Low Unemployment (SL IB Economics)

• 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

• 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

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

Unemployment rate	Employment rate	Labor force participation rate

• 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
    

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

• 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%

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

Diagram Analysis

• The market for graphic designers is in equilibrium where D_L = S_L 
• 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 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 (W_e) at W₁

Diagram Analysis

• The market equilibrium wage and quantity for truck drivers in the UK is seen at W_eQ_e
• The UK government imposes a national minimum wage (NMW) at W₁
• Incentivised by higher wages, the supply of labour increases from Q_e to Q_s
• Facing higher production costs, the demand for labour by firms decreases from Q_e to Q_d
• 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 Q_dQ_s

• 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 (D_L) 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 (D_L) shifted left from D_L→D_L1
• Wages fell from W₁→W₂ and the quantity of workers in the industry reduced from Q₁→Q₂  (structurally unemployed)
   

• 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 (D_L) shifts left and wage rates fall

Diagram Analysis

• Using a Keynesian national income model, the macroeconomic equilibrium is initially at AP1Y_FE
• 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 (D_L) in the labour market shifts left from D_L → D_L1
• The new labour market equilibrium is now at W₂Q₂
• The labour market has a lower wage rate and increased unemployment equal to Q₁ - Q₂

• 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 (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 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