Government and the macroeconomy - Employment and unemployment (3)
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1.
The unemployment rate is a key indicator of economic health. State the formula for calculating the unemployment rate and explain what each component represents.
Formula: Unemployment Rate = (Number of Unemployed / Total Labour Force) x 100
Explanation of Components:
- Number of Unemployed: This refers to the number of people who are currently without a job but are actively seeking employment.
- Total Labour Force: This represents the total number of people who are either employed or unemployed and actively looking for work. It is calculated as the sum of employed and unemployed individuals.
The unemployment rate is expressed as a percentage.
2.
Explain the difference between cyclical unemployment and structural unemployment. Give an example of a policy that could be used to address each type of unemployment.
Cyclical unemployment is caused by fluctuations in the business cycle, primarily due to a decrease in aggregate demand. It rises during recessions and falls during periods of economic expansion. It's temporary and linked to the overall health of the economy.
Structural unemployment, on the other hand, is caused by a mismatch between the skills of the workforce and the requirements of available jobs. This often occurs due to technological changes, shifts in industry, or changes in consumer demand. It is a longer-term problem.
Here's a table summarizing the key differences:
| Feature | Cyclical Unemployment | Structural Unemployment |
| Cause | Fluctuations in the business cycle (decrease in AD) | Mismatch between skills and job requirements |
| Duration | Temporary | Longer-term |
| Example | High unemployment during a recession | Unemployment due to automation in manufacturing |
Policy to address Cyclical Unemployment: The government could implement an expansionary fiscal policy, such as increasing government spending on infrastructure projects. This would boost aggregate demand and create jobs.
Policy to address Structural Unemployment: The government could invest in training and education programs to help workers acquire the skills needed for jobs in growing industries. This would reduce the skills gap and improve employability.
3.
The government is monitoring the unemployment rate closely. Discuss two factors that could cause the unemployment rate to increase. Explain how each factor would affect the numerator and/or the denominator of the unemployment rate formula.
Factor 1: Economic Recession
How it affects the unemployment rate: During an economic recession, businesses often reduce production and lay off workers to cut costs. This directly increases the number of unemployed people. The total labour force may remain relatively stable or even decrease if people give up looking for work (and are therefore no longer counted as unemployed). Therefore, the numerator increases, and the denominator may not change significantly or may decrease, leading to a higher unemployment rate.
Factor 2: Technological Advancements (Automation)
How it affects the unemployment rate: Technological advancements, particularly automation, can lead to job displacement in certain industries. This increases the number of unemployed individuals as workers are made redundant. The total labour force might not be significantly affected in the short term, but in the long term, if automation reduces the need for labour overall, it could potentially decrease the total labour force. The increase in the numerator and potentially a decrease in the denominator would result in a higher unemployment rate.