Unemployment

Unemployment

1. Unemployment is a situation in which some people who are willing, able and actively seeking work do not have a job. The country's productive resources are not fully employed.

2. measure of unemployment

   • labour force: all members of a country who are able to work
   • excludes those not actively seeking employment e.g. students, retirees, unable to work (disabled), stay at home parents, disenchanted
   • weaknesses of the measure
     • Minimum hours required to be considered employed is only 1 hour per week
     • Doesn’t take underemployment into account (part time wanting to work full time)

3. participation rate

   • the proportion of the working age population who are either in work, or actively seeking work
     • labour force participation rate
       • labour force (currently in the workforce and actively seeking a job) as a percentage of the population aged 15yrs and over.
   • factors affecting participation rate
     • Changes in economic activity
     • Changes in consumer/business confidence
     • Changes in school retention rates
     • Change in welfare rates, e.g. work for the doll (unemployment benefits)
     • Change in disincentive traps e.g. tax rates, real wages
     • Maternity leave

4. Full employment

   • all who are willing and able to work are employed
   • possible effects of full employment
     • Indication that the economy is operating at/near full capacity
     • Leads to labour bottlenecks
     • It is then likely that prices in those sectors will rise
     • Full employment therefore brings inflationary pressure

5. Types of unemployment

   • Cyclical
     • deficiency in aggregate demand. Cyclical employment can be expected to follow the ups and downs of the business cycle
   • Structural
     • occurs when there is a mismatch of available and required skills in a geographical or occupational sector of the economy.
   • Frictional
     • unemployment which exists due to people being in the process of moving from one job to another
   • Hidden
     • disenchanted, all their efforts to find a job in the past have been frustrated
   • Underemployment
     • people doing part time work who want to be working full time
   • Long term unemployment
     • Unemployed for 12 months or more due to:
       • The have a lack of skills
       • skills are out dated
       • Lack education
       • Don't feel they have the ability to be re-trained/re-educated
       • Don't have any useful skills
   • youth unemployment
     • 15-24 year olds who are actively seeking but unable to find a job Intergenerational unemployment

6. Natural rate of unemployment

   • The natural rate of unemployment is the minimum level of unemployment which can be achieved, given the current characteristics of the labour market. The main reason for non-zero unemployment is persistent structural unemployment.
   • Another reason for the natural rate of unemployment is the rigidities and impediments which prevent the labour market working efficiently. Minimum wage laws, for example tend to create an oversupply of labour. The minimum wage, being above market equilibrium, is good for those who have a job (as their wages are higher) but bad for those without a job.

7. Effects of unemployment

   • allocative
     • Unemployment leads to lower levels of spending by consumers (consumption). This reduction in the level of consumption results in a decrease in production (output) by firms. Firms lay off workers resulting in a higher level of unemployment. Unemployment therefore hinders economic growth.
     • Idle resources (unemployed) means the economy is producing inside the PPF (GDP gap – disparity between an economy’s actual total output and its possible total output). This means production, income and standard of living are below potential
     • Less tax revenue therefore less services or tax rates
     • More government expenditure required on unemployment benefits (welfare payments), job finding/training programmes for those structurally unemployed and stimulus packages to reduce cyclical unemployment. The opportunity cost of this is less funding for other areas such as health and education
     • Long term unemployment (12 months or more) find their skills become outdated; youth unemployment has minimal skills and therefore, future expansion is limited by a shortage of skilled labour
   • distributional
     • Greater income inequalities as income and standard of living for the unemployed are decreased
     • Redistribution of income from employed to the unemployed
   • Social
     • Self‑esteem (confidence) low
     • Physical and mental health problems & suicide rate.
     • Family stability decreases.
     • Crime increases.
     • To deal with the above requires even more government expenditure to be spent on welfare.

8. Relationship between inflation and unemployment

   • Philips curve
     • Illustrates that there is an inverse relationship (trade-off) between inflation and unemployment e.g. low unemployment should be accompanied by higher levels of inflation
     • As unemployment falls, there will be increases in inflation
       • Cost push created by wage increase as costs for businesses increase, resulting in an increase in the price of products
       • Consumer confidence has increased; consumers purchase more luxury goods on credit which creates demand pull inflation. This creates shortages which leads to an increase in price
   • stagflation
     • Simultaneous occurrence of high unemployment and inflation.
     • Inflation due to supply shocks or inflationary expectations.
     • E.g. Increase in the price of oil caused an increase in the cost for businesses, therefore a reduction in output causing an increase in unemployment
   • Noughties
     • Reform policies and RBA Monetary Policy enabled low inflation and low unemployment.

9. current and target rates

   • current rate: 5.7%
   • Target rate: 4-5%

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