling unemployment rate is widely interpreted as a sign of improved health of an economy.

Measurement of Unemployment

differs by country, methods includes surveys, national censuses, administrative records, unemployment insurance records and social security information. There may be inaccuracies in the data and inconsistency and the definition off unemployment.

Unemployment Rate

number of people unemployed expressed as a percentage of the total labor force.

Disequilibrium Unemployment

occurs when there are any conditions that prevent the labor market from 'clearing', there are two types real-wage [classical] unemployment and demand-deficient [cyclical] unemployment.

Unemployment Definition

people of working age who are without work, available for work, and actively seeking employment.

Costs of Unemployment; to the unemployed people themselves

they will receive less income, which implies a reduction in the standard of living and for those dependent upon them (families). A person who remains unemployed could become increasingly dejected which contributes to high levels of stress and the problems associated with stress such as anxiety and depression. Erosion of mental health can lead to relationship break-downs and, in extreme, higher levels of suicide.

Disequilibrium Unemployment: Demand-Deficient [Cyclical] Unemployment

this type of unemployment is associated with the cyclical downturns in the economy. As an economy moves into a period period of slower growth [or negative growth if recession], AD tends to fall as consumers spend less on goods and services. This is likely to lead to a fall in ADL, as firms cut back on production. If an economy slows down this is likely to lead to a fall in AD. To reduce their output, firms will reduce their demand for labor from ADL1 to ADL2. If labor markets functioned perfectly then, the average real wage would fall. However, wages are 'sticky downwards' - meaning that they increase easily but are tough to reduce. Firms realize the paying lower wages will lead to discontent and reduced motivation among workers which may result in lower worker productivity and is undesirable. Secondly, firms may not be able to reduce wages due to labor contracts and trade union power. Since wages are likely to remain 'stuck' up at We the AS of labour will be greater than the ADL and unemployment will be created. This type of unemployment is also called Keynesian unemployment because Keynes observed that it was quite possible for an economy to operate well below full employment, and this was likely to result in high levels of unemployment.

Distribution of Unemployment: Gender Disparities

unemployment rates among women have tended to be higher among women in industrialized countries; may be due to prejudices by employers, differing education or other social factors.

Distribution of Unemployment: Age Disparities

unemployment rates in the under 25 age group are higher than the national averages in many countries.

Crowding Out

when governments run budget deficits in order to stimulate an economy and reduce unemployment they face potential "crowding out". To run a deficit the government has to borrow money, this is done by selling government bonds such as treasury bills or treasury bonds ton financial institutions who then sell them on to people who want to save their money, essentially this is increasing demand for the savings that are in the economy. There is a given amount of savings in the economy and this is represented by the supply of loanable funds curve. The prices of these funds is this results in an increase in the interest rate. The increased demand for savings in order to finance a deficit results in an increase in the interest rate. The higher interest rate may reduce the incentive for businesses to invest, so it possible that investment will fall. Keynesian economists say it will not occur if the economy is producing at less than full employment. New classical economists say crowding out is a significant problem of increased government spending.