Unit 5 Unemployment (1).docx

Unit 5 Unemployment You cannot listen to the news or read a newspaper without noticing that data on the unemployment rate are released each month. The unemployment rate---the percentage of the labour force that is unemployed---is a key indicator of the economy's health. Because the unemployment ra...

Unit 5 Unemployment You cannot listen to the news or read a newspaper without noticing that data on the unemployment rate are released each month. The unemployment rate---the percentage of the labour force that is unemployed---is a key indicator of the economy's health. Because the unemployment rate is usually closely related to the economy's aggregate output, announcements of each month's new figure are followed with great interest by economists, politicians, and policy makers. What is \'Unemployment\'? **Unemployment is a phenomenon that occurs when a person who is actively searching for employment is unable to find work**. Unemployment is often used as a measure of the health of the economy. The most frequently measure of unemployment is the **unemployment rate, which is the number of unemployed people divided by the number of people in the labour force**. **[Types of Unemployment]** Economists classify unemployment according to its causes. There are four different types of unemployment: - Frictional unemployment - Cyclical unemployment - Structural unemployment - Seasonal unemployment **[Frictional Unemployment]** Frictional unemployment is sometimes called search unemployment. It arises from the normal operation of the labour market. It includes: People who are moving from one job to another 'it is not always possible to find a new job immediately', people who enter the labour force and are looking for a first job, for instance students who have just finished their studies and people who get fired. Frictional unemployment is normally short term. **[Cyclical Unemployment]** Cyclical unemployment is also referred to as demand deficient unemployment. It occurs when there is a temporary decrease in aggregate demand caused by a slump or recession in the economy. Periods of prosperity may be followed by a temporary decrease in aggregate demand (consumption, investment and exports). We refer to this as a business cycle. Sales may decrease during a recession and firms may have to reduce production. They will then reduce their demand for inputs, including labour, and workers may lose their jobs. When demand increases again, the unemployment situation may improve. Cyclical unemployment may be short- or long-term. **[Structural Unemployment ]** This type of unemployment is caused by structural changes in the economy or the way in which the economy is organised. Workers may lack the necessary skills, education or training required to get a job also it could be as a result of changes in production methods or techniques where workers are replaced by machines or changes in consumer preferences that cause a fall in the demand for certain products, increased foreign competition as a result of trade liberalization and globalization, e.g. textile industry, the decline in certain industries, e.g. the closing of a mine, discrimination and job reservation. Structural unemployment is normally long term. The sum of structural and frictional unemployment is referred to as the natural unemployment rate. The natural rate of unemployment is that amount of unemployment that occurs naturally due to imperfect information and job shopping. It is the rate of unemployment that is expected when an economy is operating at full capacity **[Seasonal Unemployment]** Seasonal unemployment is caused by seasonal shifts in labour supply and demand. Certain businesses require workers only for part of the year. Examples are as follows: - Workers in the fishing industry work only certain months of the year because catches are not allowed during the breeding season. - Workers can be employed for the picking and processing of fruit and vegetables only after the growing season. - Tourist regions and resorts have more jobs available during the peak season. - Some businesses employ more people during Christmas and Easter because of increased sales. **[Philips Curve ]** Definition: The inverse relationship between unemployment rate and inflation when graphically charted is called the Phillips curve. William Phillips pioneered the concept first in his paper \"The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861-1957,\' in 1958. This theory is now proven for all major economies of the world. The theory states that the higher the rate of inflation, the lower the unemployment and vice-versa. Thus, high levels of employment can be achieved only at high levels of inflation. The policies to induce growth in an economy, increase in employment and sustained development are heavily dependent on the findings of the Phillips curve. However, the implications of Phillips curve have been found to be true only in the short term. Phillips curve fails to justify the situations of stagflation, when both inflation and unemployment are alarmingly high. The diagram below illustrates the mechanism behind the Philips curve. https://www.economicshelp.org/wp-content/uploads/2017/05/increase-AD-Keyneisan-LRAS-middle.png An increase in aggregate demand (AD to AD2) causes higher real GDP (Y1 to Y2). Therefore firms employ more workers and unemployment falls. However, as the economy gets closer to full capacity, we see an increase in inflationary pressures. With lower unemployment, workers can demand higher money wages, which causes wage inflation. Also, firms can put up prices due to rising demand. Therefore, in this situation, we see falling unemployment, but higher inflation.  If the economy is operating below full capacity, a significant increase in aggregate demand is likely to cause a reduction in unemployment and higher inflation. Most economists would agree that in the short term, there can be a trade-off between unemployment and inflation. However, there is a disagreement whether this policy is valid for the long-term. Reference Retrieved from: Retrieved from: Retrieved from: Retrieved from: Mankiw, N. Gregory. (2011). Essentials of Economics. 6th Ed. Pearson Publishers Mankiw, N. Gregory. (2009). Principles of Macroeconomics. South-Western Cengage Learning, Mason OH