Cause or types of unemployment

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  • Frictional un-employment
    • This is un-employment that occurs as people are between jobs.
    • Types of unemployment
      • Structural un-employment
        • Results from the structural decline of industries, unable to compete of adopt in the face of changing demand, new products or emergence of more efficient competitors.
          • Structural unemployment has occurred within the service sector, due to the increasing use of information and communication technology and automated services.
            • Globalisation leads to changes in the patterns of trade between countries. Britain has probably now lost forever a cost advantage in manufacturing goods such as motor cars, household goods and audio-visual goods,
        • Technological un-employment is a special case of structural un-employment resulting from the successful growth of new industries using labour-saving technology.
          • In contrast to mechanisat-ion , which has usually increased demand for labour, automation reduces the demand for labour.
      • Casual and seasonal un-employment
        • This is a special case of frictional unemployment, occurring when workers are laid off on a short term basis.
          • For example: tourism, agriculture, catering and building.
      • Seasonal unemployment is casual un-employment from seasonal fluctuations in demand.
        • For example: building workers laid off during cold winter months.
    • Among the causes of frictional un-employment are geo-graphical and occupational immobility of labour.
      • These prevent laid-off workers from filling job vacancies immediately.
      • Family ties, ignorance about vacancies in other parts of the country and, above all, the cost of moving and obtaining housing are responsible for the geographical immobility of labour.
      • The need for training and the effects of restrictive practices and discrimination in labour markers are among the causes of occupational immobility.
        • 'Occupational Labor Mobility' Refers to the ease with which workers can switch career fields to find gainful employment or meet labour needs.
    • 'The search theory of un-employment' provides an explanation of frictional un-employment
      • A professional worker earning £1000 weekly loses his job.
        • Only vacancies in low skilled work, earning £300.
          • The newly unemployed worker sets his aspiration wage at £1000.
            • Meaning that they will choose to remain unemployed, rather than fill a low paid vacancy.
              • The lower weekly wage, and perhaps poorer conditions of work and status associated with lower-paid work, render the vacancy unattractive.
                • He lacks accurate information about the state of the job market.
                • There are a number of ways in which this voluntary search period can end...
                  • He lacks accurate information about the state of the job market.
                  • 1: The job seeker learns of a vacancy that meets his aspirations and qualifications.
                  • 2: The vacancy may have arisen during his search period from an improvement in the labour market.
                  • 3: They may have ended their voluntary un-employment as soon as they realise that their initial aspirations were unrealistically high. Settling for a lower-paid less accurate job.
                    • Disequilibrium un-employment
                      • Occurs when: Aggregate Supply of labour exceeds the Aggregate Demand for labour.
                        • And  when labour market imperfections prevent the real wage rate falling, to restore labour market equilibrium.
                      • There are two types of disequilibrium un-employment.
                        • Cyclical or demand-deficient un-employment
                          • Occurs when there is a deficient aggregate demand resulting in cyclical un-employment.
                            • Thus, as Aggregate Demand falls, the Aggregate Demand for Labour falls. Resulting in un-employment
                        • Real wage un-employment
                          • As there is excess supply in the labour market. Competitive forces in the labour market could cure the problem.
                            • Biding the real wage down, eliminating the excess supply.
                              • But, suppose market rigidity, caused by trade unions, prevents the real wage rate falling back to equlibirum.
                                • The market mechanism fails to work, the excess supply of labour persists.
                                • By the trade unions refusing to accept lower wages,it prevents the unemployed from gaining jobs.
  • Long search periods, which increase frictional un-employment in the economy, can be caused by the welfare benefit system.
    • The availability of a 'state safety net' of unemployed and other income-related welfare benefits, with redundancy payments, permits the unemployed to finance longer voluntary search periods.
    • The replacement ratio is the relationship between the benefits from un-employment and the income received whilst in work.
      • If the replacement ratio is below 1 it tells us that the income from benefits whilst unemployed is lower than the income from employment. The opposite is true for a replacement ratio above 1
      • High replacement ratios destroy incentives to work! Leading to the un-employment trap.


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