Economics: Notes for Teachers Main Causes of Unemployment MAIN CAUSES OF UNEMPLOYMENT Academic PowerPoint

1 Insufficient Aggregate Demand According to Keynes, unemployment is fundamentally caused by less than optimum aggregate demand. With a fall in aggregate demand [C + I + G + (X-M)], businesses require less staff to satisfy that demand. Note that a fall in world economic activity will also impact on aggregate demand, as the demand for exports and foreign investment decreases, thus causing more unemployment.

1 Insufficient Aggregate Demand This can have the effect of reducing demand even more, as unemployed people spend less than employed people. Private investment will also decline. Unemployment caused by insufficient aggregate demand is known as cyclical unemployment.

Insufficient Aggregate Demand on the Keynesian Cross diagram 45° AE AE1 Yeq Yf.e. Income/Output X Y Aggregate Expenditure UE XY is deflationary gap

1 Insufficient Aggregate Demand on the Keynesian Cross diagram A deflationary gap occurs when aggregate expenditure is insufficient to employ all resources in the economy. In the diagram, unemployment (UE) is the gap between Yeq and Yf.e. In order to eliminate this UE, aggregate expenditure must rise from AE to AE1. Note that attempts to increase aggregate demand at full employment will lead to pure inflation.

2 Technological Change Technological change, the development of new industries, globalisation and geographic shifts in production often require more capital intensive methods and sophisticated technological skills. As a result, labour is often substituted for capital equipment in the short term.

2 Technological Change Economic theory suggest however, that in the longer term, this releases resources which may be utilised more efficiently in other sectors, leading to increased output and standards of living.

3 Government Policy Government policy can have an impact on both aggregate demand and structural change. Fiscal policy (Government revenue and expenditure) affects the level of aggregate demand in the economy. This invariably has an impact on the level of unemployment. [See slides on ‘Insufficient Aggregate Demand’]

3 Government Policy In addition, Government fiscal policy may target particular industries in the form of protection – reducing tariffs, subsidies and quotas may cause structural unemployment in the short term.

3 Government Policy The tightening of monetary policy (interest rates) will reduce the level of investment and consumption expenditure in the economy. Reductions to these components of aggregate demand is likely to cause cyclical unemployment.

4 Rising Labour Costs Increases in labour costs greater than the increase in productivity may result in structural/technological change. This will cause structural unemployment. [See slides on ‘Technological Change’]

Policies to reduce unemployment Policies to reduce unemployment must be targeted directly at the cause. From our study of the types of unemployment, clearly only cyclical and structural unemployment have appropriate policy actions.

Policies to reduce cyclical unemployment Manipulation of aggregate demand in the economy in order to minimise the effect of cyclical swings. Expansion of fiscal policy and easy monetary policy. As investment is the most volatile mover, policies to stabilise this may be particularly important.

Policies to reduce structural unemployment Structural unemployment can be targeted by increasing the efficiency and adaptability of the economy. This may be through improved educational opportunity (e.g. accessibility to first degree) and microeconomic reform to increase productivity and lower costs and hence increase long term employment.

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