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
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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 %
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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?
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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).