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Economics summary part 2
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Economics summary for International Business The Hague first year students 2018/2019. The Chapters discussed in this summary are: 15.1, 15.6, 15.7, 20.1, 20.2, 20.4, 24.1, 24.2,
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15.5 UnemploymentMeasures for unemployment are:
1. Claimant unemployment: this is a measure of all those in receipt of
unemployment related benefits. These statistics are easy to collect. However, they
exclude all those of working age who are available for work but who are not
eligible for benefits. This results in underestimating the true level of
unemployment.
2. Standardized unemployment: here the unemployed are defined as people of
working age who are without work, available to start within two weeks and who
are actively seeking employment or waiting to take up an appointment.
This measure is used by the ILO and OECD, two international organizations that
publish unemployment statistics for many countries.
However, with this rate you exclude the people that are unemployed but that do
not actively seek work.
Unemployment rates vary per country and between groups within countries. Regions can
have different labour markets and between countries there are differences in policies on
unemployment, training schemes etc.
In many countries, female unemployment is much higher than male unemployment.
Higher youth unemployment can be explained by the suitability of the qualifications of
school leavers, the attitudes of employers to young people and the greater willingness of
young people to spend time unemployment looking for better jobs etc.
What determines the average duration of unemployment?
1. The number unemployed (size of the stock of unemployment)
Unemployment is a stock concept. It measures a quantity at a particular point in
time. The higher the stock of unemployment, the longer the duration of the
unemployment.
2. The rate of inflow and outflow from the stock of unemployment
The people making up the unemployment are constantly changing. The people
that are made redundant or quit make up the inflow. The people that find jobs
make up the outflow. The duration depends on the rate of inflow and outflow. The
rate is expressed as the number of people per period of time.
3. The phase of the business cycle
At the onset of a recession, unemployment rises but yet the average length of
unemployment is likely to be short. Once a recession has lasted for a longer period
of time, people who have been out of work longer which is likely to persist even
though the economy is pulling out of recession.
What are causes of unemployment?
1. Real wage rates
Nominal wage rates are the actual value of wage rates paid to workers. The real
wage rate is nominal wage rate corrected for inflation.
Real-wage unemployment occurs when trade unions use their monopoly to
drive wages above market-clearing level. It could also be caused by the
government setting the national minimum wage too high.
A rise in real wage rates, increases the effective cost to firms of employing
workers. This is because the wage rates paid by firms have increased relative to
the prices of their goods and services.
One effect of high wage rates is that they could lead to extra consumer
expenditure. This could lead to firms demanding more labour as they need to
meet the extra demand.
, 2. The phase of the business cycle
Demand-deficient is the name of unemployment associated with falling
aggregate demand. As aggregate demand falls, firms find that they are unable to
sell their current level of output. They might pursue this for a while but later they
start with cutting back production and workers.
As aggregate demand begins to grow again, firms increase output and
unemployment will fall. Because demand-deficient unemployment fluctuates with
the business cycle, it is also referred to as cyclical unemployment.
What affects the amount that unemployment rises because of a fall in demand is
the magnitude and persistence of the fall in demand. Another aspect is the extent
to which (if at all) the real average wage rate falls.
3. Information
Frictional (search) unemployment occurs when people leave their jobs, either
voluntarily or because they are sacked or made redundant, and are unemployed
for a period of time while they are looking for a new job. It often takes a while for
workers to find jobs, even though there are vacancies. The problem here is
imperfect information. Employers are not fully informed about what labour is
available.
4. Structural change
Structural unemployment occurs from changes in the pattern of demand or
supply in the economy. people made redundant in one part of the economy,
cannot immediately take up jobs in other parts even though there are vacancies.
A change in the pattern of demand: some industries experience declining
demand. This may be due to consumer tastes of competition (overseas).
A change in the methods of production (technological unemployment): new
techniques of production often allow the same level of output to be
produced with fewer workers. Unless output expands sufficiently to absorb
the surplus in labour, people will be made redundant; this creates
technical unemployment.
Structural unemployment often occurs in particular regions of the country
when industries located in those regions decline or introduce labour saving
technology. When it does, it is referred to as regional unemployment.
The level of structural unemployment depends on three factors:
The degree of regional concentration of industry. The more that the
industry is concentrated in particular regions, the greater will be the level
of structural unemployment if particular industries decline.
The speed of change of demand and supply in the economy. The rapid the
rate of technological change or the shift in consumer tastes, the more rapid
will be the rate of redundancies.
The immobility of labour. The less able/willing workers are to move to a
new job, the higher will be the level of structural unemployment.
There are two approaches to tackling structural unemployment:
1. Market-orientated approach: involves encouraging people to look more actively for
jobs. It involves encouraging people to adopt a more willing attitude towards
retaining, and if necessary to accept some reduction in wages.
2. Interventionist approach: involves direct government action to match jobs to the
unemployed. Examples are providing grants to firms to set up in areas of high-
unemployment and government funded training schemes.
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