Unemployment

Aims and Objectives

Aim: To understand employment policy Objectives: Define different types of unemployment Analyse the inflation/unemployment trade off Evaluate demand and supply side unemployment policies

Starter
Re-call the different types of unemployment in an economy. Draw the diagram to show unemployment Draw the diagram to show cyclical unemployment

Trade Off Between Employment and Inflation

PRICE LEVEL AD2 AD1 AS

AD

Cant have full employment without inflation occurring, especially beyond AD1. However the level that represents FE may fall over time, meaning that unemployment can fall without inflation occuring.
REAL GDP

FE

Policy Conflict
Low Inflation

Full Employment

Demand Side Causes of Unemployment

Cyclical unemployment Pt A occurs as level of AD below the FE level, experiencing a negative output gap Remedy = Increase AD maybe by reducing interest rate At AD2 low unemployment and positive output gap Danger of high inflation Remedy = increase interest rate
PRICE LEVEL AD1 AD2 LRAS PRICE LEVEL AD2 AD1 AS

AD P1 A

Y2

Y1

REAL GDP

FE

REAL GDP

AD Affects Unemployment
C

X-M

AD
G

Supply Side Causes of Unemployment

Frictional unemployment Structural unemployment http://www.youtube.com/watch? v=0vUDrUYTsHQ&feature=results _video&playnext=1&list=PL4CEC0 4390392C406 http://www.youtube.com/watch? v=4ubgig29l4k&oref=http%3A%2F %2Fwww.youtube.com%2Fresults %3Fsearch_query%3Dminers%2Bs trike%26oq%3Dminers%2Bstrike% 26aq%3Df%26aqi%3Dg4%26aql% 3D%26gs_sm%3D3%26gs_upl%3D 40934l42833l0l43483l13l13l0l3l3l 0l219l1208l0.9.1l10l0&has_verifie d=1

Supply Side Causes of Unemployment

PRICE LEVEL
LRAS1 LRAS

Equilibrium pt A, OP, OE

SRAS1 P1 B

Structural unemployment occurs SRAS SRAS1

Reduced level of output OF Higher Prices OP1 Decreases in capital equipment shift the LRAS left potential output fallen.

SRAS

A AD

REAL GDP

Evaluation: Government Intervention

http://www.youtube.com/wat ch?v=nDvGxNkX4AU You are part of the Thatcher government, tasked with reducing unemployment, which is ever rising due to the voluntary/ frictional/ structural unemployment in the economy. Decide on supply and demand side policies which could be used to combat it!

Demand Side & Supply Side Policies

Demand Side
Fiscal Policy

Supply Side
Improved education

Make Credit More Available

Increase funding on vocational training

Use regional policy to combat structural unemployment

Subsidise housing in cities where accommodation is expensive

Offer firms subsidies to hire workers in depressed regions

Provide tax breaks and tax credits

Demand Side Policy Fiscal Policy

Explanation of How Affects Employment

Evaluation of Policy: To what extent does the policy affect employment?

Make Credit More Available

Use regional policy to combat structural unemployment

Offer firms subsidies to hire workers in depressed regions

Supply Side Policy

Explanation of How Affects Employment

Evaluation of Policy: To what extent does the policy affect employment?

Improved Education

Increase funding on vocational training

Subsidise housing in cities where accommodation is expensive

Provide tax breaks and tax credits