Unemployment By the end of this session, you:By the end of this session, you: –Must know definitions for full employment. –Should understand the causes of unemployment. –Could be able to link the causes of unemployment to the current economic crisis.

Unemployment 2012 Unemployment 2.51mUnemployment 2.51m Claimant count 1.58mClaimant count 1.58m >1m year-olds out of work (21.6% workforce)>1m year-olds out of work (21.6% workforce) Female unemployment has hit a record high in recent months whilst male unemployment has dipped.Female unemployment has hit a record high in recent months whilst male unemployment has dipped. Increasing numbers of part-time workers.Increasing numbers of part-time workers.

Unemployment – Terminology Frictional unemploymentFrictional unemployment Structural unemploymentStructural unemployment Voluntary unemploymentVoluntary unemployment Discouraged workersDiscouraged workers

Demand Deficient Unemployment

Cyclical Unemployment

Unemployment What is the Hysteresis effect?What is the Hysteresis effect? Why does high unemployment reduce inflation?Why does high unemployment reduce inflation? Give an example of a demand-side policy to reduce unemployment and explain how it works.Give an example of a demand-side policy to reduce unemployment and explain how it works. Give an example of a supply-side policy to reduce unemployment and explain how it works.Give an example of a supply-side policy to reduce unemployment and explain how it works.

Supply-Side Policies Explain how each of the following will remove labour market imperfections and achieve a lower equilibrium rate if unemployment:Explain how each of the following will remove labour market imperfections and achieve a lower equilibrium rate if unemployment: –Reform the welfare system to reduce the risk of the poverty trap. –Reduce trade unions’ collective bargaining power. –Reduce income tax. –Relax immigration laws.

Flexible Labour Markets Occupational (functional) flexibilityOccupational (functional) flexibility Ease and cost of hiring and firing workersEase and cost of hiring and firing workers Contractual flexibilityContractual flexibility Wage flexibilityWage flexibility Geographical flexibilityGeographical flexibility

Advantages and Disadvantages of Flexible Labour Markets Rapid clearing of marketsRapid clearing of markets Improved occupational mobilityImproved occupational mobility Stronger employment creationStronger employment creation Attractive to inward FDIAttractive to inward FDI Higher long-run productivityHigher long-run productivity Improves the inflation- unemployment trade-offImproves the inflation- unemployment trade-off The economy copes with external shocks more effectivelyThe economy copes with external shocks more effectively Lack of training for workers on short-term contractsLack of training for workers on short-term contracts Job insecurityJob insecurity Increase in relative povertyIncrease in relative poverty Increased pensioner povertyIncreased pensioner poverty Risk of ‘slash and burn’ during an economic downturnRisk of ‘slash and burn’ during an economic downturn Effects on family lifeEffects on family life

Short-run Phillips Curve and the trade-off between unemployment and inflation

D

Match the statements to the letter Workers expect inflation to increase to 4.5% and demand higher wages. Firms mistakenly expect sales to rise due to the price rises and hire extra workers.Workers expect inflation to increase to 4.5% and demand higher wages. Firms mistakenly expect sales to rise due to the price rises and hire extra workers. Workers refuse to supply labour at 4.5% inflation and firms refuse to demand labour.Workers refuse to supply labour at 4.5% inflation and firms refuse to demand labour. The economy is operating at the NRU and workers expect inflation to be 3.5%.The economy is operating at the NRU and workers expect inflation to be 3.5%. There is an increase in aggregate demand due to government subsidies for new industries, which causes workers to seek new jobs and firms to re- employ workers.There is an increase in aggregate demand due to government subsidies for new industries, which causes workers to seek new jobs and firms to re- employ workers.

D A The economy is operating at the NRU and workers expect inflation to be 3.5%. B Workers expect inflation to increase to 4.5% and demand higher wages. Firms mistakenly expect sales to rise due to the price rises and hire extra workers. C Workers refuse to supply labour at 4.5% inflation and firms refuse to demand labour. D There is an increase in aggregate demand due to government subsidies for new industries, which causes workers to seek new jobs and firms to re-employ workers.

Expectations-augmented Phillips Curve

Long-Run Phillips Curve

Factors Explaining the Improved Trade-off between Unemployment and Inflation Flexibility of the UK labour marketFlexibility of the UK labour market Benefits of immigrationBenefits of immigration Credible inflation targetsCredible inflation targets Low inflation in the global economyLow inflation in the global economy Technological change and innovationTechnological change and innovation Increased competition in domestic and international marketsIncreased competition in domestic and international markets