A2 Economics (Macro)

Chapter 6: Unemployment

Unemployed: People who are willing and able to work but have no jobs.

𝑇𝑜𝑡𝑎𝑙 𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 100

𝑅𝑎𝑡𝑒𝑜𝑓𝑢𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 = ✗
𝐿𝑎𝑏𝑜𝑟 𝐹𝑜𝑟𝑐𝑒
where Labor Force = Employed + Unemployed

Note: Level of unemployment is total number of unemployed while rate of unemployment is the
percentage of labor force that are unemployed. Labor force does not include housewives, children,
students, retired, disabled etc.

Causes of Unemployment: ( Recap of AS Ch 5)

1. Frictional Unemployment: SI
It is the unemployment that arises when workers are between jobs. It is short run or temporary.
a) Search Unemployment: When people are searching for better jobs and remain
unemployed during that time.

b) Casual Unemployment: When workers are out of jobs between periods of employment,
eg actors between movies.

c) Seasonal Unemployment: When demand for good fluctuates according to time of the
year, eg guides during extreme winter season.

2. Structural Unemployment:
This happens due to the change in the structure of the economy. Over time some industries will
expand, some will contract. If workers cannot move from one industry to another due to
geographical or occupational immobility, they may become structurally unemployed. It takes place
due to:

a) Change in the pattern of demand: eg when some industries like coal and type writers
industry, experience a fall in demand due to change in consumer preferences, workers'
skills become redundant.

b) Technological Unemployment: Workers are replaced by machinery.

c) Regional Unemployment.

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 3. Classical Unemployment:
This happens when real wage is above equilibrium wage due to imperfections in the market eg
trade unions and minimum wage laws, as shown in the diagram. It is also known as Real Wage
Unemployment.
£
As shown, real wage is above the
WMIN
¥5
equilibrium wage.
Unemployment = Qs - Qd We

D.

↳ Ls

4. High Unemployment Benefits:

High unemployment benefits causes a decrease in the motivation to work as it decreases the
incentive to work leading to an increase in unemployment.

5. Demand Deficit / Cyclical Unemployment:

This happens due to a decrease in Aggregate Demand during recession or a fall in unemployment.
It is a long run unemployment and is the worst type of unemployment.

D¥

ADF.ASdogiauj.fi
.

When Aggregate Demand

(AD) falls, recession occurs
which decease incomes
Wi
and people's purchasing

|
power leading to a W2
Pz

/
decrease in profits. This
causes the output to fall AD , I
which decreases job
ADA Di
availability increasing ←Y , L z Ll
unemployment.

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Voluntary VS Involuntary Unemployment:

Voluntary unemployment occurs when all those willing and able to work at a given wage rate are
working . This occurs when workers refuse to work at existing wage rates or conditions. Frictional,
Classical, Unemployment benefits and Structural Unemployment come under voluntary
unemployment.

However, involuntary unemployment occurs when people are willing and able to work at the give
wage rate but no jobs are available. Only cyclical unemployment is involuntary unemployment.

Full Employment / Natural Rate of Unemployment (NRU):

Employment is said to be at NRU when when there is no involuntary unemployment in the
economy. Naturally, 100% of employment is impossible as voluntary unemployment always exists.
Normally, full employment is considered when there is around 2-3% level of voluntary
unemployment.

𝑁𝑜. 𝑜ƒ 𝑉𝑜𝑙𝑢𝑛𝑡𝑎𝑟𝑦 𝑈𝑛𝑒𝑚𝑝𝑙𝑜𝑦𝑚𝑒𝑛𝑡 ✗ 100

𝑁𝑅𝑈 =
𝐿𝑎𝑏𝑜𝑢𝑟 𝐹𝑜𝑟𝑐𝑒

NRU is the unemployment needed for full employment and it may increase or decrease depending
on the changes in current levels of voluntary unemployment. E.g if current unemployment is less
than NRU, this means that people who were initially searching for jobs or who were structurally
unemployed are now working decreasing NRU.

Consequences of Unemployment:
(1) Decrease in incomes causing a fall in the standards of living
and increasing poverty.

(2) Fall in Real GDP (RGDP)

(3) Decrease in firms' profits

(4) Deskilling i.e longer periods od unemployment lead to a decrease in skilld as workers are
inept at working with new technology

(5) Decrease in tax revenue

(6) More burden on government due to an increase in unemployment benefits leading to an

increase in the budget deficit

(7) The economy will experience opportunity cost as;

• the ouput will be below its potential level, if the unemployed had been working, more
goods and services would have been produced and living standards would have been
higher.

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 Equilibrium vs disequilibrium unemployment

Disequilibrium unemployment is when AD of labor is not equal to AS of labor. This is

usually when wage is above the equilibrium level. Examples of this is classical
unemployment and cyclical unemployment.

Equilibrium unemployment is the difference between those who would like employment
at the current wage rate and those who are willing and able to work (which means
basically total labor supply. The example of this is frictional unemployment and
structural unemployment.

S,
S N
surplus/ unemp
Wi -

f
¥
--→ Equilibrium
Wo Wo

unemp
.

D
D ,

Disequilibrium unemployment Equilibrium unemployment

At W0, D = S of labor, however at W1, At W0, D = S of labor. However, S shows the no of
there is surplus of labor, causing workers willing to work at each wage, while an curve
disequilibrium unemployment shows total no in the labor force. The gap between
the two at W0 is the equilibrium unemployment where
some workers are just not ok with the market wage.

Determinants of natural rate of unemployment

• Availability of job information. A factor in determining frictional unemployment and how quickly the
unemployed find a job.
• The level of benefits. Generous benefits may discourage workers from taking jobs at the existing
wage rate.
• Skills and education. The quality of education and retraining schemes will influence the level of
occupational mobilities.
• The degree of labour mobility.
• Flexibility of the labour market E.g. powerful trades unions may be able to restrict the supply of
labour to certain labour markets
• Hysteresis. A rise in unemployment caused by a recession may cause the natural rate of
unemployment to increase. This is because when workers are unemployed for a time period they
become deskilled and demotivated and are less able to get new jobs.
Policies to correct unemployment:

Unemployment Policies
Classical Unemployment / ➔ By Trade Union reforms
Real Wage Unemployment ➔ By abolishing minimum wage laws
➔ Subsidizing declining industries -

=
Structural Unemployment ➔ Retraining (increasing occupational mobility)
➔ Increasing geographical mobility through better
transport, cheaper housing and infrastructure
➔ Tax cuts
➔ Increase job-information by advertising of vacancies
in national media e.g newspaper
=
Frictional Unemployment
➔ Increase in mobility of geographical and occupational
of labor (e.g by education and training)
1. Expansionary Fiscal Policy
➔ a reduction in indirect or direct taxation to increase
consumer expenditure
➔ a cut in corporate taxes to stimulate investment
➔ an increase in government spending
Cyclical or Demand Deficit
Unemployment 2. Expansionary Monetary Policy
➔ reducing the rate of interest to increae consumer
expenditure and investment
➔ increasing the money supply to, again, increase
consumer expenditure and investment

3. Protectionism
➔ tariff, quota, embargo etc to discourage imports and
encourage local industries

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The pattern and trends in (un)employment

Overtime, the pattern of employment and unemployment tends to change

When:
• an economy develops: tertiary sector employment increases as people’s skills increase
• comparative advantage changes
• gender structure of population changes

• age structure of population changes

• proportion of primary, secondary and tertiary industries change
• changes in demand patterns in an economy

Difference between Occupational and Geographic Mobility

Occupational mobility is the ease with which a worker can move from one job to another job.
Skilled workers are occupationally immobile. ( specialization )
Geographic mobility is the ease with which a worker can move from one place to another.
Normally, older workers are geographically immobile. ( family commitments )
Note: Supply side policies can be used to improve both mobilities as such immobilities can
cause frictional (especially geographic immobility as people do not know of job vacancies in
different parts of the city or another part of the country causing them to remain unemployed,
while supply side policies can be used to provide workers with job vacancy centres, as well as
+ better & cheaper Leones
infrastructure to ease their movement from one place to another to find work) and structural
(especially occupational immobility as workers who become redundant are not able to acquire
new skills which increases their unemployment tenure, which can be corrected by supply side
policies through re-training and educational schemes) unemployment.

Labor Force
The labor force in an economy is defined as the total number of workers who are available for
work. It therefore refers to all women and men who can contribute to the production of goods and
services.
𝐿𝑎𝑏𝑜𝑟𝐹𝑜𝑟𝑐𝑒
𝐿𝑎𝑏𝑜𝑟𝐹𝑜𝑟𝑐𝑒𝑃𝑎𝑟𝑡𝑖𝑐𝑖𝑝𝑎𝑡𝑖𝑜𝑛𝑅𝑎𝑡𝑒 = 𝑥100
𝖶𝑜𝑟𝑘i𝑛g 𝑎g𝑒 𝑝𝑜𝑝𝑢𝑙𝑎𝑡i𝑜𝑛

Birth rate is the number of children born per thousand people in an economy.
Death rate is the number of people dying per thousand people in an economy.

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 Productivity
It measures the amount of output that can be produced from a given amount of input.
𝑻𝒐𝒕𝒂𝒍 𝑶𝒖𝒕𝒑𝒖𝒕 = APL
It is measured by the formula:
𝒏𝒐 𝒐𝒇 𝒘𝒐𝒓𝒌𝒆𝒓𝒔 𝒆𝒎𝒑𝒍𝒐𝒚𝒆𝒅
MPL =
AI
Methods to improve productivity (of labor) AL
1. Division of labor: workers specialize in the jobs they’re best at/most skilled at.
2. Training workers to improve their existing skills
3. Rewarding increases in productivity with performance-based pays/bonuses
4. Increasing job satisfaction
5. Replacing old machinery with new, better ones

Benefits of better labor productivity

win
Improved productivity can lead to fall in unemployment as MRP rises (Rt)
→
•

• it also improves firms profits and the economy’s output

• increase in GDP

• economies of scale as firms’ average costs fall.

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