Employment & Unemployment – AS/A LEVELS/IB/IAL
Employment & Unemployment – AS/A LEVELS/IB/IAL
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Employment and Unemployment
There are two measures of unemployment in the UK.
The International Labour Organisations (ILO) – Labour Force Survey (LFS).
The Labour Force Survey (LFS) is a questionnaire that asks people if they have been out of work for the last 4 weeks and ready to start work within the next 2 weeks.
The claimant count
This records people claiming job seekers allowance (JSA).
Issues with the measures of unemployment
- Both underestimate the figure as they do not include those: working part time but would like to work full time, on government training schemes who would prefer employment, classed as sick or disabled and those who aren’t actively looking for jobs but would take a job if offered or are in education because they can’t get a job
- Some people may not be included in the LFS unemployment measure but would be in the Claimant Count. These may include people working in the hidden economy or those who fraudulently claim benefits.
- The claimant count underestimates the real number of unemployed people as not everyone claims unemployment benefits due to not meeting the requirements for them or personal reasons
Types of unemployment
Frictional Unemployment
This is the time in-between jobs when people are not working.
Cyclical/Demand Deficient Unemployment
This occurs when there is a lack of demand for a good or service causing unemployment.
Structural Unemployment
Structural unemployment occurs when the skills of those looking for jobs do not meet the skills required for the jobs available.
Seasonal Unemployment
This occurs due to certain industries only requiring labour at particular times of the year. e.g. more staff are required by an ice cream company during summer.
Costs of Unemployment
The costs of unemployment are not just felt by those who are unemployed. The list below highlights the main costs of unemployment.
- Loss of incomes.
- Depletion of skills if they are out of work for long.
- Firms start to experience a decrease in demand and profits.
- Governments will collect less tax revenue and pay out more benefits.
- Impact on dependents of those who lose their jobs.
Under-employment
- These are people who are in a part-time job or a zero-hour contract when they would prefer to be in a full-time job.
- Or those who would prefer to be an ’employee’ instead of self-employed
- Under-employment also reflects those who are not working in a job which reflect their true skill level of desired industry
- Under-employment tends to be higher when the economy is in a recession
The significance of changes in the rates of employment, unemployment, and inactivity
- Fall in the Productive Potential of the country – the size of the labour force will decrease if there are increases in activity. This results in a fall in the productive potential of the country, lower GDP and less tax revenue as less people are working
- Higher Unemployment – decreases in inactivity may increase unemployment rates if there are no job available to workers
The significance of Migration and skills for Employment / Unemployment
Migration
- Increased jobs – an increase in net inward migration is likely to cause a rise in jobs. The Circular Flow of Income suggests that as immigrants spend money in the economy, jobs and total employment increases without causing an increase in unemployment.
- Lower Wages – there is a greater supply of labour, suggesting that the price equilibrium. Competition for jobs increase and workers with a poorer skillset are likely to suffer from lower wages
Skills
- Higher skills are needed – since economies tend to grow overtime, higher skills are needed to work in them
- Workforce needs to consist of highly skilled workers – in order for the UK to maintain its employment levels, it needs to ensure structural unemployment is kept to a minimal and the workforce is filled mostly with highly-skilled workers
- Long-term Unemployment – the government may need to intervene and correct market failure arising if firms do not train their workers
The Impact of Unemployment
Consumers
- Less Choice – in areas of high unemployment, stores tend to close down or limit the range of goods / services they can offer. Hence, consumers experience less variety and choice
- Lower Prices – some firms may reduce their prices in an attempt to increase their sales and demand for the product
Firms
- Lower Profit – the decrease in the demand for goods / services is likely to fall, resulting in lower profit
- Lower Wages – a lack of jobs available in the market may cause firms to offer workers lower wages as they know they will still take the job regardless
- Less skilled workers – loss of skills may arise from long term unemployment; firms are only able to employ from a smaller pool of skilled workers
Workers
- Less Income – those unemployed will have less income in comparison to those employed, which may result in a lower standard of living
- Lower Job Security – those who are employed may suffer from lower job security ad the fear of being redundant
- Loss of Skills – those unemployed may find it harder to secure another job if they lose skills
Government
- Increase in Budget Deficit – higher unemployment levels will result in a budget deficit due to increased borrowing to fund public sector spending, causing the Government to consider raising taxes
- Less Tax Revenue – the reduced income resulting due to a loss in jobs means households pay less in tax, therefore the Government generate less tax revenue
- Higher Spending – the Government may have to spend more money on welfare benefits as the number of people unemployed increase
The Economy
- Social Deprivation – a rise in unemployment is likely to cause higher crime rates, poorer health, and lower life expectancy
- Loss of Potential National Output – higher unemployment levels represent an inefficient use of scarce resources, potentially affecting LRAS in a negative way if people decide to leave the labour market
Policies to improve the Mobility of Labour
Reducing Occupational Mobility
- Training Schemes – investment into training schemes can boost human capital and equip them with new transferable skills, making them more employable when switching from one industry to another
- Vocational Training – increasing the skill levels by subsiding the provision of vocational training by the private sector
Reducing Geographical Mobility
- Subsidies – provide subsidies for those moving into an area where there are shortages of labour
- Housing Market – reformations in the housing market can reduce the price of rented properties and increase the supply of affordable properties
AQA Spec – Additional Content
Involuntary and Voluntary Unemployment
Involuntary Unemployment
A person is unable to secure a job despite being willing and able to work at the given wage rate.
This usually results from a decrease in AD and an excess supply of labour in the market – therefore it is cyclical
Voluntary Unemployment
This occurs when someone chooses not to work at the given wage rate and can be influenced by large welfare benefits
People may also be discouraged to actively participate in the labour market due to high income taxes
The Natural Rate of Unemployment
- This concept was developed by Milton Friedman and Edmund Phelps
- Natural Rate of Unemployment – this refers to the unemployment rate at equilibrium in the labour market
- The Natural Rate of Unemployment is usually caused as a result of supply-side factors
- Inflation is very unlikely to increase at this level of unemployment as there is no demand-deficient unemployment and the full level of employment is reached
- The employment rate reverts to the natural rate of unemployment in the long run
WJEC Spec – Additional Content
Solutions to Unemployment
Demand-Side Policies
These may be used to increase Aggregate Demand during a recession or negative output gap.
Demand-Side Policies – AS/A LEVELS/IB/IAL – The Tutor Academy
Evaluation of the Solutions to Unemployment
- If the government possess imperfect information regarding the economy, it could lead to poor decisions being made or inefficient spending
- There are time lags involved with implementing the Fiscal Policy
- Crowding out can occur if the government borrow from the private sector, leaving them with fewer funds available
- The effect on AD can be dependent on the size of the multiplier – the bigger the multiplier, the greater then affect on AD and therefore the more effective the policy is
- National Debt will continue to increase if the government borrows huge amounts of money and are struggling to repay it
Supply Side Policies
Supply Side Policies – The Tutor Academy
Quick Fire Quiz – Knowledge Check
1. Identify and explain five factors that influence levels of employment (10 marks)
2. Identify the two main ways of measuring unemployment (2 marks)
3. Identify the main measure of unemployment in the UK? (2 marks)
4. Explain how the labour force survey is calculated? (4 marks)
5. Explain how the claimant count is calculated? (4 marks)
6. State the current benefits amount that is provided to people claiming JSA? (2 marks)
7. Explain the problems with the ILO measure? (4 marks)
8. Explain the problems with the claimant count? (4 marks)
9. Define cyclical unemployment (2 Marks)
10. Define structural unemployment (2 Marks)
11. Define what is frictional unemployment (2 Marks)
12. Identify and explain three costs of unemployment? (6 Marks)
13. Explain the impact of unemployment on consumers (4 marks)
14. Explain the impact of unemployment on firms (4 marks)
15. Explain the impact of unemployment on workers (4 marks)
16. Explain the impact of unemployment on the Government (4 marks)
17. Explain the impact of unemployment on the Economy (4 marks)
Next Revision Topics:
A Level Economics Past Papers
