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Home / IB / Economics / SL / Revision Notes / 3. Macroeconomics / 3.3 Macroeconomic Objectives / 3.3.3 Low Unemployment


3.3.3 Low Unemployment


An Introduction to Unemployment

  • Key terms to understand are employment, labour force, unemployment, and full employment
  1. Employment: refers to the economic use of labour as a factor of production

  2. Unemployment: Someone is considered to be unemployed if they are not working but actively seeking work
     
  3. Labour force: A country's population is divided into the labour force - and non labour force
    • The labour force consists of all workers actively working PLUS the unemployed (who are seeking work)
    • The non labour force includes all those not seeking work e.g. stay at home parents, pensioners, and school children (these people are economically inactive)

  4. Full employment: describes the ideal situation when everyone in the economy who is willing and able to work has a job

Measuring Unemployment

  • Unemployment is measured in many countries using two different approaches
    • The International Labour Organisation (ILO) Survey
    • The Claimant Count

The Differences Between the ILO Labour Force Survey and The Claimant Count


The ILO Labour Force Survey


The Claimant Count


  • An extensive survey is sent to a random sample of households every quarter (60,000 households in the UK)
  • Respondents self-determine if they are unemployed based on the following ILO criteria
    • Ready to work within the next two weeks
    • Have actively looked for work in the past one month
  • The same survey is used globally so it's useful for making international comparisons


  • Counts the number of people claiming job seekers allowance or unemployment benefits
  • More stringent requirement to be considered unemployed than with the ILO survey
  • Often requires claimants to meet regularly with a 'work coach'

 

Three Metrics are Commonly used when Analysing the Labour Market in an Economy


Unemployment rate


Employment rate


Labor force participation rate


equals fraction numerator no. space actively space seeking over denominator total space labour space force end fraction space straight x space 100



equals fraction numerator no. space in space employment over denominator population space of space working space age end fraction space straight x space 100

equals fraction numerator labour space force over denominator total space population end fraction space straight x space 100

  

  • The employment rate could be increasing even as the unemployment rate is increasing:
    • May be caused by increased immigration which causes working age population to increase
    • May be caused as people move from being economically inactive to employed

  • Unemployment rates do not capture the hidden unemployment that occurs in the long term
    • Workers look for a job but may eventually give up and become economically inactive
    • This actually improves the unemployment rate as fewer people are actively seeking work

Worked Example

The table provides information about a country's labour market

Population size 4000000
Labour force size 2400000
Number employed 1800000
Number of full-time students 200000

Calculate the unemployment rate of this country [2]

Step 1: Decide which information in the table is useful

    • The number of full time students would not be included in the labour force size, so it is not useful (it is a distraction)
    • The key infromation is the labour force size and the number employed
       

Step 2: Calculate the number of unemployed in the labour force

    • Labour force - employed = unemployed
    • 2,400,000 - 1,800,000 = 600,000 unemployed
       

Step 3: Calculate the unemployment rate

   Unemployment space rate space equals fraction numerator no. space actively space seeking over denominator total space labour space force end fraction space straight x space 100

Unemployment space rate space equals space fraction numerator 600 comma 000 over denominator 2 comma 400 comma 000 end fraction space straight x space 100

Unemployment space rate space equals space 25 percent sign

Difficulties in Measuring Unemployment

  • There are several difficulties involved in the measurement and use of unemployment statistics

1. Underemployment

  • Workers who are underemployed do not appear in unemployment statistics
  • Unlike the unemployed, people who are underemployed are working
     
  • Someone is underemployed when:
    • They want to work more hours than they currently work
    • They are working in a job that requires lower skills than they have e.g. an architect working as a gym instructor
  • Underemployment is often a consequence of cyclical unemployment
    • Workers who have lost their jobs in a weak economy are willing to take part-time jobs or accept roles outside of their main skill base
  • Underemployment is also a consequence of structural unemployment
    • Unless workers retrain and gain new skills, it will be hard for them to gain full employment

2. Hidden unemployment

  • Hidden unemployment occurs when workers lose their jobs and then attempt to get a new job, usually for a very long period of time, after which, they give up
    • This often occurs during severe recessions
    • They give up looking for work as they feel that they no longer have the skills desired by the market
    • Once they stop looking for work, they are no longer considered to be unemployed
  • Unemployment rates would be much higher if this hidden unemployment was considered

 

3. Unemployment disparities

  • The headline unemployment rate is an average
  • It does not provide insight into ethnic, regional, gender or youth unemployment disparities which may exist in an economy e.g. in 2022 the USA unemployment rate was 3.8% with Nebraska having the lowest unemployment level at 2%.and the District of Columbia the highest at 6%. White workers had an unemployment rate of 3% and black workers 6.5%

Understanding Labour Market Diagrams

  • Labour market equilibrium occurs where the demand for labour (DL) is equal to the supply of labour (SL)
    • The DL is the demand by firms for workers
    • The SL is the supply of labour by workers

  • Individual firms are price takers in the labour market as they have to accept the wage rate that workers are being paid in the industry
    • If they offer a lower wage, they will likely struggle to recruit workers
    • If they offer a higher wage there will be a large number of workers applying to work there

3-3-3-low-unemployment

In the labour market for graphic designers, the equilibrium wage rate is W and the equilibrium quantity is Q. At this point the DL = SL

Diagram Analysis

  • The market for graphic designers is in equilibrium where DL = SL 
  • The equilibrium wage is W and the quantity of labour is Q
  • There is no excess supply of labour
  • There is no excess demand for labour

 

  • There are several causes of unemployment, all of which cause disequilibrium in the labour market. These include:
    • Real wage unemployment (minimum wages)
    • Structural unemployment
    • Cyclical (demand deficient) unemployment
    • Frictional unemployment
    • Seasonal unemployment

Real Wage Unemployment (Minimum Wages)

  • Real wage unemployment occurs when wages are inflexible at a point higher than the free-market equilibrium wage
    • Usually caused by the existence of minimum wage laws
    • The higher wage creates an excess supply of labour
    • This excess supply represents real wage unemployment

    • A minimum wage is a legally imposed wage level that employers must pay their workers
      • It is set above the market rate
      • The minimum wage/hour varies based on age

3-5-3--minimum-wage_edexcel-al-economics

A national minimum wage (NMW1) is imposed above the market wage rate (We) at W1

 

Diagram Analysis

  • The market equilibrium wage and quantity for truck drivers in the UK is seen at WeQe
  • The UK government imposes a national minimum wage (NMW) at W1
  • Incentivised by higher wages, the supply of labour increases from Qe to Qs
  • Facing higher production costs, the demand for labour by firms decreases from Qe to Qd
  • This means that at a wage rate of W1 there is an excess supply of labour and the potential for real wage unemployment equal to QdQs

Structural Unemployment

  • Occurs when there is a mismatch between jobs and skills in the economy
  • It usually happens as the structure of an economy changes e.g. the secondary sector is declining and the tertiary sector is growing
  • There is no longer a need for a specific type of worker e.g. shipbuilders in Glasgow
  • Many Western industries have relocated production to China causing structural unemployment in their economies
  • Unless workers receive help to retrain, they are often left unemployed or under-employed
      

3-3-3---structural-unemployment

Structural unemployment occurs in a specific industry when the demand for labour (DL) shifts left as workers are no longer required

Diagram Analysis

  •  The initial labour market equilibrium in the USA steel industry can be seen at W1Q1
  • The USA began to import more and more steel from China and with fewer workers required the demand for labour (DL) shifted left from DL→DL1
  • Wages fell from W1→W2 and the quantity of workers in the industry reduced from Q1→Q2  (structurally unemployed)
     

Cyclical (Demand Deficient) Unemployment

  • Cyclical or demand deficient unemployment is caused by a fall in AD in an economy
    • This typically happens during a slow down or recession
    • The demand for labour is derived from the demand for goods/services
    • As output falls in the economy, firms lay off workers

 

ZU9J~NrQ_3-3-3-demand-deficient-unemployment

A fall in aggregate demand (AD) leads to a fall in output. Fewer workers are required so the demand for labour (DL) shifts left and wage rates fall

 

Diagram Analysis

  • Using a Keynesian national income model, the macroeconomic equilibrium is initially at AP1YFE
  • At this level of national output, the labour market is in equilibrium at W1Q1
  • A recession causes AD to shift left from AD1 → AD2 
  • This leads to a fall in real GDP from YFE → Y1
  • With lower levels of output, fewer workers are required and the demand for labour (DL) in the labour market shifts left from DL → DL1
  • The new labour market equilibrium is now at W2Q2
  • The labour market has a lower wage rate and increased unemployment equal to Q1 - Q2

Frictional and Seasonal Unemployment

  • Seasonal unemployment occurs as certain seasons come to an end and labour is not required until the next season
    • E.g. fruit pickers; summer seaside resort workers; ski instructors

  • Frictional unemployment occurs when workers are between jobs
    • This is usually short-term unemployment
    • Workers have voluntarily left their previous job to search for another

The Natural Rate of Unemployment

  • The natural rate of unemployment (NRU) is the lowest achievable level of unemployment  in an economy
  • The unemployment rate can never be 0% as there is always some unemployment due to the existence of frictional, seasonal and structural unemployment
  • The natural rate of unemployment = frictional + seasonal + structural unemployment

The Costs of Unemployment

  • The effects of unemployment, especially long-term unemployment, are extremely damaging
    • There are impacts on the individual, the economy, the government, and firms

2-1-3-unemployment-

Long term unemployment affects individuals, the economy, government, and firms
 

  • Government's receive less tax revenue and have higher expenditures in the form of welfare payments
  • Individuals suffer significant emotional, relational and financial consequences
  • Firms may find it harder to find workers to employ (as they have moved on) once the economy starts to recover
  • The economy contracts as there is a higher level of inefficient use of available resources


  • 1. Introduction To Economics
    • 1.1 What Is Economics?
      • 1.1.1 Economics as a Social Science
        • 1.1.2 The Problem of Choice
          • 1.1.3 The Production Possibilities Curve Model (PPC)
            • 1.1.4 Modelling the Economy
            • 1.2 How Do Economists Approach The World?
              • 1.2.1 Economic Methodology
                • 1.2.2 Economic Thought
              • 2. Microeconomics
                • 2.1 Demand
                  • 2.1.1 Demand, Price & Quantity
                    • 2.1.2 Non-Price Determinants of Demand
                    • 2.2 Supply
                      • 2.2.1 Supply, Price & Quantity
                        • 2.2.2 Non-Price Determinants of Supply
                        • 2.3 Competitive Market Equilibrium
                          • 2.3.1 Market Equilibrium & Disequilibrium
                            • 2.3.2 Functions of the Price Mechanism
                              • 2.3.3 Consumer & Producer Surplus
                              • 2.4 Price Elasticity of Demand (PED)
                                • 2.4.1 Definition, Calculation & Determinants of PED
                                  • 2.4.2 The Significance of PED
                                  • 2.5 Income Elasticity of Demand (YED)
                                    • 2.5.1 Definition, Calculation & Illustration of YED
                                    • 2.6 Price Elasticity of Supply (PES)
                                      • 2.6.1 Definition, Calculation & Determinants of PES
                                      • 2.7 Role of Government In Microeconomics
                                        • 2.7.1 Reasons For Government Intervention In Markets
                                          • 2.7.2 Government Intervention: Indirect Taxes & Subsidies
                                            • 2.7.3 Government Intervention: Price Controls, Direct Provision & Regulation
                                            • 2.8 Market Failure: Externalities & Common Pool (Access) Resources
                                              • 2.8.1 Market Failure
                                                • 2.8.2 Negative Externalities
                                                  • 2.8.3 Positive Externalities
                                                    • 2.8.4 Common Pool (Access) Resources
                                                      • 2.8.5 Government Intervention to Address the Market Failure
                                                        • 2.8.6 Other Interventions to Address the Market Failure
                                                        • 2.9 Market Failure: Public Goods
                                                          • 2.9.1 Public Goods
                                                        • 3. Macroeconomics
                                                          • 3.1 Measuring Economic Activity
                                                            • 3.1.1 National Income & The Circular Flow of Income
                                                              • 3.1.2 National Income Terminology & Calculations
                                                                • 3.1.3 The Business Cycle
                                                                  • 3.1.4 Appropriateness of Using GDP/GNI to Measure Well-being
                                                                    • 3.1.5 Alternative Measures of Well-Being
                                                                    • 3.2 Variations in Economic Activity (AD & AS)
                                                                      • 3.2.1 Aggregate Demand (AD)
                                                                        • 3.2.2 Short-Run Aggregate Supply (SRAS)
                                                                          • 3.2.3 Alternative Views of Aggregate Supply (AS)
                                                                            • 3.2.4 Shifts of the Long-Run Aggregate Supply (LRAS)
                                                                              • 3.2.5 Macroeconomic Equilibrium
                                                                              • 3.3 Macroeconomic Objectives
                                                                                • 3.3.1 An Introduction to Macroeconomic Objectives
                                                                                  • 3.3.2 Economic Growth
                                                                                    • 3.3.3 Low Unemployment
                                                                                      • 3.3.4 Low & Stable Rate of Inflation
                                                                                        • 3.3.5 Potential Conflicts Between Macroeconomic Objectives
                                                                                        • 3.4 Inequality & Poverty
                                                                                          • 3.4.1 Measuring Inequality & Poverty
                                                                                            • 3.4.2 Causes of Inequality & Poverty
                                                                                              • 3.4.3 Using Taxation to Reduce Inequality & Poverty
                                                                                                • 3.4.4 Other Policies to Reduce Inequality & Poverty
                                                                                                • 3.5 Demand Management: Monetary Policy
                                                                                                  • 3.5.1 An Overview of Monetary Policy
                                                                                                  • 3.6 Demand Management: Fiscal Policy
                                                                                                    • 3.6.1 An Overview of Fiscal Policy
                                                                                                    • 3.7 Supply-Side Policies
                                                                                                      • 3.7.1 An Overview of Supply-Side Policies
                                                                                                        • 3.7.2 The Effectiveness of Supply-Side Policies
                                                                                                      • 4. The Global Economy
                                                                                                        • 4.1 Benefits of International Trade
                                                                                                          • 4.1.1 The Advantages of Free Trade
                                                                                                          • 4.2 Types of Trade Protection
                                                                                                            • 4.2.1 Tariffs
                                                                                                              • 4.2.2 Quotas
                                                                                                                • 4.2.3 Export Subsidies
                                                                                                                  • 4.2.4 Administrative Barriers
                                                                                                                  • 4.3 Arguments For & Against Trade Protection
                                                                                                                    • 4.3.1 Arguments For & Against Trade Protection
                                                                                                                    • 4.4 Economic Integration
                                                                                                                      • 4.4.1 Understanding Economic Integration
                                                                                                                        • 4.4.2 Types of Trading Blocs
                                                                                                                          • 4.4.3 The World Trade Organisation (WTO)
                                                                                                                          • 4.5 Exchange Rates
                                                                                                                            • 4.5.1 Types of Exchange Rate Systems
                                                                                                                              • 4.5.2 Causes & Consequences of Exchange Rate Fluctuations
                                                                                                                              • 4.6 Balance of Payments
                                                                                                                                • 4.6.1 Components of the Balance of Payments
                                                                                                                                • 4.7 Sustainable Development
                                                                                                                                  • 4.7.1 The Sustainable Development Goals
                                                                                                                                  • 4.8 Measuring Economic Development
                                                                                                                                    • 4.8.1 Single Indicators of Development
                                                                                                                                      • 4.8.2 Composite Indicators of Development
                                                                                                                                        • 4.8.3 Evaluating the Different Approaches
                                                                                                                                        • 4.9 Barriers to Economic Growth & Development
                                                                                                                                          • 4.9.1 Poverty Traps
                                                                                                                                            • 4.9.2 Economic, Political & Social Barriers
                                                                                                                                            • 4.10 Economic Growth & Development Strategies
                                                                                                                                              • 4.10.1 Trade Strategies, Diversification & Social Enterprise
                                                                                                                                                • 4.10.2 Market-Based & Interventionist Policies
                                                                                                                                                  • 4.10.3 Merit Goods & Inward Foreign Direct Investment
                                                                                                                                                    • 4.10.4 Foreign Aid & Development Assistance
                                                                                                                                                      • 4.10.5 Institutional Change
                                                                                                                                                        • 4.10.6 Evaluating Market Orientated Approaches Versus Government Intervention
                                                                                                                                                          • 4.10.7 Progress Towards Sustainable Development Goals

                                                                                                                                                        Author: Steve



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