Unemployment Guide
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Structural Unemployment
Definition:
Examples:
When there is a permanent fall in demand for a particular type of labor.
coal mining, software engineering, human bank telling, furniture making
• support apprenticeship programs • provide subsides or tax breaks to encourage people to move to those areas where new jobs are created, enhancing geographic mobility
Cause: In a growing economy, new types of jobs are always created and some types of jobs disappear. When this occurs, people who lack occupational or geographic mobility will lose their job.
Market based policies
Reduction Measures: Interventionist policies • education system that trains people to be more occupationally flexible • spending on adult retraining programs
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• give subsidies to firms that provide training for workers
• reduce frictional unemployment - reduce unemployment benefits so that unemployed people take the jobs that are available • reduce or remove the legislation that businesses must follow in their hiring, firing, and unemployment practices
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Classical Unemployment: What is it and what causes it?
gap, Q1-Q3, is the classical unemployment
Solutions to the
This type of unemployment is problem caused by unnecessarily high wages demanded by trade • If trade unions are propping unions and by minimum up the wage rate that is paid wage. Unemployment out, then the government happens because wage rates could reduce the power the are above equilibrium which unions specifically in the area causes an oversupply in labor. of increasing wage rates. This As the diagram shows the would prevent the unions wage floor occurs above the from taking advantage of equilibrium point, and there is their power to force higher amount of labor supply corporations into paying than demand for labor. This absurdly high wage rates for relatively unskilled labor
• If minimum wage rates is causing classical unemployment, then the government can either lower the minimum wage rate or abolish it completely.
Drawbacks to these solutions These solutions usually only hurt the low income group of people because the policies only affect how much lowincome groups earn. As a result of this, income distribution gaps may increase
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Definition of Frictional Unemployment
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Causes of Frictional Unemployment
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Solution to Frictional Unemployment Market policies:
Unemployment that is always present in the economy, resulting from temporary transitions made by workers and employers or from workers and employers having inconsistent or incomplete information.
It is caused by the transition from • The government has the power one job to another or the process to decrease unemployment of finding the very first job after benefits in order to discourage high school or university. people from remaining unemployed for long periods of time.
Interventionist policies: • Sometimes it can happen that people can’t find a job because they are not aware of the existence of it, firms can avoid this from happening by improving job advertisement. • Firms can also reduce the number of people that looses jobs due to lack of qualification by offering courses to improve worker skills.
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Seasonal unemployment It occurs when people are unemployed at certain times of the year, because they work in industries where they are not needed all year round. Seasonal unemployment, also known as periodic employment, exist in any industry that dependent upon the weather. For example, building construction usually take place in the summer as workers are unable to work until the weather gets warmer. After being laid off, the workers have another job they do during the months. Some other workers collect unemployment benefits during the off-season.
they become unemployed through no fault of their own.
Agriculture is a common job in LEDC. It has peak planting and harvest seasons. The employment rate will be lower after the harvest season. Tourism can be another example of seasonal unemployment. Different countries have their own tourist peak season. For example, an increase in demand in transportation, hospital entertainment industries during summer in Thailand.
Solutions to seasonal unemployment:
Also, sometimes people are unaware of the vacancies that exist. In this It can be reduced by case, greater flow of encouraging people to take information can reduce different jobs in their “off seasonal unemployment. season”. Stimulate the workers by reducing unemployment benefits so that they will have another job during their “off season”.
• Unemployment benefits are monetary benefits that some people can collect in the event
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Introduction to Hidden Unemployment:
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Causes of the ‘Shadow Economy’
The first possibility of this form of hidden When we walk down a more impoverish street (e.g. unemployment is the government not placing enough effort to create jobs or investing in them. As Phnom Penh) you may encounter street vendors a result, people will have no opportunity to work selling items from small model nagas, daggers to even fake iTouches. These businesses at first glance since jobs will be under provided, leading to many may look like well connected firms but instead are employing themselves in illegal sectors (like drug trading or poaching). illegal (i.e. not paying their taxes nor having the registrations). In addition, these businesses often go A second possibility could arise from simply the unrecorded within a given economy (a customer black market happening to be more profitable than may or not be given a proper receipt). Thus the the available formal businesses. In addition to the workers of these businesses are often classified as taxes enforced by the government, the black market the people of the ‘hidden/shadow economy’. does not need to pay (so long they stay hidden). A last but simpler cause would be the ‘addiction’ towards the industry. For instance, drugs are addictive and will drive some to continue buying, selling and trading these commodities. This is what keeps Mexico a vibrant place unfortunately.
Hidden Unemployment is the classification of people who are employed in the informal markets (black markets). They are excluded from the world of economic statistical gathering because these forms have no affiliations with the government and are not properly, if not at all, registered and have no Current Situations legal documents to prove of their existence. Thus, any purchases made by its customers are no Though the informal market/black market is recorded or ‘contributed’ to the country’s official mainly a developing country/failed state GDP. This is the hidden economy. phenomenon, this is actually more widespread even in the most developed of countries. With the debt crisis and the weakening economy of Greece, Greece’s hidden economy is worth nearly 30% of its GDP. Italy is not far behind at 29%, China at 13%, United Arab Emirates at 0%. It turns out that most of the economies within Europe (excluding Switzerland and Germany) have informal economies making millions and even billions of euros and still being untracked by the government.
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Solving the Problem(s) The easiest and fastest way to solve this problem is by halting its operations with military/police force. In Colombia, the government resorts to its army and river divisions to attack any drug headquarters within the Amazon Rainforest. Though this takes time and is dangerous. The Government should be creating more jobs in favour for these current black market workers (make formal businesses more desirable for current Black Market workers). The government could also enforce more educational programmes to educate people not become involved in these place market operations. Within black markets, the good and services provided will not be 100% guaranteed by the sellers. Technically, making the people wiser should boost the morality of them not to actually become involved.
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Classical Unemployment also known as “Real-wage unemployment� occurs when the real wages for a job are set above the market-equilibrium level, causing the surplus of aggregate labor supply. Second method is to reduce or abolish minimum wages, It’s caused by trade this needs to be modified unions and government by government, as the set minimum wages of minimum wage is done interfering with the by the government, if they equilibrium wage. intervene and abolish the When trade unions minimum wages, aggregate negotiate with firms to examples of classical unemployment workers - who received minimum wages demand for labors will set a minimum wage increase due to the fact that higher than equilibrium the costs of factors of wage, aggregate supply production is lower than higher than aggregate exceeds aggregate demand, How do we reduce? before, so there will be higher demand , causing a difference causing unemployment. profits for suppliers, this If we want to reduce the between the two curves S1 classical unemployment, there drives the new equilibrium of and D1 from L2 to L3, this is aggregate supply and are two ways to enforce it. the unemployment rate demand, and eliminate One is to reduce the union occurred under minimum power, which if we reduce the unemployment. wage situation. There is no power of them negotiating for However, this may also create longer equilibrium at L1 and higher benefits of labors, firms more inequality between the W1 are more willingly to hire distribution of incomes, as people as now they do not workers are now not need to worry about the cost protected by minimum of factors of productions. when the minimum wage is wages. set at W2, aggregate supply is
why does it occur?
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The natural rate of unemployment Definition: It is the sum of frictional, seasonal, and structural unemployment. The lowest rate of unemployment that an economy can sustain over the long run. The Natural Rate of Unemployment is the rate of unemployment when the labour market is in equilibrium.
Causes The natural rate of unemployment is unemployment caused by supply side factors rather than demand side factors.Thus even when the macro economy is at full output or a “full employment” there can still be unemployment, this unemployment is the natural rate.
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frictional unemployment
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structural unemployment
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E.g. a worker who is not able to get a job because he doesn’t have the right skillsCauses
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Availability of job information. A factor in determining frictional unemployment
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Skills and Education. The quality of education and retraining schemes will influence the level of occupational mobilities.
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Degree of labour mobility
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Flexibility of the labour market E.g. powerful trades unions may be able to restrict the supply of labour to certain labour markets
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Monetarists argue that the Natural Rate of Unemployment occurs when the Long Run Phillips Curve crosses the x axis. The Natural Rate of Unemployment will therefore include:
What Determines the Natural Rate of Unemployment?
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The Natural Rate of Unemployment is sometimes known as the Non accelerating inflation rate of Unemployment NAIRU This is because when unemployment is 4% there is no tendency for inflation to increase In this example the Natural rate of unemployment is 4%. If the government increased AD there may be a temporary fall in unemployment but in the Long Run it would return to the natural rate of 4%
Reduction Measures There are different reduc.on measures for each type of unemployment.
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Structural Unemployment Structural unemployment, the worst type of unemployment, occurs when there is a change in the structure of an economy; there is a permanent fall in demand for a particular type of labour. Structural Unemployment
Causes
Interventionist Policies
Market based Policies
It occurs naturally in growing economies where jobs are constantly being replaced. E.g. when economies shift from mainly jobs in the primary sector to jobs mainly in the secondary and tertiary sectors.
Technological unemployment (new technologies): some types of labour become unnecessary. E.g. ATMSs rendering human bank tellers redundant.
Education system to train people to be more occupationally flexible.
Governments reduce unemployment benefits to give more incentives to take the available jobs.
Structural unemployment results in long-term unemployment as people often lack occupational mobility (skills transferable across jobs) to change jobs. Hence, this type of unemployment is difficult to correct.
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Low-cost foreign labour: e.g. less demand for Italian furniture makers in Italy, as the Chinese furniture makers have lower costs and therefore lower selling prices. Change in consumer taste: e.g. concerns about the negative externalities of consumption and production of coal to finding alternatives, and a fall in the demand for coal-related labour.
Government spending on adult retraining programmes to increase occupational mobility. Government subsidies to firms to provide training Government subsidies or tax breaks to encourage people to move to areas/regions where there are more job opportunities, so as to reduce geographical structural unemployment. Government support for apprenticeship programmes.
Deregulation of labour markets: reducing/removing the legislation that businesses must follow in their hiring, firing and employing, to make it easier to employ new people.
Diagram
Frictional Unemployment Definition: Frictional unemployment is the short-term unemployment that occurs when people are in between jobs, or they have left education and are waiting to take up their first job.
beneficial to the economy as it offers a better allocation of resources.
Reduction measures: A typical market-based measure would be for the
Causes: Frictional unemployment is caused by a mismatch between jobs as people leave old jobs in search of better, more fitting jobs, or when new entrants (university graduates) or re-entrants are searching for the best possible first job. Frictional unemployment is a form of natural unemployment and is always present in the economy . It is
However, if the search takes too long and mismatches too frequent, the economy will suffer as some work will not get done. Therefore, the government still will take some reduction measures.
government to lower unemployment benefits to encourage unemployed workers to take the jobs that are available rather than to allow them to sit and wait for the right job.
the flow of information from potential employers to people looking for jobs, so that people are well-informed of suitable job opportunities. Such mediums can include job sites, newspapers and job centers. Other solutions may include setting up schooling and training facilities to better prepare workers for their ideal job, or promoting the establishment of facilities to increase availability and flexibility (e.g. daycare centers). Relocation of industries and services can also make it more convenient for workers to find the best possible job.
A more interventionist approach can be improving 11
Real-wage unemployment (Classical unemployment) Description
Definition
• Real-‐ wage unemployment is a form of dis-
• Classical unemployment occurs when real wages are kept above the market clearing wage rate, leading to a surplus of labour supplied.
• Unemployment is caused by trade unions and government minimum wages interfering with the labor market.
• Classical unemployment is some.mes known as real wage unemployment because it refers to real wages being too high.
equilibrium unemployment that occurs when real wages for jobs are forced above the market clearing level.
• Trade union negotiates wages higher than equilibrium. • Minimum wage is set above the equilibrium. • This increases the equilibrium.
Solutions • Reduce the ability of union to negotiate higher wages • Reduction in the minimum wage- However, this might create problems for unemployed people since high- income workers are not the ones who receive minimum wages. A reduction in the minimum wage will reduce the income and living standards of those workers who are already earning low wages. 12