Low unemployment Chapter 17

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

Labor force or work force is the economically active population Varies from country to country, however, there is a certain range of age (start to work and retire)

People who are not considered unemployed Students Children Retirees Stay-at-home parents People who choose not to work

Unemployment rate Definition: is the number of people who are unemployed expressed as a percentage of total labour force (not the whole population)

Measuring the unemployment rate Difficult Vary from country to country (different systems); Austria and Switzerland use “record of people who are registered as unemployed”; Britain and Belgium use “the number of people who are claiming unemployment benefits” Gathered from national censuses and surveys as well as administrative record such as unemployment insurance record and social security information

Hidden unemployment People who are unemployed for a long period of time and have given up in the search for work People who have part time work but really want to have full time jobs People who are overqualified to do the job

Distribution of unemployment Typical disparities that exist in different group of people

Distribution of unemployment Geographical disparities: some regions might be higher, inner cities normally higher in unemployment Age disparities: under-25 normally higher in many countries Ethnic differences: ethnic minorities always higher Gender disparities: women occasionally higher

Cost of unemployment To unemployed people themselves To society Less income, leading to lower standard of living More difficult to find a job for long term unemployment stress To society Poverty, homelessness, crime, vandalism, etc To the economy as a whole Actual output will shrink or less than the PPC because the factor of production, labor, is not fully utilized

Main factors affecting the level of unemployment The number of unemployed people refers to as “pool”

Causes of unemployment To understand the causes of unemployment, it is crucial to understand the labor market concepts Aggregate demand for labor curve is dependent on aggregate demand in the economy The labour market is in equilibrium where the aggregate demand for labour is equal to the aggregate supply of labour.

Causes of unemployment The labor market represents the demand and supply for all labor in the economy. Therefore it is called aggregate demand for labor (ADL) If AD increases and more output produced,it is assumed that more labor demanded to produce extra output. AS of labor illustrates the number of workers who are willing and able to work at every given average wage rate.

Causes of unemployment There are 2 category of unemployment – equilibrium unemployment and disequilibrium unemployment

Disequilibrium unemployment Real-wage unemployment or classical unemployment Demand-deficient unemployment or cyclical unemployment

Real-wage unemployment or classical unemployment Some unemployment is caused by trade unions and government minimum wages interfering with labor market Trade unions negotiate wages that are higher than the equilibrium Government sets the minimum wage higher than the equilibrium (can be seen further through the diagram)

Solution to the Real-wage unemployment Government should reduce the power of trade unions to negotiate a higher wage (if this is the cause) The minimum wage should be reduced to clear the labor market (if this is the cause)

Cyclical unemployment Associates with cyclical downturn of the economy When economy slows down after the peak of economic activity Demand for labor decrease due to the decrease in output However, the wage is “sticky downwards”, causing higher unemployment (can be seen further through the diagram, page 210)

Solution to the cyclical (demand deficient) unemployment Due to low level of AD, the solution would be: Government intervention to increase AD through fiscal policies (such as increased government spending, lower direct and indirect taxes to increase consumption) and monetary policies (such as decreasing interest rates or increasing the money supply)

Equilibrium Unemployment (Natural unemployment) Frictional unemployment Seasonal unemployment Structural unemployment

Frictional unemployment Occurs when people are in between jobs Or have left their education and are waiting to take up their first job.

Solutions to frictional unemployment Government should lower 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. Improving the flow of information from the potential employers to people who are looking for jobs.

Seasonal unemployment Cause by seasonal jobs Can be solve by encouraging to take off season jobs Reducing the unemployment benefits Better flow of information

Solutions to seasonal unemployment Reducing unemployment benefits and improving the flow of information in order for the workers to take “off season” jobs

Structural unemployment Jobs lost permanently due to the changing of the structure of the economy - some causes: New technology Lower costs in different countries Changes in consumer taste: some people start to think about negative externalities of consumption and production such as go green and so on.

Solutions to structural unemployment: market-based / free market supply-side policies. Governments should reduced unemployment benefits to unemployed people the incentive to take the jobs that are available Deregulation of labor markets so that the companies have more power to fire and hire employees and as a result companies are more willing to hire employees.

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Crowding out Crowding out is a potential problem when the government run budget deficit and finances the deficit by selling government bonds or treasure bills to financial institutions Financial institutions then sell the bonds to people who want to save money.

Crowding out It basically increasing the demand for saving Financial institutions then sell the bonds to people who want to save money.