Lesson Objectives Recap on the causes and consequences of unemployment Understand what is meant by the NAIRU Explain the NAIRU Diagram Identify factors that influence the NAIRU Understand potential Government actions to reduce the NAIRU

Causes and Consequences of Unemployment

Starter 1.Define unemployment. 2.What are the two main measures of unemployment? 3.What has caused unemployment in the UK?

Unemployment –People able, available and willing to find work and actively seeking work – but not employed The Claimant Count Measure –The number of people claiming the Jobseekers’ Allowance The Labour Force Survey –Must have actively sought work in the previous four weeks and be available to start work immediately

Illustrating Unemployment on the PPF Consumer Goods Capital Goods Z Remember, with allocative efficiency, it is impossible to re-allocate scarce resources so as to increase overall welfare or satisfaction At point z, there is unemployment. We do not have allocative or productive efficiency 0

Demand and Supply Side Causes Lack of AD causes: Cyclical Unemployment, (or “Demand Deficient” unemployment, or “Disequilibrium Employment) Supply Side Issues cause: Voluntary unemployment Frictional unemployment Structural unemployment

Causes of Unemployment Frictional unemployment: Workers who are between jobs / looking for their first job Cyclical Unemployment: Unemployment due to a lack of Aggregate demand Voluntary unemployment: People choose not to work at the going wage rate Seasonal Unemployment: Regular seasonal changes in employment / labour demand. Affects certain industries more than others e.g Checkout workers at Christmas in Tesco.

Causes of unemployment Casual Unemployment : Workers are made redundant on a short term basis in industries such as tourism and construction. Structural unemployment: Arises from the mismatch of skills and job opportunities as the pattern of labour demand in the economy changes over time. Arises from immobility of labour Regional / Technological / International unemployment

Structural Unemployment Structural unemployment Explored: Regional: Where declining and expanding industries are geographically distant (eg Thames Valley v The Clyde) Technological: Where new technology reduces demand for labour in some jobs (eg cashpoints replace cashiers) International: Due to changes in comparative advantage (eg decline of manufacturing in the UK / expansion in China)

The Replacement Ratio Replacement ratio = disposable income out of work disposable income in work This influences the length of time a person is searching for a job.

What type of unemployment is it? Read the case studies. What are the reasons for these people being out of work? What are the economic consequences of a high rate of unemployment?

The Consequences on Economic Performance The Opportunity Cost of unemployment is the output that has been lost Unemployment means that the economy is not performing on its PPF boundary - allocative efficiency is not being maximised - there is a negative output gap Unemployment reduces tax revenues and increases public spending on benefits - government budget is adversely influenced G may also have to increase to deal with crime / health problems Unemployment reduces AD and may discourage investment

The Consequences on the Individual Fall in income, fall in self esteem, increased costs from staying at home, loss of skills and employability, increased incidence of mental illness, physical violence and divorce. Imagine being unemployed for ten years. Increasing debts, no cash to spend, nobody much to talk to all day, tension at home, sitting around watching Judge Judy and Rikki Lake all day, sinking into despair. You may give up looking for work all together: such people are called “discouraged workers”

Government Policies on Unemployment What demand side measures can the government apply? Monetary Policy Tools: Influence interest rates to stabilise AD at level required to minimise cyclical unemployment, and encourage investment / growth Fiscal Policy Tools: Adjust G to minimise cyclical unemployment But what about voluntary, frictional and structural unemployment?

Government Policy on Unemployment SUPPLY SIDE MEASURES may be required - make work more attractive to the unemployed (and vice versa!) Increase flexibility of the labour market Make it easier to hire and fire staff Reduce trade union power Invest in training and education, targeting long term unemployed Reduce unemployment benefits, or link them to conditions Target regions for fiscal incentives to encourage investment

A Good Question To what extent was the UK economy’s excellent record on unemployment in recent years due to supply side and demand side interventions? (25 marks)

A Good Question: Supply side and demand side policies Supply side –Improved Education –Working and Child Tax Credits –Efficient Technology –Increased minimum wage –Access to universities Demand Side –Monetary policy - Use of Interest Rates to ensure that businesses are able to borrow money to invest. –Fiscal – Government spending on adult education (can be ss)

The Consequences of Unemployment These depend on………………what?

The Consequences of Unemployment These depend on…. The rate of unemployment The duration of unemployment The nature of the unemployment and its geographical spread Think in terms of effect on economic performance and on individuals

Are there any Benefits of Unemployment? Individuals may re-train and get a more rewarding job. Labour force flexibility is increased Wage increase pressures may be held down (in some sectors / regions) Inflationary pressures are reduced MOST ECONOMISTS BELIEVE THAT THE COSTS OF UNEMPLOYMENT FAR OUTWEIGH ANY BENEFITS

The NAIRU and Natural Rate of Unemployment

The Natural Rate of Unemployment and The NAIRU- Key terms The Natural Rate of unemployment: The level of unemployment that exists when the aggregate demand for labour equals the aggregate supply of labour at the going wage rate (includes voluntary and frictional). The NAIRU: Non Accelerating Inflation Rate of Unemployment Level of unemployment at which there is no tendency for inflation to exist.

Wage Rate No of Workers 0 ALF ASL ADL Q QZ W Gap narrows as W increases QZ - Q = NAIRU The NAIRU Diagram

The NAIRU Diagram Explained Definitions: ALF means the aggregate labour force - the total labour force at a given wage rate ASL means the aggregate supply of labour - the total number of people prepared to work at a given wage rate ADL means the aggregate demand for labour The NAIRU exists when aggregate demand for labour equals aggregate supply of labour The NAIRU is the rate of unemployment that places no upward pressure on wages and thus inflation

Definitions Disequilibrium unemployment Equilibrium unemployment NAIRU PAGE 72

What affects NAIRU? Hysteresis: Unemployment generates longer term unemployment Education and training Unemployment benefits Flexibility of labour Trade Unions Income tax rates Labour market regulations

Policies to reduce NAIRU Quantity and quality of labour force Increase labour flexibility Cut income tax rates Cut unemployment benefits Reduce labour regulations and trade union power Increase government spending on training and education Regional policies - “move work to where the workers are”

Government policies The Thatcher Era: Reduce trade union power massively Open up the labour market “get on your bike and look for work” ethic The Blair Era: Perhaps surprisingly, still free-market / supply-side focused: –Increase spending on education and training –Introduce the “New Deal” to develop skills of unemployed –Introduce minimum wage - widen replacement ratio The Brown Era: Supply side policies –Increase spending on education and training –Benefit Reforms - work for benefits –Increase skills of young people - stay in education until 18 The Cameron Era: Supply side policies –Cutting welfare to incentivise work –Apprenticeships –Increase in NMW