Unemployment - A2 Economics

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  • Created on: 15-06-13 10:22
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There are many definitions of unemployment. It may be defined as the number of people of
working age who do not have a job, who are actively seeking work at existing wages. In the
UK, unemployment is measured in two main ways ­ the Claimant Count and the Labour
Force Survey.
Claimant Count measures the number of people claiming unemployment benefits, but
actively seeking work. It serves as a barometer for the UK labour market.
Labour Force Survey is a quarterly sample of households living at private addresses in the
UK. Its purpose is to gain information about the labour market.
However, the problems with these measurements are that rules tend to change over time,
and so the unemployment data cannot be compared across different time periods. Also, it
doesn't take into account those eligible for unemployment benefits and do not claim. Finally,
different countries follow different rules, so it is difficult to measure unemployment rates
across different countries.
Causes of unemployment
1. Frictional unemployment
Unemployment caused by the time people take to move between different jobs e.g.
graduates or people changing jobs. There will always be frictional unemployment
because of imperfect information, and also because it takes time to find work.
2. Structural unemployment
Occurs due to a mismatch of skills in the labour market ­ for example:
Occupational immobilities ­ i.e. a miner will find it difficult to work in current industries.
The difficulties in learning new skills applicable to a new industry.
Geographical immobilities ­ i.e. the difficulty in moving across regions to find a job.
E.g. there may be jobs in London, but issues in relation to accommodation.
Technological change ­ i.e. if technology improves, there will be a lower demand for
Structural change ­ i.e. decline in coal mines ­ many miners become unemployed,
and can't find work because of limited skills.
3. Classical/real wage unemployment

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Demand deficient/cyclical unemployment
It occurs when the economy is below full capacity. E.g. in a recession, AD will fall,
leading to a decline in output and negative economic growth.
With a fall in output, firms will employ fewer workers because they are producing
fewer goods. Also, some firms will go out of business, leading to large scale
In recessions, unemployment tends to rise rapidly as firms lay off workers.
Consequences of unemployment
1. Loss of income
Unemployment normally results in a loss of income.…read more

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The government loses out because of a fall in tax revenues and higher spending on welfare
payments for families with people out of work. The result can be an increase in the budget
deficit which then increases the risk that the government will have to raise taxation or scale
back plans for public spending on public and merit goods.
5. Social costs
Rising unemployment is linked to social deprivation.…read more

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It may also encourage
firms to invest, as the marginal cost of investment will fall.…read more

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Here, real wages are not allowed to fall to their free market levels. They remain at OW2
because of the existence of union power, minimum wage legislation and the existence of
state benefits which are worth more than the free market equilibrium wage level.
The supply of labour NS exceeds the demand for labour ND and the number of potential
workers who are without employment has therefore risen.
To reduce the natural level of unemployment (i.e.…read more

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What did the coalition do?
Changed income support rules
Made it so that private contractors provide training e.g. A4E ­ they were only paid
when jobs are found and kept.
Keynesian economists believe that large scale unemployment is not voluntary it is caused by
a lack of effective demand. This could be tackled by the use of monetary and fiscal means to
boost the overall level of AD, shifting the ADL curve to the right.…read more

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If unemployment is low, prices will tend to rise since demandpull is likely to exist, and large
wage increases will take place. To bring inflation under control, the government must be
prepared to accept a high level of unemployment. It was possible to use the Phillips Curve to
predict what inflation would be associated with a given level of unemployment.
However, from the late 1960s, the curve seemed to break down as new inflation developed.
This was a combination of unemployment and inflation (stagflation).…read more

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The higher prices mean that the real wages of workers have not increased and so the
workers who were encouraged to take up employment now decide to not work. Firms will find
that the higher prices have reduced demand and workers are being paid more, making it no
longer desirable to employ the additional workers. The result is that the economy moves to
point C. Unemployment is back at its original natural level, but inflation is now at 4%.…read more

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Augmented Phillips Curve (Extra reading)
The Phillips curve showed the tradeoff between unemployment and inflation. However, the
problem that emerged with it in the 1970s was its inability to explain unemployment and
inflation rising at the same time ­ stagflation. Friedman attempted to explain stagflation
through the expectationsaugmented Phillips curve.
Friedman argued that there were a series of Phillips curves for each level of expected
inflation. If people expected inflation to occur, they then would expect a corresponding wage
rise.…read more

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The shedding of labour by firms
and withdrawal of labour from the market shifts the economy to point W, back to the same
level of unemployment. At point W, we have a higher rate of inflation at the same rate of
If the government persists at attempting to reduce unemployment by increasing AD, firms
and consumers are ready for the anticipated inflation, and so the same thing happens again.
However, as wage rises (and price of FOP etc...…read more



This is a lengthy and well written summary with brief details on the causes and consequences of unemployment followed by more detailed analysis of NAIRU and the Phillips curve.

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