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Unemployment types

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  • 1. Types of unemploymentFrictional, structural and disequilibrium
  • 2. Frictional unemployment Temporarily unemployed whilst moving between jobs Often measured by number of vacancies Includes geographical immobility (cost of moving, family ties, lack of information) Includes occupational immobility (discrimination, need for training) Includes seasonal unemployment
  • 3. FRICTIONAL cont...The search theory of unemployment Will a redundant worker take a lower paid job? Will consider living costs (mortgage commitment?), status, working conditions, chance of better paid job becoming available As time passes, a gradual reduction in aspirational wage will take place Either desired job is found (after search), desired job becomes available or accepts lower-paid job This is classed as voluntary unemployment
  • 4. FRICTIONAL cont...Factors affecting search period Redundancy pay Welfare benefits (replacement ratio – ratio between in-work and out-of-work pay) Savings or family support Commitments (e.g. main income earner for household?)
  • 5. Structural Unemployment Structural decline of industries (sunset industries) and growth of others (sunrise) Due to international competition (e.g. cheap-labour economies) Or due to changing consumer wants Or due to improving technology (technological unemployment) Or due to depleting natural resources
  • 6. STRUCTURAL cont... Impact Regional unemployment (e.g. ship building, mining, textiles) Changing jobs available (low to high value-added) Resisted (by unions and media) due to human cost and national pride – our jobs going abroad, destruction of communities Largely beneficial in long run – real incomes rise and UK maintains competitive edge Automation reduces need for labour whilst mechanisation means workers needed with higher skills
  • 7. Disequilibrium Unemployment The natural rate of unemployment is where demand for labour equals supply of labour (equilibrium) This is not the same as zero unemployment Frictional and structural unemployment make up the natural rate Economy in disequilibrium when  AS labour exceeds AD labour  Sticky wages prevent wages falling to clear market
  • 8. DISEQUILIBRIUM version 1Classical or real-wage unemployment Excessive wages cause supply to exceed demand Classical economists believe that if the labour market is competitive then wage level will fall Blame is cast on trade unions and restrictive legislation for firms
  • 9. DISEQUILIBRIUM version 2 Cyclical, Keynesian or demand- deficient unemployment Deficient aggregate demand Based on Says Law (19th century economist Jean-Baptiste Say) “Supply creates its own demand” When an output is produced the factor incomes are sufficient to create demand for additional output Monetarists argue that monies are spent therefore demand-deficiency wont arise Keynesians argue that money may be held therefore causing insufficient demand
  • 10. Link with inflation We came across the Keynesian view that money can be held rather than spent in relation to inflation also Monetarists assertion that people spend the money they receive led to the belief that inflation was directly related to the money supply (MV=PT) This same belief leads to the conclusion that demand will follow supply and demand-deficient unemployment does not exist Keynes believed that people may hold their money therefore the link between M and P may not always hold This same belief leads to the conclusion that Says Law does no necessarily follow and there may be periods of increased supply failing to lead to increased demand

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