Employment & Unemployment - A-Level Economics
Employment & Unemployment
Unemployment is another important aspect of economic performance.
Unemployment indicates that the economy is working below its productive capacity (inside its PPF), and that more could be produced if more people are drawn into work.
Also, unemployment imposes costs on the economy, and in terms of standard of living unemployment is damaging.
Key Terms
An unemployed person is classified as a person who does not have a job but is actively seeking work and is ready to begin work within two weeks.
The unemployment level is the number of unemployed people.
The unemployment rate is the proportion of unemployed people relative to the size of the workforce.
The workforce consists of the employed and unemployed.
How is unemployment measured in the UK?
ILO Unemployment Rate (using Labour Force Survey)
The International Labour Organisation (ILO) uses the Labour Force Survey, which is now the official measure used in the UK.
The survey involves interviews and telephone conversation with many households in the UK, asking questions about work. For example, they ask whether anyone in the household has been out of work for 4 weeks and is ready to start within the next 2 weeks.
The ILO Unemployment Rate uses an internationally standardized definition of unemployment, allowing for easy international comparison. However, there are sampling problems and carrying out the survey is time-‐consuming and costly. In fact, by the time all of the surveys are completed, the data is normally out of date!
Claimant Count of Unemployment
The Claimant Count of Unemployment measures the number of people claiming Jobseeker’s Allowance each month.
The claimant count used to be the main measure of unemployment used in the UK. However, there are problems with this measure:
- People claiming Jobseeker’s Allowance (JSA) have to be actively seeking work, but many people claim the benefit and are not actively ready for work.
- The count does not include people who are looking for work but are not eligible for unemployment benefit. For example, unemployed people who have savings of over
£16,000 are not eligible, and neither are people who have refused more than 3 job offers.
Even though the claimant count is quick and easy in terms of obtaining data, and also allows us to obtain separate data for different counties (therefore allowing local comparison), due to the its problems it has been replaced by the ILO unemployment rate.
N.B. The claimant count is always smaller than the ILO Unemployment Rate because many people are not eligible for JSA.
What are the types and costs of unemployment?
Types of Unemployment
Real Wage Unemployment
Real Wage Unemployment happens when the wage rate is maintained above the equilibrium rate, leading to an excess supply of labour.
The best solution to this is ‘laissez faire; let the market sort itself out’. For example, if people accept lower wages, then the cost of living falls as firms do not need to charge such high prices, so the lower wages soon become acceptable.
However, trade unions and regulations such as the NMW prevent wages falling below a certain point. This leads to real wage unemployment which will not disappear because the wage rate cannot fall.
Demand Deficient Unemployment
This is when there is insufficient aggregate demand in the economy for everyone to have a job. Therefore the economy can be in equilibrium but without everyone having a job.
There are several reasons for demand deficient unemployment:
- Saving-‐ if people save too much, then spending falls. Less spending means fewer job opportunities. Fewer jobs means more unemployment and even less spending and so the cycle continues. Saving is particularly common during a recession.
- Lack of business confidence-‐ this reduces investment and increases saving, leading to fewer jobs being available because less is produced.
- Increase in value of currency-‐ this increases imports and reduces exports, meaning more money leaves the circular flow. Therefore, there is less spending so jobs are reduced yet again.
- Imports from poorer countries-‐ increased imports from low-‐wage economies leaks more money from the circular flow, reducing spending in the country further.
External Shocks-‐ if the price of an inelastic good, such as oil, from abroad increases, consumers have less disposable income, so spending decreases further.
Structural Unemployment
This occurs when the economy is undergoing structural change, so that different types of labour are required. For example, when countries convert from manufacturing to services, those skilled at manufacturing will be left unemployed. Over time, as fewer people are trained in manufacturing and more people are trained in services, the problem will disappear.
Frictional Unemployment
Frictional unemployment is transitional unemployment due to people moving between jobs: For example, redundant workers or people joining the labour market for the first time such as university graduates may take time searching to find the work they want at wage rates they are prepared to accept.
A lack of information about new job opportunities increases the ‘search time’. However, on the whole, frictional unemployment is unavoidable and is therefore not overly worrying.
Voluntary Unemployment
If the unemployment benefit is not too much lower than the going (equilibrium) wage rate, the opportunity cost of not working is reduced. Therefore some people willingly remain unemployed, pretending to be actively seeking work and still claiming benefits.
Costs of Unemployment
Cost to Individuals and Dependents
Unemployment reduces living standards for people and those who depend on them. This can lead to illness and a poor diet (i.e. people begin to live off cheap foods).
Cost to firms
Firms will find that people spend less, so they have to lower prices, which reduces profits.
Cost to government
The government has to pay more Jobseeker’s Allowance and will receive less in the form of income tax revenue. Also, more social problems will develop (e.g. poverty, ill health), which may require more government investment to fix.
Cost to economy
The economy is in a position within its PPF, so GDP is lower than it can be. The long-‐ termed unemployed may leave the workforce permanently, leading to a fall in resources and an inward shift of the economy’s PPF.
Advantages of Unemployment
- Firms benefit because workers work harder to keep their jobs, and the firm will not have pressure to pay high wages. Also, there is less risk of strike by workers because people fear for their jobs.
- Firms may be forced to reduce prices due to lower spending, which will reduce inflation
What affects the unemployment rate?
The unemployment rate is a level, not a rate. This is because unemployment rate is the % of the population unemployed.
Changes in the rate of employment is affected by the following factors:
- School Leaving Age-‐ a higher school leaving age will reduce employment in the short term, but in the long term it will make school leavers more employable.
- University Fees-‐ since the increase in fees, fewer students are continuing to university. This will increase employment in the short term, but in the long term it will make people less employable.
- Net migration-‐ if immigration exceeds emigration, there is a net influx of people into the economy. This increases the size of the workforce, and both employment and unemployment levels rise.
- Job Availability-‐ the more jobs available, the more employment (generally).
Levels of taxes and benefits-‐ high income tax and high unemployment benefit encourage people not to work.
Employment refers to the state of having a job or being employed, whereas unemployment refers to the state of not having a job but actively seeking employment.
The unemployment rate is the percentage of the labor force that is unemployed but actively seeking employment.
The four main types of unemployment are cyclical, structural, frictional, and seasonal. Cyclical unemployment occurs due to fluctuations in the business cycle, while structural unemployment occurs when workers’ skills do not match the available job opportunities. Frictional unemployment occurs when workers are between jobs, and seasonal unemployment occurs when certain industries have predictable seasonal fluctuations in demand.
The natural rate of unemployment is the rate of unemployment that exists when the labor market is in equilibrium and there is no cyclical unemployment. It is also known as the non-accelerating inflation rate of unemployment (NAIRU).
The labor force participation rate is the percentage of the population that is of working age and either employed or actively seeking employment.
Generally, when there is a high level of unemployment, wages tend to decrease as workers compete for a limited number of job opportunities. Conversely, when unemployment is low, wages tend to increase as employers compete for a limited number of available workers.
The government measures unemployment through the use of the labor force survey, which is conducted by the Office for National Statistics (ONS) in the UK. The survey asks individuals about their employment status, including whether they are employed, unemployed, or not in the labor force.
The government can reduce unemployment through a variety of policies, such as monetary policy, fiscal policy, and supply-side policies. Monetary policy can be used to stimulate economic growth and create jobs through the manipulation of interest rates and the money supply. Fiscal policy involves the government increasing its spending or reducing taxes to stimulate economic activity. Supply-side policies focus on increasing the productivity and efficiency of the economy, which can lead to increased employment.
The gig economy refers to a labor market characterized by short-term contracts or freelance work as opposed to permanent jobs. The advantages of the gig economy include flexibility, autonomy, and the ability to earn income without committing to a full-time job. However, the gig economy also has its disadvantages, such as lack of job security, lack of benefits, and the potential for exploitation by employers.
Technology can both create and destroy jobs. The introduction of new technologies can lead to the creation of new industries and job opportunities, while also rendering certain job roles obsolete. However, overall the impact of technology on employment tends to be positive, as technological advancements can increase productivity and lead to economic growth.
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