Unemployment - Causes, Cures and Consequences
- Created by: s.waterhouse
- Created on: 09-05-17 19:06
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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
- Workers are unable to leave a region with high unemployment to move somewhere with jobs
- Decline in a certain industry or occupation
- 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
- Structural
- 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- Workers who are unemployed for a long time may find their skills becoming outdated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)
- Demand-side policies
- 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
- E.g. giving workers subsidies to move or by building more affordable housing in areas that need workers
- Policies which tackle geographical and occupational immobility
- 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
- Structural
- 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
- E.g. reducing benefits will give a greater incentive to work
- 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
- E.g. giving workers subsidies to move or by building more affordable housing in areas that need workers
- Policies which tackle geographical and occupational immobility
- Cyclical
- The number of people who are actively seeking work but who are not currently working
- Causes
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