Unemployment: people of working age who are without work, available for work, and actively seeking employment

• Formula: number of unemployed people / labour force * 100%

Difficulties in measuring unemployment:

• Hidden unemployment: people who have given up on finding work, overqualified people

• Underemployment: people who work part time but want full time jobs

Consequences:

1. Loss of GDP

2. Loss of government revenue (tax)

3. Cost to the government in the form of unemployment benefits

4. Disruptions in government spending

5. Social problems

Costs of unemployment:

• On society: Poverty, homelessness, violence, and increase crime rates. These are caused by other factors as well, however, unemployment has major effects on society

• On unemployed people: Little to no money leads to a poorer standard of living and quality of life.

• On the economy as a whole: Can be illustrated using a production possibilities curve. Actual output is less than possible output, which leads to unemployed people paying less direct taxes, therefore decreasing benefits to the economy and government since they receive less money and have to spend more to fix the effects of unemployment

Equilibrium in the labour market:

At a lower wage rate, producers are more willing to hire workers

If AD increases, more labour is required to produce more output

As average wage rate increases, more people will work so Aggregate supply curve slopes upwards

The labour market is in equilibrium when AD for labour is equal to AS of labour

Types of unemployment:

• Frictional: people switching jobs

• Structural: people who lose their jobs because they are no longer needed. Ex: machinery taking over

• Seasonal: workplaces that only operate seasonally

• Cyclical: (demand deficit) weak demand for certain goods. Firms decrease output and fire workers

• Real-wage unemployment: when another wage is set higher than the equilibrium price

Graphs of different types of unemployment:

Cyclical unemployment: as AD decreases from AD1 to AD2, unemployment increases from Yfe to Y2. Also known as demand deficient unemployment

• As consumer demands decreases, firms decreases output, so the demand labour decreases

• Wages do not tend to decrease, but there will be unemployment

Real wage unemployment

1. Solution for frictional and seasonal:

   a. Cutting unemployment benefits (less beneficial to stay unemployed)

   b. Improving information to find jobs easier

2. Solution for structural:

   • Training schemes and education to enhance people’s skills

   • Relocation; incentives to move where skills are required

3. Solution for cyclical:

   • Expansionary fiscal and/or monetary policies aimed at increasing AD

Crowding out: when governments run budget deficits to stimulate an economy and reduce unemployment. Government has to borrow money to run a budget deficit

• Will crowding out occur in:

  • Keynesian: no, if the economy is producing at less than full employment

  • Classical: yes, they are opposed to the use of demand management policies, argue that crowding out is a significant problem of increased government spending

    

    • Government increases demand for loanable funds in the economy

    • Higher interest rates causes private investments to fall, which reduces aggregate demand

    • Final effect on the AD depends on if an increase in government spending outweighs the fall in investments