2.3 C
Equilibrium Unemployment
Or the Natural Rate of Unemployment NRU
B & D pages 211 – 214
Learning Objectives
n
n
Distinguish between the causes of [and
describe], using examples, the meaning of
frictional, seasonal and structural
unemployment
Explain, using a diagram, how structural
unemployment is caused by changes in the
demand for particular labour skills, changes
in the geographical location of industries,
and labour market rigidities
Equilibrium Unemployment
(also called “Voluntary unemployment” which occurs when the jobless/unemployed
are either unwilling or unable to accept jobs at the going wage rate.
Wage
(price of
labour)
Equilibrium (or
natural)
unemployment
TLF
Equilibrium
wage, W
AD labour
AS labour
0
Equilibrium
employment = FE
Quantity of
Labour
Types of natural unemployment
In the short-run (under 6 months) we have Frictional
unemployment: recently (re)entering the workforce.
For example:
2. Another short-run u/e is Seasonal Unemployment,
where workers are regularly unemployed each
season. For example:
3. Structural unemployment is due to a type of job or
skills, that is no longer needed because of
technological or other economic shifts. For example:
1.
Structural unemployment occurs for many reasons.
(1) There is a permanent fall in the demand for a particular type
of labour due to technology or changing consumer tastes.
This is natural in a growing economy. There will always be new
types of jobs being created (eg: software engineers) and other
jobs in a country may disappear (eg: coal mining) making
people unemployed.
For example, ATMs reduce the demand for human bank tellers.
This can be referred to as technological unemployment.
(2) It is made worse if they lack the occupational mobility to
change jobs by not having skills for the new jobs available.
(3) lack of geographical mobility. It may be that jobs are created
in part of the country, while the unemployed are living in
another part of the country.
Demand for a particular type of labour might fall due to lower cost
labour in foreign countries.
5 Situations: What type of u/e?
Pene was employed in harvesting grapes and finds he will not
have work for several months.
James can no longer find a job in making construction equipment
since similar products are now being imported more cheaply.
Chris moved from Canada over a year ago, works as an Physics
teacher but cannot find work as a skilled rocket scientist.
A recent graduate of AIC has spurned all offers from Yale and
Harvard to pursue her dream of becoming a graphic artist but is
yet to get a job.
Workers in DVD manufacturing/servicing are becoming
“redundant” and then find it hard to get a new job.
What are solutions to natural
unemployment?



Policies need to be designed to make people more
able to take the vacant jobs or encourage them to
be more willing to take the available jobs.
These policies will cause the aggregate supply
curve of labour to shift to the right.
Supply side policies should be designed to
increase the quantity and improve the quality of
the labour.
Based upon Text, Pages 187-190
INTERVENTIONIST & MARKET-BASED
SUPPLY SIDE POLICIES
Recall: (from 2.2B) An increase in LRAS will
occur when either of two basic things happen:
1.
2.
An increase in the quantity of factors of
production perhaps due to an increase in the
working population, discovery of new raw
materials or an increase in net investment in the
nation's capital stock.
An increase in the quality of factors of
production, perhaps due to technological
progress or improved education, training and
health care; these will cause the productivity
(output per hour) of resources to increase.
Supply side policies aim for long run
growth
Demand Side Policies can’t improve growth beyond Yf.
Price
Level
And low
inflation
LRAS198
0
LRAS199 LRAS200
0
0
In the longrun, only
improved
resources,
technology and
market reforms
increase AS
P200
0
P1980P1990
AD2000
AD1980
0
Y1980 Y1990
AD1990
Y2000
This will lead to both real growth in output
Quantity of
Output
More 2.2 B Learning Objectives
1.
2.
Explain that supply-side policies aim at
positively affecting the production side of an
economy by improving the institutional
framework and the capacity to produce (that is,
by changing the quantity and/or quality of factors
of production).
State that supply-side policy may be marketbased or interventionist and that in either case
they aim to shift the LRAS curve to the right,
achieving growth in potential output.
SUPPLY SIDE POLICIES
Interventionist VS market-oriented
policies
Interventionist Policies
True to their name, interventionist policies rely on
government involvement in the labour market.
Market Oriented Policies
Market oriented policies emphasize the importance
of allowing the labour market to function freely
without government intervention.
Basics of Supply Side Policy pages 187-190
Market Based
1:Labour Market & Welfare Reform
Reduce union power / worker rights
Reduce minimum wages /welfare benefits
2: Tax and Compliance Reform
Reduce income taxes / corporate taxes
Tax breaks for investment (including sharemarket)
Reduce compliance costs – e.g. RMA
Interventionist
1:Education and Training
Provides incentives for investing in “human capital”
Improve quality and delivery of training
2: Incentives for improvements in technology
Tax breaks, research grants, sharing information
Effect: Increasing the LRAS (Neo-Classical Model)
Price
Level
AS
Equilibrium
price
A
AD
0
Equilibrium
output
Real Output