Unemployment Learning outcome AD Define unemployment SBC Economics Unemployment Learning outcome AD Define unemployment Describe how unemployment is measured Explain the types of unemployment Describe the pattern of unemployment in the UK in recent years Explain the causes of unemployment and explain the processes with AD/AS diagrams Explain the effects, both negative and positive, of unemployment Explain the concept of the natural rate of unemployment Evaluate counter unemployment policy Explain the original and Friedman Phillips curve concepts Explain the concepts of a trade off between unemployment and inflation Reading: Units 29, 86, 87 & 88

The number of people out of work at a given time Unemployment The number of people out of work at a given time

Measuring unemployment Unemployment can be measured using two methods: The claimant count All those who register as unemployed Used in the UK until 1997 Labour force survey (ILO) A survey of the population to identify those unemployed Used in the UK since 1998

Types of unemployment There are various types of unemployment, the main types are: Classical Cyclical Frictional Seasonal Structural

Types of unemployment Classical (real wage unemployment) Classical unemployment exists when the wage rate is above the level that would create equilibrium in the labour market In simple terms wages are too high but are unlikely to fall as wages are ‘sticky downwards’ reasons for this include minimum wages, union power and pay agreements This can be shown using a supply & demand diagram for labour The level of wages (W1) would provide equilibrium (Q1) Wages however are too high (W2) the result is unemployment of (Q2 to Q3)

Classical (real-wage) unemployment Real wage rate W2 W1 D O Q2 Q1 Q3 Quantity of workers

Types of unemployment Cyclical (demand-deficient) Cyclical unemployment exists when the economy is in recession, unemployment rises because there is a fall in the demand for labour within the economy This can be shown using a supply & demand diagram for labour Lower demand means that the demand curve shifts in resulting in a decrease in employment If wages do not fall then there will be unemployment of Q1 to Q2

Cyclical (demand-deficient) unemployment S Real wage rate W1 Q2 W2 D 1 D2 O Q1 Quantity of workers

Types of unemployment Structural Structural unemployment exists when the demand for labour is less than its supply in an industry or area One example is regional unemployment where there is higher unemployment one area of the country than another i.e. North-East of England Another example is sectoral unemployment where there is a fast decline in an industry leaving many workers unemployed i.e. UK car industry Structural unemployment is a serious problem however increasing the mobility of labour helps to reduce the problem

Types of unemployment Frictional (search) Most people who lose their jobs move quickly into new ones, this is short-term unemployment and is known as frictional unemployment It is not seen as a serious problem as there needs to be some movement of labour in an efficient economy Better job information and help with searching will reduce the time it takes to find a new job and therefore reduce frictional unemployment

Types of unemployment Seasonal Some employment is seasonal (people only work at certain times of year) i.e. fruit picking or tourism Seasonal unemployment tends to rise in winter and fall in summer There is little that can be done to reduce seasonal unemployment