Unemployment

Aims and Objectives Aim: To understand employment policy Objectives: Define different types of unemployment Analyse the inflation/unemployment trade off Evaluate demand and supply side unemployment policies

Starter Re-call the different types of unemployment in an economy. Draw the diagram to show unemployment Draw the diagram to show cyclical unemployment

Trade Off Between Employment and Inflation AS FE PRICE LEVEL REAL GDP AD AD1 AD2 Cant have full employment without inflation occurring, especially beyond AD1. However the level that represents FE may fall over time, meaning that unemployment can fall without inflation occuring.

Policy Conflict Low Inflation Full Employment

Demand Side Causes of Unemployment Cyclical unemployment Pt A occurs as level of AD below the FE level, experiencing a negative output gap Remedy = Increase AD maybe by reducing interest rate At AD2 low unemployment and positive output gap Danger of high inflation Remedy = increase interest rate AS FE PRICE LEVEL REAL GDP AD AD1 AD2 AD2 LRAS P1 AD1 Y1 Y2 PRICE LEVEL REAL GDP A

AD Affects Unemployment I G X-M

Supply Side Causes of Unemployment Frictional unemployment Structural unemployment http://www.youtube.com/watch?v=0vUDrUYTsHQ&feature=results_video&playnext=1&list=PL4CEC04390392C406 http://www.youtube.com/watch?v=4ubgig29l4k&oref=http%3A%2F%2Fwww.youtube.com%2Fresults%3Fsearch_query%3Dminers%2Bstrike%26oq%3Dminers%2Bstrike%26aq%3Df%26aqi%3Dg4%26aql%3D%26gs_sm%3D3%26gs_upl%3D40934l42833l0l43483l13l13l0l3l3l0l219l1208l0.9.1l10l0&has_verified=1

Supply Side Causes of Unemployment PRICE LEVEL Equilibrium pt A, OP, OE Structural unemployment occurs SRAS – SRAS1 Reduced level of output OF Higher Prices OP1 Decreases in capital equipment shift the LRAS left – potential output fallen. LRAS1 LRAS SRAS1 P1 B SRAS P A AD F E REAL GDP

Evaluation: Government Intervention http://www.youtube.com/watch?v=nDvGxNkX4AU You are part of the Thatcher government, tasked with reducing unemployment, which is ever rising due to the voluntary/ frictional/ structural unemployment in the economy. Decide on supply and demand side policies which could be used to combat it!

Demand Side & Supply Side Policies Fiscal Policy Make Credit More Available Use regional policy to combat structural unemployment Offer firms subsidies to hire workers in depressed regions Supply Side Improved education Increase funding on vocational training Subsidise housing in cities where accommodation is expensive Provide tax breaks and tax credits

Explanation of How Affects Employment Demand Side Policy Explanation of How Affects Employment Evaluation of Policy: To what extent does the policy affect employment? Fiscal Policy   Make Credit More Available Use regional policy to combat structural unemployment Offer firms subsidies to hire workers in depressed regions

Explanation of How Affects Employment Supply Side Policy Explanation of How Affects Employment Evaluation of Policy: To what extent does the policy affect employment? Improved Education   Increase funding on vocational training Subsidise housing in cities where accommodation is expensive Provide tax breaks and tax credits