UnemploymentGuide

S E Q U O I A C L U B

2

Definition:

When there is a permanent fall in demand for a particular type of labor.

Cause:

In a growing economy, new types of jobs are always created and some types of jobs disappear. When this occurs, people who lack occupational or geographic mobility will lose their job.

Examples:

coal mining, software engineering, human bank telling, furniture making

Reduction Measures:

Interventionist policies

• education system that trains people to be more occupationally flexible

• spending on adult retraining programs

• give subsidies to firms that provide training for workers

• support apprenticeship programs

• provide subsides or tax breaks to encourage people to move to those areas where new jobs are created, enhancing geographic mobility

Market based policies

• reduce frictional unemployment - reduce unemployment benefits so that unemployed people take the jobs that are available

• reduce or remove the legislation that businesses must follow in their hiring, firing, and unemployment practices

Structural Unemployment

C L A S S I C A L U N E M P L O Y M E N T

3

What is it and what causes it?This type of unemployment is caused by unnecessarily high wages demanded by trade unions and by minimum wage. Unemployment happens because wage rates are above equilibrium which causes an oversupply in labor. As the diagram shows the wage floor occurs above the equilibrium point, and there is higher amount of labor supply than demand for labor. This

gap, Q1-Q3, is the classical unemployment

Solutions to the problem•If trade unions are propping

up the wage rate that is paid out, then the government could reduce the power the unions specifically in the area of increasing wage rates. This would prevent the unions from taking advantage of their power to force corporations into paying absurdly high wage rates for relatively unskilled labor

•If minimum wage rates is causing classical unemployment, then the government can either lower the minimum wage rate or abolish it completely.

Drawbacks to these solutionsThese solutions usually only hurt the low income group of people because the policies only affect how much low-income groups earn. As a result of this, income distribution gaps may increase

Classical Unemployment:

F R I C T I O N A L U N E M P L O Y M E N T

4

Definition of Frictional Unemployment

Unemployment that is always present in the economy, resulting from temporary transitions made by workers and employers or from workers and employers having inconsistent or incomplete information.

Causes of Frictional Unemployment

It is caused by the transition from one job to another or the process of finding the very first job after high school or university.

Solution to Frictional Unemployment

Market policies:

• The government has the power to decrease unemployment benefits in order to discourage people from remaining unemployed for long periods of time.

Interventionist policies:

• Sometimes it can happen that people can’t find a job because they are not aware of the existence of it, firms can avoid this from happening by improving job advertisement.

• Firms can also reduce the number of people that looses jobs due to lack of qualification by offering courses to improve worker skills.

5

Seasonal unemployment, also known as periodic employment, exist in any industry that dependent upon the weather. For example, building construction usually take place in the summer as workers are unable to work until the weather gets warmer. After being laid off, the workers have another job they do during the months. Some other workers collect unemployment benefits during the off-season.

• Unemployment benefits are monetary benefits that some people can collect in the event

they become unemployed through no fault of their own.

Agriculture is a common job in LEDC. It has peak planting and harvest seasons. The employment rate will be lower after the harvest season. Tourism can be another example of seasonal unemployment. Different countries have their own tourist peak season. For example, an increase in demand in transportation, hospital entertainment industries during summer in Thailand.

Solutions to seasonal unemployment:

It can be reduced by encouraging people to take different jobs in their “off season”. Stimulate the workers by reducing unemployment benefits so that they will have another job during their “off season”.

Also, sometimes people are unaware of the vacancies that exist. In this case, greater flow of information can reduce seasonal unemployment.

Seasonal unemploymentIt occurs when people are unemployed at certain times of the year, because they work in industries where they are not needed all year round.

S E Q U O I A C L U B

6

Introduction to Hidden Unemployment:

When we walk down a more impoverish street (e.g. Phnom Penh) you may encounter street vendors selling items from small model nagas, daggers to even fake iTouches. These businesses at first glance may look like well connected firms but instead are illegal (i.e. not paying their taxes nor having the registrations). In addition, these businesses often go unrecorded within a given economy (a customer may or not be given a proper receipt). Thus the workers of these businesses are often classified as the people of the ‘hidden/shadow economy’.

Hidden Unemployment is the classification of people who are employed in the informal markets (black markets). They are excluded from the world of economic statistical gathering because these forms have no affiliations with the government and are not properly, if not at all, registered and have no legal documents to prove of their existence. Thus, any purchases made by its customers are no recorded or ‘contributed’ to the country’s official GDP. This is the hidden economy.

Causes of the ‘Shadow Economy’

The first possibility of this form of hidden unemployment is the government not placing enough effort to create jobs or investing in them. As a result, people will have no opportunity to work since jobs will be under provided, leading to many employing themselves in illegal sectors (like drug trading or poaching).

A second possibility could arise from simply the black market happening to be more profitable than the available formal businesses. In addition to the taxes enforced by the government, the black market does not need to pay (so long they stay hidden).

A last but simpler cause would be the ‘addiction’ towards the industry. For instance, drugs are addictive and will drive some to continue buying, selling and trading these commodities. This is what keeps Mexico a vibrant place unfortunately.

Current Situations

Though the informal market/black market is mainly a developing country/failed state phenomenon, this is actually more widespread even in the most developed of countries. With the debt crisis and the weakening economy of Greece, Greece’s hidden economy is worth nearly 30% of its GDP. Italy is not far behind at 29%, China at 13%, United Arab Emirates at 0%. It turns out that most of the economies within Europe (excluding Switzerland and Germany) have informal economies making millions and even billions of euros and still being untracked by the government.

S E Q U O I A C L U B

7

Solving the Problem(s)The easiest and fastest way to solve this problem is by halting its operations with military/police force. In Colombia, the government resorts to its army and river divisions to attack any drug headquarters within the Amazon Rainforest. Though this takes time and is dangerous.

The Government should be creating more jobs in favour for these current black market workers (make formal businesses more desirable for current Black Market workers).

The government could also enforce more educational programmes to educate people not become involved in these place market operations. Within black markets, the good and services provided will not be 100% guaranteed by the sellers. Technically, making the people wiser should boost the morality of them not to actually become involved.

8

why does it occur?

It’s caused by trade unions and government minimum wages interfering with the equilibrium wage. When trade unions negotiate with firms to set a minimum wage higher than equilibrium wage, aggregate supply exceeds aggregate demand, causing unemployment.

when the minimum wage is set at W2, aggregate supply is

higher than aggregate demand , causing a difference between the two curves S1 and D1 from L2 to L3, this is the unemployment rate occurred under minimum wage situation. There is no longer equilibrium at L1 and W1

How do we reduce?

If we want to reduce the classical unemployment, there are two ways to enforce it. One is to reduce the union power, which if we reduce the power of them negotiating for higher benefits of labors, firms are more willingly to hire people as now they do not need to worry about the cost of factors of productions.

Second method is to reduce or abolish minimum wages, this needs to be modified by government, as the set of minimum wage is done by the government, if they intervene and abolish the minimum wages, aggregate demand for labors will increase due to the fact that the costs of factors of production is lower than

before, so there will be higher profits for suppliers, this drives the new equilibrium of aggregate supply and demand, and eliminate unemployment.

However, this may also create more inequality between the distribution of incomes, as workers are now not protected by minimum wages.

Classical Unemployment also known as “Real-wage unemployment”occurs when the real wages for a job are set above the market-equilibrium level, causing the surplus of aggregate labor supply.

examples of classical unemployment workers - who received minimum wages

9

The natural rate of unemploymentDefinition:

It is the sum of frictional, seasonal, and structural unemployment.

The lowest rate of unemployment that an economy can sustain over the long run.

The Natural Rate of Unemployment is the rate of unemployment when the labour market is in equilibrium.

Monetarists argue that the Natural Rate of Unemployment occurs when the Long Run Phillips Curve crosses the x axis.

The Natural Rate of Unemployment will therefore include:◦ frictional unemployment◦ structural unemployment◦ E.g. a worker who is not

able to get a job because he doesn’t have the right skillsCauses

CausesThe natural rate of unemployment is unemployment caused by supply side factors rather than demand side factors.Thus even when the macro economy is at full output or a “full employment” there can still be unemployment, this unemployment is the natural rate.

EXAMPLES

• The Natural Rate of Unemployment is sometimes known as the Non accelerating inflation rate of Unemployment NAIRUThis is because when unemployment is 4% there is no tendency for inflation to increase

• In this example the Natural rate of unemployment is 4%. If the government increased AD there may be a temporary fall in unemployment but in the Long Run it would return to the natural rate of 4%

What Determines the Natural Rate of Unemployment?

• Availability of job information. A factor in determining frictional unemployment

• Skills and Education. The quality of education and retraining schemes will influence the level of occupational mobilities.

• Degree of labour mobility• Flexibility of the labour

market E.g. powerful trades unions may be able to restrict the supply of labour to certain labour markets

Reduction Measures There  are  different  reduc.on  measures  for  each  type  of  unemployment.

10

Structural UnemploymentStructural unemployment, the worst type of unemployment, occurs when there is a change in the structure of an economy; there is a permanent fall in demand for a particular type of labour.

Structural Unemployment

It occurs naturally in growing economies where jobs are constantly being replaced. E.g. when economies shift from mainly jobs in the primary sector to jobs mainly in the secondary and tertiary sectors.

Structural unemployment results in long-term unemployment as people often lack occupational mobility (skills transferable across jobs) to change jobs. Hence, this type of unemployment is difficult to correct.

Causes

Technological unemployment (new technologies): some types of labour become unnecessary. E.g. ATMSs rendering human bank tellers redundant.

Low-cost foreign labour: e.g. less demand for Italian furniture makers in Italy, as the Chinese furniture makers have lower costs and therefore lower selling prices.

Change in consumer taste: e.g. concerns about the negative externalities of consumption and production of coal to finding alternatives, and a fall in the demand for coal-related labour.

Interventionist Policies

Education system to train people to be more occupationally flexible.

Government spending on adult retraining programmes to increase occupational mobility.

Government subsidies to firms to provide training

Government subsidies or tax breaks to encourage people to move to areas/regions where there are more job opportunities, so as to reduce geographical structural unemployment.

Government support for apprenticeship programmes.

Market based Policies

Governments reduce unemployment benefits to give more incentives to take the available jobs.

Deregulation of labour markets: reducing/removing the legislation that businesses must follow in their hiring, firing and employing, to make it easier to employ new people.

Diagram

11

Definition:

Frictional unemployment is the short-term unemployment that occurs when people are in between jobs, or they have left education and are waiting to take up their first job.

Causes:

Frictional unemployment is caused by a mismatch between jobs as people leave old jobs in search of better, more fitting jobs, or when new entrants (university graduates) or re-entrants are searching for the best possible first job.

Frictional unemployment is a form of natural unemployment and is always present in the economy . It is

beneficial to the economy as it offers a better allocation of resources.

However, if the search takes too long and mismatches too frequent, the economy will suffer as some work will not get done. Therefore, the government still will take some reduction measures.

Reduction measures:

A typical market-based measure would be for the

government to lower unemployment benefits to encourage unemployed workers to take the jobs that are available rather than to allow them to sit and wait for the right job.

A more interventionist approach can be improving

the flow of information from potential employers to people looking for jobs, so that people are well-informed of suitable job opportunities. Such mediums can include job sites, newspapers and job centers.

Other solutions may include setting up schooling and training facilities to better prepare workers for their ideal job, or promoting the establishment of facilities to increase availability and flexibility (e.g. daycare centers). Relocation of industries and services can also make it more convenient for workers to find the best possible job.

Frictional Unemployment

12

Real-wage unemployment (Classical unemployment)

•Real-­‐  wage  unemployment  is  a  form  of  dis-equilibrium unemployment that occurs when real wages for jobs are forced above the market clearing level.

•Unemployment  is  caused  by trade unions and government minimum wages interfering with the labor market.

• Trade union negotiates wages higher than equilibrium.

• Minimum wage is set above the equilibrium.

• This increases the equilibrium.

Solutions• Reduce the ability of union to negotiate higher wages• Reduction in the minimum wage- However, this might create problems for unemployed people

since high- income workers are not the ones who receive minimum wages. A reduction in the minimum wage will reduce the income and living standards of those workers who are already earning low wages.

• Classical  unemployment  occurs  when  real  wages  are  kept  above  the  market  clearing  wage  rate,  leading  to  a  surplus  of  labour  supplied.

• Classical  unemployment  is  some.mes  known  as  real  wage  unemployment  because  it  refers  to  real  wages  being  too  high.

DefinitionDescription