IFY Economics

Topic

Date: February,
2021
LEARNING OBJECTIVES

 Definition of unemployment
 Explain unemployment measurement

 Explain the UK pattern of unemployment since 1980

 State the types of unemployment

 Explain the causes of unemployment

 State the costs/effects of unemployment

 State the meaning of Phillips curve

 Explain the trade-off between unemployment and money

wage rates, NAIRU
 Explain the meaning of natural level of unemployment
KEY WORDS
 Unemployment
 Labour force

 cyclical unemployment

Classical unemployment

 Frictional unemployment

Structural unemployment

 Tradeoff
STARTER ACTIVITY
Why is unemployment a major issue to every
economy?

ANSWER: This because unemployment is a serious

social and economic issue that results in a
tremendous impact on everything.
 MEANING OF UNEMPLOYMENT
 People are unemployed when they are able
and willing to work but cannot find a job.
 The level of unemployment refers to the
total number of people who are unemployed
whereas
 Unemployment is a clear example of
inefficiency. An economy is not achieving
productive efficiency as it is not making full
use of its resources and not producing as
much as possible.
 Unemployment Rate

The rate of unemployment is the number

of unemployed people as a
percentage of the labour force.
 MEASUREMENT OF UNEMPLOYMENT
 There are two measures that can be
used to describe unemployment:
 1. The International Labour
Organisation (ILO) measure of
unemployment from the Labour Force
Survey (LFS), which essentially
captures people who are currently not
working, but are available for work.
 2. The actual number of people
claiming unemployment benefits
(mainly Jobseeker’s Allowance (JSA)),
also known as the ‘claimant count’.
ACTIVITY 1
 Why is there disparity
between claimant
measure of
unemployment and ILO
measure of
unemployment?
 CLAIMANT COUNT METHOD
 Contribution based job seeker
allowance – if you have paid two
years of NI contributions, you can be
paid JSA whatever you income and
savings is. This can be paid for 6
months.
 Income based job seeker allowance
– This is paid to those on low
incomes and with low savings. If you
have not made sufficient
contributions, you will still be eligible
for this as long as your income is not
too high.
PROBLEMS WITH CLAIMANT COUNT
 The government has often changed the criteria
which make it unsuitable for comparison
 It exclude a lot of people some who may be
classified as unemployed
 People over pension age
 People under 18, (with a few exceptions)

 People in full time education, who may still be

classed as unemployed.
 Any one on a government training schemes,

 Some people may not claim JSA even when they are

eligible to.
 Married women looking to return to work

 Those looking for part time work and not full time

work
 Some people may claim benefits whilst still
working in the “black market”
ILO METHOD
 Comprise of people without a job,
want a job, have actively sought
work in the last four weeks, and are
able to start work within the next
two weeks; or
 are out of work, have found a job
and are waiting to start it in the next
two weeks Problems
 It includes some people not eligible

PROBLEMS
for job seeker allowance. It could be subject to sampling errors
and may not be truly representative
 It is good for international Difficult to decide whether somebody is
comparisons. sick or actively seeking work
UK UNEMPLOYMENT SINCE 1980
 Unemployment rose to a post-war peak in
1982 (12%) due to the recession of 1981.
 The unemployment was concentrated in
former industrial areas, which suffered from
falling output during the early 1980s.
 Unemployment did not fall below 3 million
until the mid-1980s, when the economy
started to boom.
 Another recession in 1991, caused another
rise in unemployment to over 3 million
(10%).
 During the long boom of the late 1990s and
2000s, unemployment fell to a low of 5%.
This was near full-employment.
 In 2008, the deep recession caused a sharp
rise in unemployment due to people being
 CAUSES OF UK UNEMPLOYMENT
 Recession – causing cyclical, demand
deficient unemployment.
 Structural factors. There is
structural unemployment due to the fast-
changing nature of the economy. For
example, manufacturing jobs have been
lost due to the economy becoming more
service sector based.
 Geographical unemployment. Immobility
of labour
 Frictional unemployment.
 Youth Unemployment is highest amongst
young workers – often because they lack
skills or the right motivation
 Types of unemployment
 1. Cyclical (Keynesian
Unemployment): cyclical
unemployment is the component of
overall unemployment that results
directly from cycles of economic
upturn and downturn.
 Unemployment typically rises during
recessions and declines during
economic expansions.
 Types of unemployment
 2. Classical
 Types of unemployment
 3. Frictional: Frictional unemployment is the
result of workers searching for new
employment or transitioning from their old
jobs to new ones.
 This includes new people who are entering the
workforce, anyone who moves to find work in
a different city, and people who quit their jobs
to find other work.
Types of unemployment
 Types of unemployment
5. Structural
 It refers to a mismatch
between the jobs available
and the skill levels of
the unemployed
 The negative multiplier effect occurs when an initial withdrawal of spending
from the economy leads to knock-on effects and a bigger final fall in real GDP.
 For example, if the government cut spending by £10bn, this would cause a fall
in aggregate demand of £10bn. However, the effect may be greater than the
£10bn. If nurses lose their jobs, then they will spend less money, causing lower
demand for shopkeepers and cafes. Also, if the government are buying few
capital goods, then factories will see a fall in demand.
Causes of negative multiplier effect
 Fall in consumer spending

 Fall in investment

 Fall in exports

 Fall in government spending

 HOW FALL IN DEMAND CAN CAUSE
UNEMPLOYMENT
 Demand deficient unemployment
occurs when the economy is below full
capacity.
For example, in a recession aggregate
demand (AD) will fall leading to a
decline in output and negative
economic growth.
 With a fall in output, firms will employ
fewer workers because they are
producing fewer goods. Also, some
firms will go out of business leading to
large scale redundancies.
 In recessions, unemployment tends to
GDP
rise rapidly as firms lay off workers.
 COSTS/EFFECTS OF UNEMPLOYMENT
1. COSTS TO THE UNEMPLOYED AND THEIR DEPENDANTS
 COSTS/EFFECTS OF UNEMPLOYMENT
2. COSTS TO THE LOCAL COMMUNITY
 It makes society weak and stops
its productive power
 It leads to child labour

 High crime rate i.e drugs

addiction, robbery and terrorism
 It result to poverty
 COSTS/EFFECTS OF UNEMPLOYMENT
3. COSTS TO GOVERNMENT FINANCE
 Loss of income: Higher
unemployment will cause a fall in
tax revenue
 Increased government borrowing.

 Higher spending on unemployment

and welfare benefits
 COSTS/EFFECTS OF UNEMPLOYMENT
4. COSTS TO THE ECONOMY
 Waste of resources as output will be below its
potential level
 Taxes may have to rise to pay for increase
welfare payment.
CLASS ACTIVITIES 2
TASK 3
 REFLATIONARY FISCAL POLICY TO CURB
UNEMPLOYMENT
 ■ a reduction in indirect or direct
taxation to increase consumer
expenditure
■ a cut in corporate taxes to
stimulate investment
■ an increase in government
spending.
 MONETARY MEASURES TO CUB
UNEMPLOYMENT
 The include:
■ reducing the rate of interest to increase
consumer expenditure and investment
■ increasing the money supply to, again,
increase consumer expenditure and
investment
■ lowering the exchange rate, either
through a formal devaluation or through
intervention in the foreign exchange
market in the case of a managed float, to
increase net exports.
 THE PHILLIPS CURVE
 The Phillips Curve is a relationship between
unemployment and inflation identified by Professor
A.W.Phillips.
 The relationship was based on observations he made
of unemployment and changes in wage levels
between 1861 to 1957.
 Phillips found evidence that was a trade-off between
unemployment and inflation. The effect of this
tradeoff was that efforts by governments to reduce
unemployment were likely to result in increased
inflation.
 NEGATIVE RELATIONSHIP BETWEEN UNEMPLOYMENT AND
MONEY WAGE
 Philips derived the empirical relationship that when rate
of unemployment is high, the rate of increase in money
wage rates is low.
 This is so because workers are reluctant to offer their
services at less than the prevailing rates when the
demand for labour is low & unemployment is high so
that wage rates falls very slowly.
 On the other hand, when unemployment is low, the rate
of increase in money wage rate is high. This is because
when the demand for labour is high & there are very few
unemployed we should expect employers to bid wage
rates up quite rapidly.
TASK 4
THE PHILLIPS CURVE

 A fall in aggregate demand

will reduce price and increase
unemployment
 An increase in aggregate
demand will increase price and
reduce unemployment
THE PHILLIPS CURVE

 A fall in aggregate supply will

increase price and increase
unemployment
 An increase in aggregate
supply will reduce price and
increase unemployment
  In the long-run, there is
stagflation which is consistence
with the level of unemployment.
 Fiscal expansion aimed at
reducing unemployment will
increase inflation
CLASS ACTIVITY 5
 What is the trade-off between inflation and unemployment in the
short-run?
 What is the trade-off between inflation and unemployment in the
long-run?
 NAIRU AND THE NATURAL LEVEL OF UNEMPLOYMENT
 Proposed by Milton Friedman
(Monetarist) • The non-accelerating
inflation rate of unemployment (NAIRU)
– the unemployment rate at which
inflation does not change over time.
 The short-term Phillips Curve looked
like a normal Phillips Curve but shifted
in the long run as expectations changed.
 In the long run, only a single rate of
unemployment (the NAIRU or "natural"
rate) was consistent with a stable
inflation rate. The long-run Phillips
Curve was thus vertical, so there was no
trade-off between inflation and
unemployment.
 NAIRU AND THE NATURAL LEVEL OF UNEMPLOYMENT

 The NAIRU theory says that when

unemployment is at the rate defined by this
line, inflation will be stable.
 However, in the short-run policymakers will
face an inflation-unemployment rate trade-
off marked by the "Initial Short-Run Phillips
Curve" in the graph.
 Unemployment rate can be reduced
temporarily, moving from point A to point B
through expansionary policy.
 This raise inflation expectations, shifting the
short-run curve rightward
 NAIRU AND THE NATURAL LEVEL OF UNEMPLOYMENT

 Since the short-run curve shifts outward due

to the attempt to reduce unemployment, the
expansionary policy ultimately worsens the
exploitable trade-off between unemployment
and inflation.
 That is, it results in more inflation at each
short-run unemployment rate.
 The name "NAIRU" arises because with
actual unemployment below it, inflation
accelerates, while with unemployment above
it, inflation decelerates.
SUMMARY
 People are unemployed when they are able and willing to work but cannot
find a job people are unemployed when they are able and willing to work
but cannot find a job
 Unemployment rate is the rate of unemployment is the number of
unemployed people as a percentage of the labour force
 Method of estimating unemployment include Claimant count method and
ILO method
 Types of unemployment include cyclical, classical, frictional, seasonal and
structural
 SUMMARY CONT....
 A fall in output, firms will employ fewer workers because they are
producing fewer goods.
 Costs/effects of unemployment include costs to the unemployed and
their dependants, costs to the local community, costs to government
finances and costs to the economy
 The Phillips Curve is a relationship between unemployment and
inflation
 Philips derived the empirical relationship that when rate of
unemployment is high, the rate of increase in money wage rates is low
 The name "NAIRU" arises because with actual unemployment below
it, inflation accelerates, while with unemployment above it, inflation
decelerates
EXTENDED LEARNING 1
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