1. Low unemployment
Chapter 17

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

3. 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)

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

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

6. 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

7. 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

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

9. 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

10. 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

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

12. 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.

13. 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.

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

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

16. 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)

17. 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)

18. 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)

19. 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)

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

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

22. 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.

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

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

25. 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.

26. 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.

27. l

28. 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.

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