Revision notes on unemployment

A revision blog on possible unemployment questions on AS and A2 papers

Make sure you are aware of the main UK measures of unemployment, i.e. the claimant count and the Labour Force Survey measure.
Be aware of how employment and unemployment may be determined by both demand-side and supply-side factors

Demand side factors include:

1/ Strength / weakness of aggregate demand in the economic cycle i.e. changes in C+I+G+X-M - e.g. effect on jobs of a fall in UK exports overseas
2/ Cost of employing workers including real wages, employers’ national insurance contributions - many economists now calling for a cut in NIC as a way of stimulating jobs
3/ Impact of changes in the exchange rate and growth in trading partner countries on demand for and output in our export industries
4/ How changes in government spending and taxation can change the incentive for businesses to employ more/less people - impact of fiscal austerity / sharp decline in public sector jobs
5/ Impact of foreign direct investment on the demand for labour in the UK economy
6/ Employment effects from policies designed to stimulate enterprise (long run employment creation effects)

Supply-side factors include:

1/ Incentives to search for and then accept paid work (frictional U)
2/ Skills of the labour force (human capital) (structural U)
3/ Impact of changes in geographical mobility of labour (structural U)
4/ Impact of changes in net migration of workers into the economy
5/ Importance of the availability and cost of child care as a factor affecting the ability of parents to seek and find work
6/ Changes in state retirement ages and investment in further and higher education

*Students should be able to analyse and evaluate these determinants with the help of production possibility curves and AD/AS diagrams.
*Students should also understand the terms cyclical, frictional, seasonal and structural unemployment.
*There should be an understanding of the output gap in relation to economic growth, unemployment and the price level

It is likely that questions on unemployment will focus on the consequences of the slowdown / recession on the labour market and also on the policy options that will be most effective in stimulating growth and new jobs. Growth of real GDP of less than 2 per cent per year is often enough to trigger a rise in the number of people registered as unemployed and looking for work

Key revision points on unemployment - A2 macroeconomics

At A2 level the focus of study on unemployment switches more to the consequences of unemployment and economic inactivity. For example you need to understand and discuss the consequences for individuals and the performance of the economy

Consequences may include:

(i) Effects on the underlying trend growth rate
(ii) Impact on government finance and the budget deficit
(iii) Implications for relative poverty / inequality
(iv) Direct effects on demand and associated multiplier and accelerator effects
(v) Longer term impact on the skills / motivation / employability of the unemployed
(vi) Social implications

There is also a need to be aware of the determinants of the natural rate of unemployment and both the short-run and long-run Phillips curves, and to be able to discuss the implications of these for economic policy.

So crucial to your revision will be

1/ The dynamics of the natural rate (i.e. frictional + structural) and the most effective policies to bring down both types of unemployment
2/ Discussions about the efficacy of different demand-side approaches to limiting cyclical unemployment in a recession
3/ The basics of the original Phillips Curves and criticisms / variants of it including the importance of inflation expectations, money illusion and the NAIRU
4/ Understanding the factors that explain why there are persistent differences in unemployment rates between countries - not least within the 27 nations of the European Union
5/ Consideration of labour market flexibility and how it can impact on macroeconomic performance
6/ Long term unemployment / youth unemployment and other deeper policy dilemma

Evaluation on unemployment policies

1. Unemployment policies are designed to
a. Improve skills / human capital of the workforce so that people can be flexible as the economy changes over time
b. Provide the right incentives to look for and accept work
c. Increase the occupational and geographical mobility of labour
d. Maintain a sufficiently high level of demand for goods and services to create new jobs
e. Encourage entrepreneurship and innovation as a way of creating new products and market demand which will generate new employment opportunities
2. There are always cyclical fluctuations in employment. If growth can be sustained and monetary and fiscal policy can avoid a large negative output gap then it should be possible to create a steady flow of new jobs.
3. An economic recovery creates new jobs, the issue is whether people in the labour market have the right skills, qualifications and experience to take them
4. Demand and supply-side policies need to work in tandem for unemployment to fall. Simply boosting demand if the root cause of unemployment is structural is an ineffective way of tackling the problem. If demand is stimulated too much, the main risk is rising inflation
5. Full-employment does not mean zero unemployment! There will always be some frictional unemployment – it may be useful to have a small surplus pool of labour available. Most economists argue that in a modern economy there will always be some frictional unemployment of perhaps 2-3% of the labour force.
6. There are still large regional differences in unemployment levels which causes significant economic and external costs. Urban and regional regeneration can take decades to achieve.

Economists agree that unemployment cannot fall to zero since there will always be frictional unemployment caused by people moving into the labour market and others switching between jobs. Full-employment might be defined as when the labour market has reached a state of equilibrium - i.e. when those who are willing and able to work at going wage rates are able to find work.