IB Economics: Unemployment Lesson 2

What are the main factors causing UNEMPLOYMENT?  What do you understand by the term POOL of unemployment? POOL of UNEMPLOYMENT Class Task Complete the diagram

Equilibrium unemployment O Average (real) wage rate No. of workers AD L WeWe AS L e QeQe

O Average (real) wage rate No. of workers AS L AD L WeWe W2W2 Disequilibrium unemployment Q2Q2 Q1Q1 BA What may cause real wages to be too high and thus cause U? Do you know a similar diagram from Micro?

AD L 2 O Average (real) wage rate No. of workers AD L 1 W1W1 Q1Q1 Q2Q2 W2W2 AS L Demand-deficient unemployment

Q2Q2 QeQe O Average (real) wage rate No. of workers AS L AD L WeWe N e d Equilibrium unemployment According to the ILO definition of unemployment are the people represented between e and f actually unemployed?

O Wage rate Period of search t lt l Wage rate offered (W o ) Wage rate acceptable to worker (W a ) Average duration of unemployment

O Average (real) wage rate No. of workers AS L AD L WeWe W2W2 ba e N c Equilibrium unemployment Disequilibrium unemployment Equilibrium and disequilibrium unemployment

3 Types of Natural Unemployment  Frictional unemployment  Seasonal unemployment  Structural unemployment  Each of these can be solved through interventionist and non- interventionist measures.  Structural unemployment is regarded as the worst because is long term in nature and costly to society, the causes can be split into;  Changes in technology  Poor international competitiveness  Changes in consumer tastes

How can we solve STRUCTURAL U?  It is key to try and increase the OCCUPATIONAL MOBILITY of labour  Changes to the education system – skills not jobs  Adult retraining programmes  Subsidies to firms to improve training  Subsidies or tax breaks for people or firms that move regions  Support of apprenticeship programmes What are the problems associated with such policies? What type of policies are these?

How can we solve STRUCTURAL U?  It is key to try and increase the OCCUPATIONAL MOBILITY of labour  Reductions in U benefit  Reduction of legislation What are the problems associated with such policies? What type of policies are these?

Are demand side or supply side policies better?  The policy MUST fit the problem if it is to succeed.  Will reductions in tax lead to increased spending?  Education etc is very costly – what about the budget deficit?  Crowing out?  What about natural unemployment?  Do you know what problem you are dealing with? What are the problems associated with such policies? What type of policies are these?

 Physical crowding out  Psychological crowding out Loanable Funds MarketLevel of Investment EVALUATION: What do Keynesian and Classical economists think about this? Will an increases in Govt. spending lead to increases in AD? (HL)