AS Macro - Unemployment and the Labour Market

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Unemployment is one of the major macro-economic
performance indicators. The more unemployed people
in our economy the more we are producing below our
potential, less income is earned (reducing saving,
consumption and tax revenue) and there is a negative
impact on the welfare of society.

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AS Macro - Unemployment and the Labour Market

  1. 1. The Labour Market Unemployment is one of the major macro-economic performance indicators. Keeping unemployment as low as possible is a major policy objective of the government. WHY? Fed – “Dual Mandate” U.K Forward Guidance 1
  2. 2. Economic Costs • Lost output • Inefficiencies Fiscal Costs • Less tax revenue • Higher welfare payments External Costs • Anti-social behaviour • Demands on NHS Why high unemployment matters Inside PPF; Allocatively and productively inefficient Negative output gap Automatic stabilisers – less tax revenue means less leakages Automatic stabilisers – G rises, helping AD Youth unemployment rising, more crime, more stress Effect of unemployment depends on the type e.g. Structural more significant than frictional Hysteresis and permanent effects could cause PPF to shift in Income tax + N.I + VAT : >50% of UK tax revenue Workless households more likely to be in poverty… intergenerational issues…
  3. 3. Don’t confuse unemployment with inactivity Unemployed are looking for a job; whilst Inactive are not in the labour market Retired The inactivity rate in the UK for those aged from 16 to 64 was 22 per cent The unemployment rate is 7.2 per cent of the economically active population Students Prisoners Disabled Stay-at-home parents
  4. 4. As many people unemployed in UK as there are long-term sick
  5. 5. What are the causes of unemployment? Look at the case studies on page 15. You have 2 minutes to work out which type of unemployment applies to the three people You have 2 minutes
  6. 6. What are the causes of unemployment? Hidden FrictionalCyclical
  7. 7. Types of unemployment (1) • Unemployment related to the process of changing jobs, which may involve a period out of work. Frictional • The category of unemployed whose number varies according to the business or economic cycle. Cyclical Improve by: increasing flow of information – job centres NB: Not just in a recession (e.g. in a boom, bankruptcy lawyers have no business!) Demand-deficient / Keynesian
  8. 8. Types of unemployment (2) • When there is a mis-match between the skills of those unemployed and the skills that new jobs require. Structural • Unemployment which is known to exist but is not included in the official government figures Hidden Improve by: supply-side policies such as retraining Especially amongst illegal immigrants – evaluation on official figures
  9. 9. Types of unemployment (3) • This type of unemployment occurs when trade unions bargain for higher wages, which leads to fall in the demand for labour. Classical / real-wage • A type of unemployment that occurs due to the seasonal nature of the job is known as seasonal unemployment. Seasonal The more they push wages up, depending on the elasticity of labour supply and demand, the more unemployment E.g. tourism
  10. 10. Key Facts about unemployment Task : Using the chart, identify two significant points of comparison between UK unemployment and economic growth over the period shown. Demand- deficient (Keynesian) unemployment Unemployment tends to LAG real GDP… Why?
  11. 11. Key Facts about unemployment Remember, if the question asks for a comparison then don’t just describe. What is the same? What is different? Is the level of change different for the two statistics? What’s the overall change over the course of the time period?You have 2 minutes
  12. 12. Key Facts about unemployment Task : Using the chart above, identify two significant points of comparison between UK unemployment and economic growth over the period shown. Comparison 1 Unemployment has grown throughout the period, economic growth has been variable (add figures!) Comparison 2 Largest increase in unemployment occurred during 2008-2009, during the same period economic growth was negative (add figures). ADD UNITS! %, £, levels, et c
  13. 13. What do you think are the current rates and levels (March 2014) for the categories below? Statistic Real statistic Unemployment rate (as a % of the economically active population, Labour Force Survey) Unemployment total (no. of people registered unemployed, Labour Force Survey) Economically inactive (i.e. people without a job who have not actively sought work in the last four weeks) Unfilled Vacancies (where employers are actively seeking additional workers) Employment Total (the number of people over 16 in employment) Youth Unemployment (the number of people aged 16 – 24 who are registered unemployed) 7.2% 2.34 m 8.94 m 144 k 30 m 950k
  14. 14. Key Facts about unemployment In an evaluative question relating to unemployment you need to be able to DISAGGREGATE: demonstrate the importance of youth unemployment, long-term unemployment and the availability of jobs. You will not be asked to state a macro-economic performance statistic. However, the ability to state a current trend may be a useful way of demonstrating knowledge to an examiner.
  15. 15. 25% of ALL Eurozone youth unemployed are in Spain!
  16. 16. Youth unemployment: Fears of a ‘lost generation Around a million young people are now unemployed across the UK. Demographic of unemployment
  17. 17. Hysteresis Permanent effects Atrophy of skills
  18. 18. c.25% of UK’s youth unemployed have been unemployed are LONG TERM unemployment
  19. 19. Unemployment during the Recession Analysis: Suggest three reasons why unemployment has not been as high during the economic downturn since 2008. You have 2 minutes
  20. 20. Unemployment during the Recession Period Peak Unemployment Rate 1979 - 84 12% 1990 - 94 10.8% 2008 - present 8.4% Reason 1 Higher proportion of part-time jobs / Zero hours contracts… Reason 2 Employers less willing to make workers redundant (holding out for improvement in demand); Labour hoarding Reason 3 Less available benefits/more robust benefit claim system
  21. 21. Unemployment during the Recession Period Peak Unemployment Rate 1979 - 84 12% 1990 - 94 10.8% 2008 - present 8.4% Analysis: Suggest two possible consequences of this different pattern of unemployment. Consequence 1 Employers keeping less effective workers Consequence 2 Employers have a higher proportion of part-time workers Productivity impact?
  22. 22. Unemployment during the Recession Keeping less effective workers Point: Faced with falling output, firms are more willing to keep workers employed which suggests that they have been keeping some less productive workers. Evidence for this: Productivity levels in the UK have remained stagnant and have not improved (unlike during other recessions). Explanation of why this is a problem: Lower productivity leads to higher possible costs and potentially higher prices compared to competition (from abroad). It depends upon…… (an evaluative point): Other factors leading to lower productivity such as quality (and age) of machinery leads to a lower levels of output
  23. 23. How much of their shortfall in income is compensated by any potential state benefits Part-time jobs attract a pro-rata level of wages, meaning that people earn less than if they worked full-time. Unemployment during the Recession Having a higher proportion of part-time workers Point: Evidence for this: Explanation of why this is a problem: It depends upon…… (an evaluative point): leads to lower levels of consumption Employers have seen an increase in the proportion of their workers who are part-time. Statistics show an increase in the number of people who work part-time even though they wish to work full-time.
  24. 24. Source: ONS UK labour productivity (2010=100) Source: Labour Force Survey - ONS Part-time employees who could not find full-time work Underemployment…
  25. 25. Exam question: Evaluate the policies that might be most effective in reducing youth unemployment in the UK. Definition: Young people aged between 18 and 24 who are actively seeking work but are unable to find a job.
  26. 26. TWEEP Evaluation
  27. 27. Analysis: Explaining high youth unemployment – 16-24yrs Human Capital Problems Reluctant Employers Reduced retirement rates Weakness of training schemes 17 Both demand-side AND supply-side causes Tax? Supply side issue? RULC? Competition?
  28. 28. Exam question: Evaluate the policies that might be most effective in reducing youth unemployment in the UK. Policy Example Targeted macro stimulus policies to boost growth Expansion of apprenticeship schemes Improving geographical mobility of labour Measures to stimulate business start-ups Active regional development policies Reduce corporation tax To include new skills such as brick- laying Expansion of EU New Employment Allowance to reduce NI contributions for new small businesses Regional employment funds No guarantee of success – quality not quantity of policy matters Time lags Short term vs long term Effects of unemployment depends on government’s response Policy depends on cause of unemployment
  29. 29. Policy Impact Targeted macro stimulus policies to boost growth T Expansion of apprenticeship schemes W Improving geographical mobility of labour E Measures to stimulate business start-ups E Active regional development policies P Using TWEEP Reduce corporation tax To include new skills such as brick-laying Expansion of EU New Employment Allowance Regional employment funds No guarantee of success – quality not quantity of policy matters Time lags Immediate or delayed impact? Productivity impact? Efficiency – new skilled workers Improve female employment Regional unemployment priority
  30. 30. 10/04/2014 Twitter: @tutor2u_econ

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