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MACRO ECONOMICS THE PROBLEM OF UNEMPLOYMENT

MACRO ECONOMICS THE PROBLEM OF UNEMPLOYMENT. UNEMPLOYMENT. To understand what an economist means by “unemployment” we must first understand the workings of the labour market. LABOUR MARKET.

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MACRO ECONOMICS THE PROBLEM OF UNEMPLOYMENT

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  1. MACRO ECONOMICS THE PROBLEM OF UNEMPLOYMENT

  2. UNEMPLOYMENT To understand what an economist means by “unemployment” we must first understand the workings of the labour market.

  3. LABOUR MARKET The labour market can be seen as being just like any other market. The good being traded is labour (measured in work hours). It is supplied by (potential) workers, and demanded by firms. The price for one unit of this good, the hourly wage, adjusts so as to balance supply and demand.

  4. LABOUR SUPPLY • The (aggregate) labour supply curve shows the (aggregate) quantity of labour supplied by workers at different real wage rates. • Generally as the real wage falls people withdraw from the labour force

  5. LABOUR MARKET EQUILBRIUM At labour market equilibrium the real wage adjusts so that labour demand equals labour supply.

  6. LABOUR MARKET EQUILBRIUM

  7. INFLOWS (per period of time) UNEMPLOYMENT Flows into and out of unemployment From outside the labour force From jobs • School/college leavers • People returning to the labour force (e.g. after raising children) • People made redundant • People sacked • People temporarily laid off • People resigning

  8. Flows into and out of unemployment From outside the labour force From jobs • School/college leavers • People returning to the labour force (e.g. after raising children) • People made redundant • People sacked • People temporarily laid off • People resigning INFLOWS (per period of time) UNEMPLOYMENT OUTFLOWS (per period of time) To jobs To outside the labour force • People taking new jobs • People returning to old jobs who had been temporarily laid off • People who have become disheartened and give up looking for a job • People who have reached retirement age • People who temporarily withdraw from labour force (e.g. to raise a family) • People who emigrate • People who die

  9. TYPES OF UNEMPLOYMENT We distinguish between: Voluntary unemployment When workers refuse opportunities to work at existing wage rate Involuntary unemployment When there are insufficient jobs in the economy at the existing wage rate

  10. TYPES OF UNEMPLOYMENT Economists identify different types of unemployment: FRICTIONAL UNEMPLOYMENT When workers are unemployed for short lengths of time in between jobs SEARCH UNEMPLOYMENT When workers spend time searching for the best job available.

  11. SEASONAL UNEMPLOYMENT When workers are unemployed at certain times of the year. STRUCTURAL UNEMPLOYMENT When there is a mismatch between the structure of the labour force and the demand for labour. e.g. regional unemployment, sectoral unemployment or technological unemployment.

  12. CYCLICAL, DEMAND-DEFICIENT OR KEYNESIAN UNEMPLOYMENT When there is insufficient demand in the economy for all workers who wish to work at the current wage rate to obtain a job. CLASSICAL OR REAL WAGE UNEMPLOYMENT When real wages are kept at such a high level that the DemandLabour < SupplyLabour

  13. VOLUNTARY or INVOLUNTARY? There is some disagreement about what which qualifies as voluntary unemployment FRICTIONAL Voluntary SEARCH Voluntary SEASONAL Voluntary?? STRUCTURAL Voluntary?? CYCLICAL Involuntary CLASSICAL Involuntary

  14. COSTS OF UNEMPLOYMENT Unemployment imposes a number of costs on society. • Unemployed labour resources are costly to society because output and income are lost.

  15. COSTS OF UNEMPLOYMENT 2) Unemployed people put a strain on the government budget. As unemployment increases: Spending on benefits increases Tax revenue falls Gov Budget deteriorates (=total government spending – tax revenue)

  16. COSTS OF UNEMPLOYMENT 3) Unemployment may increase crime, divorce rates and cause health problems (e.g. depression). Unemployment imposes costs on society and the individual. As a result governments aim to avoid high levels of unemployment.

  17. DYNAMIC LABOUR MARKET The labour market is not static. It reflects continuous flows into and out of the labour force and between unemployment and employment. Demographic changes, institutional reforms and policy measures which affect these flows also affect the rate of unemployment

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