Low Unemployment (HL IB Economics)
Revision Note
An Introduction to Unemployment
Key terms to understand are employment, labour force, unemployment, and full employment
Employment: refers to the economic use of labour as a factor of production
Unemployment: Someone is considered to be unemployed if they are not working but actively seeking work
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)
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
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Three Metrics are Commonly used when Analysing the Labour Market in an Economy
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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]
Answer:
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
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
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
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
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
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 Q 1- 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
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
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