Lecture 14: Unemployment Causes And Remedies PDF

Birmingham International Academy Business and the Market [Sep:1130444] [Jan:1134786] Lecture 14: Unemployment: Causes, and Remedies Dr Rasha Aly Email- [email protected]. ...

Birmingham International Academy Business and the Market [Sep:1130444] [Jan:1134786] Lecture 14: Unemployment: Causes, and Remedies Dr Rasha Aly Email- [email protected].  Birmingham Outline International Academy  Background to unemployment  Who counts as the unemployed  The unemployment rates  Types of unemployment  Is unemployment always bad?  Effects of unemployment on business  Policies to tackle unemployment  Birmingham International Academy Learning Outcome  Be able to understand who the unemployed are  Familiar with different types of unemployment  Understand the effect of unemployment on businesses  Be familiar with some of the policies used to tackle unemployment  Birmingham International Academy Introduction  Unemployment occurs when those actively looking for work are not able to get one  Low level of unemployment is one of the main objectives of macroeconomic policy  High unemployment has many consequences for a country and its people  Birmingham International Academy Consequence of Unemployment  Unemployment creates:  Lost incomes which can reduce demand for goods & services  Lost production which waste resources because (workers) that could otherwise produce goods and services are not able to do so  Unemployment also means workers lose skills (lost human capital), especially if they are unemployed for long periods  Loss of tax revenues and increased welfare payments  Can increase crime and inequality  Therefore the country’s output (GDP) will be lower if unemployment is high  Birmingham International Academy Desirable or Undesirable  A low level of unemployment doesn’t mean we want zero unemployment  Some unemployment is needed in a changing economy  Imagine if a new company want to hire people  Imagine if a company want to expand  Imagine if hotel rooms are full etc etc.  To understand this further, we will think of different types of unemployment  But first we will define who counts as unemployed and look at the unemployment rates  Birmingham International Academy Unemployment  When is someone counted as being unemployed?  The unemployed have 3 basic characteristics:  Of working age (i.e. not still at school or a pensioner)  Available for work (so not, for example, in full- time education or unfit to work)  Without work, and actively seeking employment  Birmingham International Academy The Unemployment Rate  The unemployment rate is the percentage of the workforce that is unemployed  The workforce is the sum of the employed and the unemployed  Recall the group counted as unemployed plus those who are already in employment make up the workforce or labour force  Birmingham International Academy 14 Unemployment rate, G7 12 10 Canada 8 France Germany 6 Italy Japan United Kingdom 4 United States 2 0 9 0 9 2 9 4 9 6 9 8 0 0 0 2 0 4 0 6 0 8 1 0 1 2 1 4 1 9 1 9 1 9 1 9 1 9 2 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0  Birmingham International Academy Unemployment rate, regions 14.00 12.00 10.00 8.00 6.00 4.00 2.00 0.00 9 1 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 20 East Asia & Pacific European Union Middle East & North Africa North America Sub-Saharan Africa Source: WDI  Birmingham International Academy Observation from the graphs  What do we see from the previous figures?  Some countries/regions tend to have higher rates than others  Germany and France both higher than Japan in every year  Rates tend to rise and fall in cycles – but not as clearly as growth rates  Youth (under 25) unemployment is a serious problem and is higher in many countries and regions  Birmingham International Academy Youth Unemployment, under 25s 70.0 European Union Germany 60.0 Greece Spain 50.0 France Italy United 40.0 Kingdom 30.0 Greece, 20.0 Spain & Italy high 10.0 rates 0.0  Birmingham International Academy Youth Unemployment- under 25s 30 25 20 15 10 5 Source: WDI 0 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19 19 19 19 19 20 20 20 20 20 20 20 20 20 East Asia & Pacific European Union Middle East & North Africa North America Sub-Saharan Africa  Birmingham International Academy What causes the unemployment rate to fluctuate?  In any time period, people enter and leave the unemployment pool  Entrants:  People fired from their jobs  People who quit their jobs  New entrants (school/university leavers)  Re-entrants (e.g. after raising a family)  Birmingham International Academy What causes the unemployment rate to fluctuate?  In any time period, people enter and leave the unemployment pool  Leavers:  People hired to new jobs  Withdrawals (e.g. starting to claim a pension, starting to study)  The level of unemployment rises if there are more entrants than leavers in the pool  Birmingham International Academy Types of Unemployment  There are three types of unemployment:  People who are unemployed for short periods of time as they change jobs – frictional unemployment  People who lose their jobs due to changes to the structure of the economy – structural unemployment  Sometimes called mismatch between skills and locations to what is available in a region  People who lose their jobs because of the overall performance of the economy (e.g. a recession) – cyclical unemployment or demand-deficient  Birmingham International Academy Frictional Unemployment  Would we ever expect to see everyone in an economy in a job?  Some people lose their jobs and – even though there are vacancies in other businesses – take time to find a new job  Some people might move to a new city and take time to find a job  Birmingham International Academy Structural Unemployment  Economies tend to change over time: some industries disappear while others grow  This means some firms in declining industries fire workers while new firms want to hire them  But the fired workers’ skills and location might not match the new firms  For example an engineer in North East England can’t get a job as a web designer in London  So the engineer may remain unemployed  Birmingham International Academy Structural Unemployment  Structural unemployment can be long-term  Declining industries may not be replaced  Workers lose skills, or have skills that are no longer needed  Governments may have a role in retraining workers or supporting new industries in affected regions  Birmingham International Academy Cyclical Unemployment  In the last lecture we looked at economic growth and saw that there are periods of high growth (booms) and periods of low growth or recession or slumps  During periods of high growth (upturns), firms produce more, so they need to hire more workers – unemployment falls  But in recessions (downturns), firms produce less and some go out of business – so fewer workers are hired and unemployment rises  So cyclical unemployment fluctuates with the business cycle  Birmingham International Academy Is Unemployment always bad?  Another way of asking this questions is: Do we want an unemployment rate of zero?  Let’s consider the three types of unemployment  Zero cyclical unemployment would be good  Cyclical unemployment is a sign that the economy is doing badly – low growth or recession  Low cyclical unemployment means a healthy economy  Birmingham International Academy Is Unemployment always bad?  What would zero structural unemployment mean?  That the structure of the economy isn’t changing  No new industries or new technology – no progress!  So some structural unemployment is normal  But it can have harmful effects on groups of workers or regions  governments should focus on creating jobs and retraining  Birmingham International Academy Is Unemployment always bad?  What would zero frictional unemployment mean?  People only leave a job if they already have a new job  Very unlikely – some people want to change career or move to a new city and may take time to find a new job  So some frictional unemployment is fine – but we want it to last a short time for any person  Birmingham International Academy Unemployment and Business  Unemployment rates reflect the economic conditions firms operate in  High unemployment rates may reflect that the economy is in recession and firms are hiring fewer (or firing more) workers  Or could be because of changing structure of the economy  The 2007 financial crisis saw unemployment rise across the world  Birmingham International Academy Unemployment and Business  Is unemployment bad for business?  May reflect underlying problems (demand issues)  But may also present opportunities (other firms benefit)  Possibility of hiring high-skilled workers who have lost jobs elsewhere  Lower pressure on wages (and therefore costs)  Birmingham 2019 News International Academy  Jaguar Land Rover planning to cut 5000 jobs in the new year because of sliding demand for its cars from China, drop in demand for diesel cars and concerns about Brexit.  It has already cut 1000 temporary workers at its Solihull plant last April while reducing working hours for workers at its Wolverhampton factory.  Example that if the economy is not doing well, jobs are going to be lost. If you are a firm selling abroad too, fall in demand abroad is also going to affect your business.  So a Chinese car maker may benefit from this.  Birmingham International Academy Policies to tackle Unemployment  With structural unemployment, government can support retraining of workers and update skills  Support the building of new industries in areas affected by structural changes to the economy  With frictional unemployment, governments can initiate housing policies that make relocation easier  Create job centres, or utilise modern technology where all job vacancies are advertised  Birmingham International Academy Policies to tackle Unemployment  Cyclical unemployment may require government policies to attract spending and investment  Reduce income tax in order to stimulate consumer spending  Increase government spending if the private sector or businesses have less confidence in investing  Government can reduce interest rates in order to attract entrepreneurs to borrow and invest  Initiate loan guarantee schemes for small and medium size businesses  Expand the export potential of your country  Birmingham International Academy Summary  After this lecture, you should understand  Different causes of unemployment  Why high unemployment rates are bad for an economy…  … but that doesn’t mean we want zero unemployment