Low unemployment

Low unemployment

Unemployment: when a person is actively searching for a job, which they are able and willing to do, but cannot find one.

Unemployment ratethe proportion of unemployed in the labour force

=number of unemployed/labour force x 100

Labour forcethe total number of people that are able to work, therefore including both the unemployed and the employed.

Difficulties in measuring unemployment:

Hidden unemployment: the stated unemployment rate may be overstated because some individuals conceal their true employment status as they fear the loss of transfer payments, like benefits, or are employed in illegal industries.

Discouraged workersthese are people that would like to work and have previously been seeking employment, but have since stopped because they could not find a job.

Underemployment: individuals that are employed but they are unsatisfied as the work is inadequate. This may be because the only work they could find was part time, when they wanted full time, or they are highly skilled but have a low paid job.

Average ignoring disparities: the unemployment rate is only an average so does not account for disparities in age, gender, ethnicity and region. For instance, youth unemployement tends to be higher as well as the unemployment rate amoungst ethnic minority groups.

Consequences of unemployment

Economics consequences:

  • Loss of GDPthe distance between actual and potential output grows as fewer goods and services are being producted due to fewer workers.

  • Loss of household incomeinevitably the loss of a job will mean lower income for the individual and therefore a lower standard of living. In order to prevent more job losses, employers may cut the pay of those still employed which again leads to a loss of household income.

  • Loss of tax revenuewith lower real incomes, households will pay the lower rates of direct tax and private spending will decrease, so tax revenue from indirect taxes also decreases.

  • Increased cost of unemployment benefitsgovernmnet spending will increase as more people will be in need of tranfer payments, like benefits, in order to maintain an adequate standard of living.

  • Large income disparities: certain groups of people are more geographically mobile than others and therefore more likely to find work whilst others may remain unemployed for a long time. Also individual industries tend to fair an economic downturn differently. For instance, owners of dicount stores and bankrupcy lawyers may do better than holiday companies and furniture stores during a recession.

Social consequences:

  • Increased crime ratesprolonged unemployment may lead individuals to go to extrem ends, like theft, in order to maintain a sustable standard of living. In addition, frustration with the policies may lead to greater violence and riots. Some people also resort to alcohol and drug abuse due to a loss of self esteem.

  • Increased stress levelseven those that are still employed are likely to suffer from greater stress because they constantly fear lossing their own job. This can reult in a higher instance of mental health issues.

  • Increased indebtednesswith lower household incomes, families are likely to be less able to make their mortgage repayment and therefore their debt will increase.

  • Homelessnessthe government’s policies to redistribute wealth may not be adequate under the pressure of high unemployment, leading those that are unable to support themselves to be left homeless.

  • Family breakdownsthe increase in stress from unemployment tends to cause greater friction within families and therefore more separations.

Types and causes of unemployment

Frictional unemploymentthis occurs when people move between jobs and are in a transitory state on unemployment as they seek a new job. It is regarded as a natural and inevitable form of unemployment as even in a vibrant and growing economy some people will be changing their job.  

Structural unemploymentthis is a more permanent form of unemployment as it is when certian sectors or industries of the economy experience joblosses. It is caused by changes in the demand for particular labour skills, changes in the geographical location of industries, and labour market rigidities. For instance, the miners in 1980s Britain suffered severe job losses in particular.

Seasonal unemploymentthis is when people are unemployed at certain times of the year, often due to weather conditions. For instance, ski instructors are only employed in the winter months, whereas lifeguards may be in more demand in the summer months.

Cyclical unemployment: this is also referred to as demand deficient unemployment as it is a result of a lack of aggragate demand for goods and services. High levels of this tends to occur when economic growth is low. This is a particuarly dangerous form of unemployment as it can result in a perpetual cycle of unemployment. For example, as individuals lose their jobs, their real income decreases and so they usually reduce their consumption. This means that firms recieve lower revenues and profits, so they have to cut jobs and decrease their investment. Therefore, the unemployment rate increases further as aggregate demand moves from AD to AD1.

Government policies to deal with unemployment

Frictional unemployment

  • Improving information for job seekers as imperfect information worsens frictional unemployment because people are unaware of job opportunities.

  • Lowering unemployment benefits can incentivise people so they become more willing to find a job. However, this reduction in benefits can result in people becoming more vulnerable if they cannot find work and social dissatisfaction which may lead to uprisings.

Seasonal unemployment

  • Improving the skills of individuals in order to increase their occupational mobility. For example, a ski instructor may go on a lifeguarding course so that he can more easily change jobs.  This training results in higher costs for firms which they may not be willing to pay for and so firms may reduce the number of workers that they hire.

Structural unemployment

  • A broader range of training programmes and university courses could be introduced to allow individuals to retrain in areas that are experiencing stronge economic growth. However, this has an opportunity cost as it would mean that the government may have to increase taxes or run into a budget deficit.

Cyclical unemployment:

  • Expansionary fiscal and monetary policy is used in order to increase aggregate demand and therefore job opportunities. (see Monetary Policy and Fiscal Policy)

    • Expansionary fiscal policy: the government reduces taxes and/or increases government spending to stimulate growth.

    • Expansionary monetary policy: the central bank reduces the base rate to decrease the banks’ interest rates and/or increase the money supply.

Low and stable rate of inflation

Inflation: an increae in the average price level of goods and services in a nation over time.

Disinflation: a decrease in the rate of inflation

Deflation: decrease in the average price level of goods and services over time.

Consumer price index (CPI): this measures inflation and deflation by calculating the change in the price of a basket of goods and services consumed by the average household. It is therefore a type of weighted price index.