Unemployment - Causes, Cures and Consequences

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  • Unemployment
    • Causes
      • Structural
        • Decline in a certain industry or occupation
          • E.g. due to a change in consumer preferences, technological advances or the availability of cheaper alternatives
        • Occupational
          • Workers do not have the skills to do the jobs that are available
        • Geographical
          • Workers are unable to leave a region with high unemployment to move somewhere with jobs
            • E.g. people cannot afford to move or they have family ties to the area
      • Frictional
        • Shortage of jobs in a recession
        • There will always be employees changing jobs
        • High welfare benefits give less incentive to look for a new job
          • People can afford to take time to look for employment
        • Lack of information about the labour market
          • E.g. regarding skills or availability
        • Occupational and geographical immobility of labour
      • Real-wage
        • Real wages are pushed above the equilibrium level
        • Trade unions negotiating for higher wages
        • Introduction of a national minimum wage
        • Supply of labour increases and demand for labour falls
          • However, a rise in productivity or consumer spending would increase the demand for labour and reduce the level of unemployment
      • Cyclical
        • Economy is in a recession
        • Aggregate demand falls
        • Negative output gap
      • Seasonal
        • Demand for certain industries is not the same all year round
        • Peak seasons
          • Tourism and farming are often dependent on weather/climate
          • Retail industry is usually busy at Christmas
    • Consequences
      • Leads to lower incomes and less spending
      • Businesses may sell fewer goods or cut prices and make less profit
      • Indicates that there is unused labour in the economy - so fewer goods and services can be produced
      • The government will have to spend more on welfare benefits (JSA) and will receive less revenue through income tax
        • However, the government only spent 1% of welfare payments on unemployment benefits in the year 2014/15
      • Structural unemployment leads to a negative multiplier effect - unemployment causes less spending so causes more unemployment
      • Areas with high unemployment can have high crime rates
      • Reduced incomes can lead to health problems
      • Workers who are unemployed for a long time may find their skills becoming outdated
        • This will reduce their employability and make it more likely that they will stay unemployed in the future
    • Cures
      • Cyclical
        • Demand-side policies
          • However, these are hard to fine-tune and can cause more problems
          • Time lags mean that improvements are slow to develop
            • Governments may think policies are not working and increase spending further, creating inflation
          • However, a lack of information about the size of a country's output gap may cause the government to overspend (causing inflation) or underspend (prolonging a recession)
          • However, a lack of information about the size of the multiplier can cause problems with spending
        • Boost aggregate demand
          • E.g. reflationary fiscal policies (decreasing taxes or increasing welfare payments)
          • E.g. expansionary monetary policies (lowering interest rates)
      • Frictional
        • Supply-side policies
          • Structural
            • Policies which tackle geographical and occupational immobility
              • E.g. giving workers subsidies to move or by building more affordable housing in areas that need workers
                • However, workers will still be reluctant to leave family
              • E.g. government investment in training schemes to help workers improve their skills
              • E.g. governments providing benefits to firms in areas of high unemployment
          • However, these can be unpopular
            • Concerns about whether they are inequitable
          • It can take a long time to see the results
            • These cannot be used to fix the economy quickly
          • There can be unintended consequences
          • Difficult to introduce in the short term
        • Policies which encourage people to find a job and speed up the job searching process
          • E.g. reducing benefits will give a greater incentive to work
            • Helps the government avoid the unemployment trap
          • E.g. income tax cuts increasing the incentive for workers to find a job or work longer hours
          • E.g. increased information about jobs helps people to find jobs more quickly
      • Structural
        • Policies which tackle geographical and occupational immobility
          • E.g. giving workers subsidies to move or by building more affordable housing in areas that need workers
            • However, workers will still be reluctant to leave family
          • E.g. government investment in training schemes to help workers improve their skills
          • E.g. governments providing benefits to firms in areas of high unemployment
    • The number of people who are actively seeking work but who are not currently working

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