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Types of unemploymentFrictional, structural and disequilibrium
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
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
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?)
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
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
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
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
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
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