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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…

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4. 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…

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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

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incomes all of which will boost consumption and demand. It may also encourage
firms to invest, as the marginal cost of investment will fall.

Supplyside policies

These are measures to improve labour supply (reduce frictional and structural

Increased spending on education & training including an emphasis on

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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…

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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…

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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…

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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…

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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.…

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anticipated inflation wage rises may withdraw their labour. 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




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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