Unemployment By the end of this session, you: Must know definitions for full employment. Should understand the causes of unemployment. Could be able to link the causes of unemployment to the current economic crisis.

Demand Deficient Unemployment

Unemployment What is the Hysteresis effect? Why does high unemployment reduce inflation? Give an example of a demand-side policy to reduce unemployment and explain how it works. Give an example of a supply-side policy to reduce unemployment and explain how it works.

Supply-Side Policies Explain how each of the following will remove labour market imperfections and achieve a lower equilibrium rate if unemployment: Reform the welfare system to reduce the risk of the poverty trap. Reduce trade unions’ collective bargaining power. Reduce income tax. Relax immigration laws.

Flexible Labour Markets Occupational (functional) flexibility Ease and cost of hiring and firing workers Contractual flexibility Wage flexibility Geographical flexibility

Advantages and Disadvantages of Flexible Labour Markets Rapid clearing of markets Improved occupational mobility Stronger employment creation Attractive to inward FDI Higher long-run productivity Improves the inflation-unemployment trade-off The economy copes with external shocks more effectively Lack of training for workers on short-term contracts Job insecurity Increase in relative poverty Increased pensioner poverty Risk of ‘slash and burn’ during an economic downturn Effects on family life

AD-AS and the Output Gap

Short-run Phillips Curve and the trade-off between unemployment and inflation

Expectations-augmented Phillips Curve

Long-Run Phillips Curve

Factors Explaining the Improved Trade-off between Unemployment and Inflation Flexibility of the UK labour market Benefits of immigration Credible inflation targets Low inflation in the global economy Technological change and innovation Increased competition in domestic and international markets