1. Money, money, money Conflicting objectives?

2. AS Economics Homework due in…. 2 scenario unemployment Q’s Greg & Youth unemployment Extra HWK owing

3. Policies to reduce unemployment Demand and supply side approaches

4. AS Economics Policies to improve unemployment… Demand side policies –Monetary –Fiscal Supply side policies

5. AS Economics Economic policies Monetary policies Fiscal policies Can be used for either Demand side or Supply side stimulation Interest Rates & Quantitative easing Taxation & Government spending

6. AS Economics Demand side policies – how does each factor affect unemployment? Demand side policies Lower interest rates Lower direct tax rates Increased govt Spending on infrastructure Increase New Deal benefits PM/MP/Royal ‘tour’ to Promote UK businesses

7. AS Economics Worksheet – how does each factor affect unemployment? Demand side policies Lower interest rates Lower direct tax rates Increased govt Spending on infrastructure Increase New Deal benefits PM/MP/Royal ‘tour’ to Promote UK businesses Which policies are Monetary And which are Fiscal ? Monetary Fiscal

8. AS Economics Prince Andrew – trade envoy

9. AS Economics Demand side Policies to Reduce Unemployment These are mainly measures to boost total labour demand (reduce cyclical unemployment) –Lower interest rates –A lower exchange rate –Lower direct taxes –Government spending on major capital projects (e.g. improving the transport infrastructure) –Employment subsidies (including the New Deal programme) – designed to reduce the cost to a business of employing additional workers –Incentives to encourage flows of foreign investment in the UK – particularly in areas of above average unemployment

10. AS Economics Demand side Policies to Reduce Unemployment These are mainly measures to boost total labour demand (reduce cyclical unemployment) –Lower interest rates (monetary policy) –A lower exchange rate (monetary policy) –Lower direct taxes (fiscal policy) –Government spending on major capital projects (fiscal policy) –Employment subsidies (fiscal policy/ supply side) –Incentives to encourage flows of foreign investment in the UK – (supply side policy)

11. AS Economics Supply side policies – how does each factor affect unemployment? Supply side policies Increased spending on education & training Better information On job availability Increased tax free income & working credits Reduce corporation tax & remove business red tape PM/MP/Royal ‘tour’ to encourage inward investment into UK

12. AS Economics Supply side policies – how does each factor affect unemployment? Supply side policies Increased spending on education & training Better information On job availability Increased tax free income & working credits Reduce corporation tax & remove business red tape PM/MP/Royal ‘tour’ to encourage inward investment into UK Which policies are Monetary And which are Fiscal ? Possible monetary incentives… Fiscal

13. AS Economics Supply-side policies to reduce Unemployment These are measures to improve labour supply (reduce frictional and structural unemployment) –Increased spending on education & training including an emphasis on “lifetime-learning”) –Improved flows of information on job vacancies –Changes to tax and benefits to improve incentives –Measures designed to make the labour market more flexible so that workers have the skills and education that gives them improved employment options –Incentives to encourage flows of foreign investment in the UK – (supply side policy)

14. Phillips curve Key theory for Analysis & evaluation…

15. AS Economics Aims To understand the consequences of unemployment and inflation To be aware of the concept of the Phillips Curve.

16. AS Economics What’s the relationship here?

17. What are the consequences of falling unemployment?

18. AS Economics Consequence of falling unemployment on…  ….the circular flow of income?  1 st draw me a circular flow diagram!  What are the 2 main sectors?  Who’s at the top?  Who’s at the bottom?  What are the initial flow of incomes?  What else happens?

19. AS Economics So what would happen if there was a fall in unemployment? What would be the positive consequences? What would be the negative consequences?

20. AS Economics What are the consequences of falling unemployment?  Did we cover these groups and issues?  On circular flow of income?  On balance of payments?  On govt finances?  On inflation?

21. AS Economics Consequences of falling unemployment  The circular flow and the multiplier: –Incomes flowing into households will grow –Falling unemployment adds to demand and creates a positive multiplier effect on incomes, demand and output.  The balance of payments: –When incomes and spending are growing, there is an increase in the demand for imports. Unless this is matched by a rise in export sales, the trade balance in goods and services will worsen

22. AS Economics Consequences of falling unemployment  Government finances: –With more people in work paying income tax, national insurance and value added tax, the government can expect a large rise in tax revenues and a reduction in social security benefits  Inflationary effects –Falling unemployment can also create a rise in inflationary pressure – particularly when the economy moves close to operating at full capacity –However this is not really a risk when the economy is coming out of recession, since aggregate supply is likely to be highly elastic because of a high level of spare capacity

23. Is there a trade off between…. Unemployment & Inflation…?

24. Give me ONE policy that Govt could use to reduce unemployment? Lower interest rates Lower direct tax rates Increased govt spending on infrastructure Increase New Deal benefits PM/MP/Royal ‘tour’ to Promote UK businesses Increased spending on education & training Better information On job availability Increased tax free income & working credits Reduce corporation tax & remove business red tape PM/MP/Royal ‘tour’ to encourage inward investment into UK How does each of these affect inflation?

25. AS Economics Policies that Govt could use to reduce unemployment…  Stimulate an improvement in the human capital of the workforce –training, education, skills  Improve incentives for people to search and then accept paid work – this may require reforms of the tax and benefits system for example a reduction in the starting rate of income tax (an incentive for people in lower paid jobs).  Employment subsidies: Government subsidies for those firms that take on the long-term unemployed will create an incentive for businesses to increase the size of their workforce.  Achieve a sustained period of economic growth – this requires that aggregate demand is sufficiently high for businesses to be looking to expand their workforce.

26. AS Economics Give me a policy that Govt could use to reduce unemployment?  Stimulate an improvement in the human capital of the workforce –training, education, skills  Improve incentives for people to search and then accept paid work – this may require reforms of the tax and benefits system for example a reduction in the starting rate of income tax (an incentive for people in lower paid jobs).  Employment subsidies: Government subsidies for those firms that take on the long-term unemployed will create an incentive for businesses to increase the size of their workforce.  Achieve a sustained period of economic growth – this requires that aggregate demand is sufficiently high for businesses to be looking to expand their workforce.

27. Demand Pull Inflation

28. AS Economics Demand Pull Inflation Price Level Real National Output Y1 LRAS Y2 AD1 0 ADAD SRAS In the LR, workers are not willing to sacrifice Leisure time for more overtime…. But still have high wage expectations…. demand pull inflation SRAS2 Known as DEMAND PULL INFLATION

29. Cost push inflation

30. AS Economics Draw an Classical AD/AS diagram Price Level Real National Output Y1 LRAS 0 ADAD SRAS1 SRAS2 Y2

31. The Phillips Curve. Old theory!!!

32. AS Economics The Phillips Curve You need to use this diagram in an exam Q on inflation & unemployment

33. AS Economics Old data…

34. AS Economics Phillips Curve  In 1958 AW Phillips plotted 95 years of data of UK wage inflation against unemployment. It seemed to suggest a short-run trade-off between unemployment and inflation. The theory behind this was fairly straightforward. Falling unemployment might cause rising inflation and a fall in inflation might only be possible by allowing unemployment to rise.  HOW CAN GOVT INCREASE AD? (AD= C + I + G + (X-M))  If the Government wanted to reduce the unemployment rate, it could increase aggregate demand but, although this might temporarily increase employment, it could also have inflationary implications in both the labour and the product markets.

35. AS Economics Phillips Curve – Macro Trade off  The opposite is true when unemployment is high- a large pool of surplus labour will mean that workers are willing to work for lower wages to guarantee themselves a job, and so firms, facing lower wage costs, can reduce price increases in their goods/services.  The explanation offered by Phillips was that when unemployment levels are low in an economy there will be a shortage of labour available for firms to employ. This will bid up wage prices, and firms will be forced to pass on these higher costs to consumers to maintain profit margins. Thus, price levels increase, and inflation rates rise.

36. In the long run… if it’s a supply side policy to reduce unemployment?

37. AS Economics Non-inflationary growth Price Level LRASLRAS2 Yfc1Yfc2

38. AS Economics Non-inflationary growth Price Level LRASLRAS2 AD1 AD2 Vital diagram What govt wants to achieve!

39. AS Economics The inverse relationship has now gone! (A2 Ec theory!)

40. AS Economics Homework…  Textbook p199 – 200  “Unemployment in Wolverhampton”  Do Q 2  “Discuss the economic costs that might be created by the redundancies to: 1.Individuals & families 2.Local community 3.Taxpayers 4.UK economy 4 marks per ‘stakeholder’