2.3 Macroeconomic objectives Low unemployment Remember ■ Low unemployment (or a high level of employment) is one of the macroeconomic policy goals as unemployment is a costly phenomenon for the economy as well as for individuals and society. Example 1 Determine whether the following statements are true or false. Explain your answers. 1 To deal with cyclical unemployment, demandside policies are typically employed. True. Since cyclical unemployment is a result of insufficient AD (and is also known as demand deficient or Keynesian unemployment) it is expected that policy makers will try to increase AD to lower cyclical unemployment. Later, it will be seen that these demand-side policies include fiscal policy, whereby the government tries to increase AD by increasing its expenditures G or by decreasing taxes T, and also monetary policy, whereby (typically) the central bank tries to increase AD by lowering interest rates r or by pumping more money into the economy. 2 There is not much that can be done for the seasonally unemployed. True. Construction workers in the winter in areas where temperatures drop to sub-zero levels (such as in New England in the USA) are regularly unemployed for several weeks and collect unemployment benefits. Some are highly skilled workers so it makes no sense for them to seek alternative employment as clerks at a food store. That is why monthly unemployment statistics are ‘seasonally adjusted’ which just means that the effect of seasonal unemployment is isolated from the data. For seasonally unemployed unskilled workers, unemployment may decrease if better and faster information about job availabilities is open to them. 3 Structural unemployment will decrease if the government increases its expenditures. False. Structural unemployment may decrease only through: – interventionist supply-side measures (such as providing retraining, assisting relocation of 116 individuals to areas with job vacancies they can fill or providing tax breaks to firms willing to move to areas with high regional unemployment) – market-oriented supply-side policies (SSPs) that aim to make the labour market more flexible (such as lowering the level of unemployment benefits, making it easier for firms to dismiss workers so that they become more willing to hire workers when the business outlook is good instead of trying to rely only on their existing labour force, or abolishing minimum wage laws and collective bargaining processes). Example 2 Rewrite the following statements and fill in the blanks by using the terms provided below. labour costs searching natural discouraged permanent structural decrease rigidity increases skills unemployment benefits retraining collective fire stopped tax hire employed technological moving accept mismatch security part-time An individual is considered unemployed if he or she is actively (1) ______________ for a job but cannot find one. It follows that (2) ______________ workers who have been unemployed for so long that they have (3) __________ looking for a job are not included in official unemployment statistics. In addition, (4) __________ workers are also excluded from official statistics as they are gainfully (5) _________. 2.3 Macroeconomic objectives As a result of unemployment, government spending (6) ________________ because most governments pay (7) ____________ to eligible unemployed individuals. At the same time, high unemployment will, ceteris paribus, lead to lower (8) __________ revenues for the government as the unemployed have lost their wage income and tend to spend less. High unemployment benefits may (9) __________ the probability that an unemployed worker will (10) _____________ a job offer. Job (11) _____________ and labour protection laws may also be responsible for increased level of unemployment as firms hesitate in an upturn to (12) ________ new workers fearing that it will be difficult to (13) _________ them if things turn sour for the firm. (14) ________________bargaining adds to labour-market (15) ______________ as wages cannot differ and change to clear labour markets. These factors tend to increase (16) ___________________ unemployment and consequently (17) ____________ unemployment. Perhaps more importantly, structural unemployment is a result of a (18) _________ between the (19) _________ the unemployed possess and the skills in demand in the labour market. Some jobs may have disappeared because of (20) _____________ advancements while other jobs may have disappeared because of firms (21) ______________ elsewhere in the country or abroad in search of lower (22) __________. These (23) ____________ decreases in the demand for certain skills imply that only through (24) ____________ of these workers will they be able to find work again. (1) searching, (2) discouraged, (3) stopped, (4) part-time, (5) employed, (6) increases, (7) unemployment benefits, (8) tax, (9) decrease, (10) accept, (11) security, (12) hire, (13) dismiss, (14) collective, (15) rigidity, (16) structural, (17) natural, (18) mismatch, (19) skills, (20) technological, (21) moving, (22) labour costs, (23) permanent, (24) retraining Example 3 The following data refer to Lalaland in 2010. Population 2,251,503 Population aged 15–64 years 1,627,071 Labour force 1,192,000 Unemployment rate 5.5 % Calculate the number of unemployed in Lalaland. The unemployment rate is the number of the unemployed as a proportion of the labour force. The statistics provided above about the size of the general population of individuals between 15 and 64 years old is irrelevant to this problem. Solving the unemployment rate equation number of unemployed Unemployment rate 5 labour force for the number of unemployed we get: Number of unemployed 5 1,192,000 3 0.055 5 65,560 individuals unemployed Remember that to express a percentage as a decimal you move the decimal point two positions to the left, so that 5.5 % 5 0.055. Example 4 The labour force of the Armania Republic in 2011 was 2.95 million, of which 182,900 individuals were without a job but actively searching for one. Calculate the rate of unemployment in Armania for 2011. This is again a matter of substituting the numbers. Care should be taken in that the labour force is given in millions: you have to move the decimal six positions to the right so it becomes 2,950,000 individuals. The equation used to compute the rate of unemployment is: number of unemployed Unemployment rate 5 labour force Substituting yields: 182,900 Unemployment rate 5 2,950,000 5 0.062 5 6.2 % 117 SECTION 2 Macroeconomics Example 5 Applying the equation Unemployment in Fairyland in 2010 was at 5.2 % with a labour force of 62.44 million. Calculate the number of unemployed. Remember to express the unemployment rate as a decimal: 5.2 % 5 0.052 (moving the decimal two positions to the left). number of unemployed yields: Unemployment rate 5 labour force x 0.052 5 62.44 x 5 0.052 3 62.44 5 3.24688 million (3.25 million or 3,246,880 individuals) Exercise 1 Determine whether the following statements are true or false. Explain your answers. Use a diagram to illustrate if possible. 5 If unemployment decreases then the production 1 Policy makers aim at lowering unemployment to as close 6 The LRAS curve of an economy will shift to the right if to 0 % as possible. 2 Structural unemployment tends to be of a short-term nature. 3 Some frictional unemployment is unavoidable. 4 Official unemployment statistics tend to both overestimate and underestimate true unemployment. possibilities curve of a country will shift outwards. cyclical unemployment decreases. 7 The LRAS curve of an economy will shift to the right if structural and frictional unemployment decreases. Exercise 2 Rewrite the following statements and fill in the blanks by using the terms provided below. Some words may be used more than once or not at all. money taxes interest rates deficient frictional seasonal short information increases durable sticky labour recession confidence consumption higher cyclical aggregate demand investment expenditures government spending Unemployment that is a result of people moving between jobs is referred to as (1) ___________. This type of unemployment is of a (2) _______ term basis and can decrease if labour market participants had faster access to better labour-market related (3) __________. On the other hand, unemployment because of the weather, for example among construction workers during very cold winters, is known as (4) _________ Exercise 3 Using an appropriate diagram explain structural unemployment and evaluate policies that may be adopted to lower it. Exercise 5 Maintaining unemployment at a low level is considered an important macroeconomic objective. Why? Is it possible to drive the unemployment rate to zero? 118 unemployment and typically not much can be done about it. Unemployment resulting from insufficient (5) _____________ is known as demand (6) ______________ or (7) _____________ unemployment. This type of unemployment (8) _____________ in a (9) _________ as real GDP then is decreasing. Demand for (10)________ by firms decreases but because (11) _________ wages are (12) ___________ downwards, excess supply of labour results, i.e. unemployment. The deeper the recession the (13) __________ this type of unemployment will be. Governments try to prop up aggregate demand to lower cyclical unemployment. Policy makers may increase (14) __________________ or lower (15) __________. Central banks also decrease (16) ________________ to induce higher (17) _________________ expenditures by households on (18) ___________ goods such as cars or appliances and higher (19) _________ expenditures by firms on capital goods. There is no guarantee that these policies will work if consumer and business (20) ______________ levels are very low. Exercise 4 Explain the different types of unemployment and policies that may be employed to reduce each. What difficulties arise in addressing the problem of unemployment? Exercise 6 Discuss the possible consequences of unemployment (economic, personal and social).