Causes and Impacts of Unemployment content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class. Subtopics Causes of Unemployment Costs of Unemployment

1. Unemployment -
Causes &
Impacts
Lower 6th Macro
Macroeconomic Objectives

2. Causes of
Unemployment
Unemployment - Causes and Impacts
Mr O’Grady

3. Causes of Unemployment
Unemployment (recap): people who are jobless, actively seeking work, and
available to take a job.
Unemployment rate: number of unemployed as a percentage of the labour force (the sum of
the employed and unemployed)
Gov target: full employment - the labour market is at state of equilibrium
Those who are willing and able to work at going wage rates are able to find work
This is not the same as zero unemployment – we need a bit of flex in our economy
Causes of Unemployment:
Cyclical (AKA Demand deficient): where there
is insufficient AD for all workers to get a job,
output is below YFE
As labour is derived demand U/E is inevitable
Diagram: AD-AS equilibrium output is below YFE
Not all resources are being used at their maximum
efficiency, including labour!
LRAS
RNO
Price
Level
YFE
YL
-ve
Output Gap
AD L
A negative
output gap
corresponds to
cyclical U/E

4. Structural Unemployment: long-term unemployment caused by the changing
structure of the UK economy and occupational and geographical immobility
Occupational immobility: barriers faced by workers in moving between different sectors of
the economy
Causes: Declining secondary industries & growing tertiary leads to a mismatch of skills
E.g. Rural wales faced very high U/E after mine closures in the 1980s, workers couldn’t retrain easily
Geographical immobility: barriers faced by workers in moving from one area to another to
find jobs
Causes: family and social ties as well as the financial cost of moving
E.g. Northern England tends to have higher U/E than Southern England as moving to areas with much
higher costs of living is not an attractive prospect
Technological unemployment: unemployment caused by the substitution of
labour for capital
Cause 1: More and better capital raises labour productivity so less is needed
E.g. Farming
Cause 2: Labour is completely replaced, especially in routine tasks where no human
judgement is needed
E.g. Manufacturing

5. Real-wage: Unemployment caused when wages are
held above the market rate, causing an excess supply of
labour
Causes: powerful TUs, NMW being set too high, wages being
sticky downwards after a period of higher wages
Diagram: at the wage rate W1, the quantity supplied of
labour (L1) outweighs the quantity of labour demanded (L2)
There are workers willing to work at W1, but there aren’t
enough jobs!
Wage
Quantity of
Labour
DL
W
L
SL
W1
L1
L2
Involuntary U/E
Seasonal: Unemployment due to changes in demand for particular products,
across different seasons of the year
E.g. Tourism workers in the off-season
Frictional: Unemployment associated with people changing jobs. Usually
temporary, thus not seen as problematic by gov.
E.g. A young person waiting to start on a graduate scheme in September having finished at
university in July
Voluntary: Workers refuse to accept jobs at the existing wage rates

6. Costs of
Unemployment
Unemployment - Causes and Impacts
Mr O’Grady

7. Costs of Unemployment
Lower standard of living: Consumers will have lower average earning when
unemployment is high, meaning the average consumer can buy fewer G&S
Falling sales, revenues and profits for firms: As unemployed consumers have
lower incomes, they will not be as willing to buy G&S from firms
Lower tax revenues: fewer individuals earning taxable incomes
Government’s problem is exacerbated as there is also higher expenditure on benefits as
there are more unemployed to support
Opportunity cost: time and energy spent out of work could have been spent
producing goods and services.
Hysteresis: if U/E persists into the long run, workers will de-skill/exit labour force
Potential benefits of U/E: Low wage rates (reduced power of workers to bargain
for higher wages/salaries) and reduced inflationary pressure (lower AD as average
consumer incomes are suppressed)

8. Where next?
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