The causes of unemployment - edEcon Online …

Thecausesofunemployment-edEconOnline…Thecausesofunemployment.Therearevarioustheories,whichattempttoexplainwhyunemploymentmightexistinaneconomy.1.Realwageunemployment:Thisisaformofunemployment,whichoccurs,whenrealwagesareforcedabovethemarket-clearingwage.Traditionallytradeunionsandwagecouncilsareseenastheinstitutionscausingthistypeofunemployment.SupposeatradeunionsetsaminimumwageWR1abovethemarket-clearingwageWR2.AtthenewminimumwagethedemandforlabourfallstoQ1whilethesupplyoflabourincreasestoQ3.Thesupplyoflabournowexceedsthedemandforlabourandwehavedisequilibriumunemploymentasshownonthediagram.Policiestosolverealwageunemployment.1.Abolishtheminimumwage.2.Reducethepoweroftradeunions.Duringthe1980’stheconservativegovernmentintroducedlegislationtoreducethepowerofTU’s.Theproblemwiththesepoliciesisthattheyaimtoreduceunemploymentbyreducingrealwages.Howeverifrealwagesfallthismayreduceconsumptionandthereforeaggregatedemand.Thisdecreaseinaggregatedemandmayleadtofirmstoreducethedemandforlabourandthereforecauseafurtherincreaseinunemployment.2.Demanddeficientunemployment.(cyclicalunemployment)Cyclicalunemploymentisnormallyassociatedwitharecession.Itoccursduetoafallinthelevelofoutputintheeconomycausingfirmstoshedlabourtoreducecosts.Theequilibriumlevelofnationalincomeyuliesbelowthefullemploymentlevelofnationalincomeyf.Inotherwordsthereisinsufficientdemandintheeconomyforallworkerstoobtainemployment.Althoughdemanddeficientunemploymentisnormallyassociatedwitharecessionitcanalsoexistinthelongruniftheeconomyisconstantlyrunbelowfullcapacity.Policiesfordemanddeficientunemployment.Theusualresponseistoraisethelevelofaggregatedemand.Thiscanbeachievedbyusingavarietyofpolicies.1.Fiscalpolicy:Increasinggovernmentspendingorcuttingtaxation.2.Monetarypolicy:reducinginterestrateswhichwillincreaseborrowinganddecreasesavingwhichwillthereforeincreasespendingwhichwillincreaseAD.3.Exchangeratepolicy:depreciatingthepoundwillleadtoanincreaseinexportsandareductioninimportsbymakingexportslessexpensiveandimportsmoreexpensive.3.Equilibriumunemployment:EquilibriumunemploymentisalsoknownastheNaturalRateofUnemployment(NRU).Thenaturalrateofunemploymentoccurswhenthelabourmarketisinequilibrium;i.e.thedemandforlabourisequaltothesupplyoflabour.Equilibriumunemploymentoccurswhenthetotalnumberofjobsavailableinaneconomyisequaltothenumberofpeopleunemployedandseekingwork.IntheUKin2021justlessthan1millionpeoplewereregisteredunemployedandatthesametimetherewerejustover1millionunfilledvacancies.ThereforetheNRUfortheUKisestimatedat1millionpeople.Therearetwomaintypesofequilibriumunemployment:1.Frictionalunemployment2.StructuralunemploymentFrictionalunemployment:Thistypeofunemploymentreferstojobturnoverinthelabourmarket.Evenwhentherearevacanciesittakestimetosearchandfindnewemploymentandworkerswillremainfrictionallyunemployed.Policiesforfrictionalunemployment1.Reduceunemploymentbenefits:Ifbenefitsfallsearchtimesbetweenjobswilldecrease,asworkershavetofindnewjobstomaintainfinancialsecurity.2.Reducethetimeoverwhichbenefitsarepaid:Ifbenefitsarepaidforalimitedperiodpeoplewilltryhardertofindajobbeforetheirbenefitsareremoved.3.Improvejobinformation:jobclubs,agencies,jobcentresandnewspapers,freeuseoftelephoneandstampsetc.Thesearealldesignedtohelptheunemployedfindworkmorequickly.Structuralunemployment:Structuralunemploymentexistsevenwhentherearevacancies,duetoamismatchbetweentheskillsoftheunemployedandthoseneededbyemployers.ItisdifficultforaredundantshipyardworkerfromH&Wtotakeupemploymentinahightechcomputerfirm.Structuralunemploymentoftenoccursinregionsduetothedeclineoftraditionalindustries,e.g.northofEnglandcoalandsteelindustriesdeclined,orshipbuildinginNI.Thestructurallyunemployedoftentendtobeunemployedforlongperiods(over2years).Thelongertheyremainoutofworkthemoredifficultitbecomestosecureemployment.Policiesforstructuralunemployment:1.Improveeducationandtraining:Investmentineducationwillgiveworkerstheskillsnecessarytofindemployment,e.g.vocationaleducation2.Welfaretoworkschemes(newdeal):retrainunemployedworkers,firmsgivensubsidiestoemploythelongtermunemployed.3.Regionalpolicy:grantsandsubsidiesgiventofirmstolocateinareasofhighunemployment.4.Improvethegeographicalmobilityoflabour:Providerelocationgrantsandlowcosthousingtoencourageworkerstomovetoregionswithgreateremploymentopportunities,e.g.movementwestintheRofIreland.Theproblemwiththisisthatpeopleareinherentlyimmobileandareboundbyfamilyties.Freemarketsolutiontounemployment:Someeconomistsarguethatinterventioninthemarketforlabourslowsthenaturalreallocationofresourcesandthereforeonlymakesmattersworse.Theyarguethatifpeoplebelievethatthegovernmentwillencouragefirmstomovetotheregiontheyliveintheywillbelesslikelytomovetofindemployment.Thenaturalrateofunemployment(NRU/NAIRU)WecanalsouseAD/ASanalysistoexplainthenaturalrateofunemployment.OnthediagrambelowtheLRAScurvebecomesverticalatpointN(whichwepreviouslyreferredtoasfull-employment.Howeveratthispointtheremaystillbesomeunemployment,i.e.thenaturalrateofunemployment.IntheUKtheNRUisestimatedtob