economic essays on unemployment

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AP®︎/College Macroeconomics

Course: ap®︎/college macroeconomics   >   unit 2.

• Unemployment rate primer
• Natural, cyclical, structural, and frictional unemployment rates
• Worked free response question on unemployment

Lesson summary: Unemployment

• Unemployment
• Types of unemployment and the natural rate of unemployment

Lesson overview

Key takeaways, the labor force participation rate (lfpr), limitations of the unemployment rate, three types of unemployment, the natural rate of unemployment, changes in the natural rate of unemployment (nru), key equations, the labor force:, the unemployment rate (ur), common misperceptions.

• Not everyone who is out of work is unemployed. In order to be counted as unemployed you have to be out of work, looking for work, and able to accept a job if one is offered to you. If you are out of work and not looking, then you are considered “not in the labor force” rather than unemployed.
• We tend to think of unemployment as an undesirable thing, but a certain amount of unemployment is actually part of a healthy economy. Structural unemployment occurs when new industries are created and old industries become obsolete. For example, when we moved from using horses and buggies to using cars to get around, this put a lot of buggy makers in the structurally unemployed category.
• Frictional unemployment might not seem very fun, but consider what it means to have zero unemployment—nobody ever looks for a job, they just remain in whatever job they are given! In fact, a number of dystopian novels have been written in which everyone in a society is automatically assigned a fixed career (such as the Divergent series). Those societies have zero frictional unemployment, but they are also quite unpleasant if you are unhappy with that career!
• A decrease in the unemployment rate isn’t necessarily a sign of an improving economy. When people stop looking for jobs and drop out of the labor force as discouraged workers, the unemployment rate will decrease even though the true employment situation hasn’t gotten any better. This is why it is important to look at both changes in the unemployment rate and changes in the labor force participation rate. Looking at both changes let’s you get a more complete idea about changes in the employment situation.

Discussion Questions:

• An inventor in Burginville developed a fantastic new dictation machine that perfectly records speech and turns it into a typed document. Unfortunately, that meant that unemployment increased among typists working in offices. Which type of unemployment is this? Explain. Solution, please. This is structural unemployment because typists skills are no longer desired. The changing structure of office work has resulted in people losing their jobs.
• The nation of Fitlandia has 120 , 000 ‍   people. Of these, 20 , 000 ‍   are children under the age of 16, 72,000 ‍   have jobs, 8,000 ‍   don’t have jobs and are looking for work, and 20,000 ‍   people are retired. Assuming that these are all noninstitutionalized civilians, calculate the labor force participation rate and the unemployment rate. I think I got it. Can I check my work? L F = # Employed + # Unemployed = 72,000 + 8,000 = 80,000 L F P R = L F Eligible Population × 100 % = 80,000 100,000 × 100 % = 80 % U R = # Unemployed # Labor Force × 100 % = 8,000 80,000 × 100 % = 10 % ‍  
• Explain why a decrease in the unemployment rate can actually signal a tough job market.

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Economics: Unemployment, Its Causes and Types

This essay sample explores solutions, types, and causes of unemployment. Read it to get ideas for your essay about unemployment.

Unemployment Essay Introduction

Unemployment, types of unemployment, causes of unemployment, conclusion for unemployment essay.

Unemployment has become a major problem in almost every society. The challenges posed by unemployment are both social and economical in nature. Under normal circumstances, unemployment leads to despondency since a section of society lacks ways of earning a living.

This affects not only the economic status of the society but also the political and social aspects. It is against this background that a lot of efforts are put in place so as to address the issue of unemployment. Job creation is one sure way of ensuring that unemployment is under control.

This involves concerted efforts to bring about opportunities to work through which income can be generated. However, unemployment is of different types, and a better understanding of the same is crucial in the event of finding a meaningful solution.

Furthermore, unemployment is caused by several factors which are responsible for the whole situation. The aim of this paper is to navigate through the light of unemployment, thoroughly analyzing the causes and types of the same.

Unemployment refers to a situation in which qualified people are seeking employment but remain unemployed. This is primarily due to the scarcity of job opportunities or other different causes. Unemployment, therefore, leads to a lack of a source of income, thus affecting the economic condition of the society. Unemployment takes different forms and shapes (Harris, 2001).

The condition of unemployment differs from society to society, depending on the factors responsible for the situation. This brings out the fact that unemployment does not occur in a uniform manner; it rather takes different forms depending on the various forces in the social, economic, and political arenas.

Unemployment is a major problem that needs to be addressed by all means. However, a better understanding of the causes and types of unemployment is necessary for the event of finding an appropriate solution to the whole situation.

Unemployment occurs in different forms. Under normal circumstances, the type of unemployment is denoted by the nature of factors that have brought about the situation. As a result, unemployment is categorized by forces that play a role in the creation of the situation (Hooks 2003).

Another important factor in the categorization of unemployment is the manner in which the situation occurs and for how long it occurs. In such a situation, certain forms of unemployment tend to be repetitive in nature, while others only take place once.

The seriousness of the unemployment problem also forms a good basis for its categorization. Under normal circumstances, unemployment is categorized in economic terms. Therefore the dynamics of economics play an important role in the whole scenario.

There are several types of unemployment that occur in different forms and are brought about by different situations and circumstances. The following are the types of unemployment;

• Hidden unemployment
• Cyclical unemployment
• Seasonal unemployment
• Long-term unemployment
• Underemployment
• Hardcore unemployment
• Structural unemployment
• Frictional unemployment

Hidden unemployment refers to cases of unemployment that are not represented in the official records of unemployment. This happens since many cases of unemployment are unreported, and statistics given by government agencies don’t represent them. Seasonal unemployment, on the other hand, refers to those jobs that are seasonal in nature.

These kinds of jobs only operate during certain times and not others (Abbot 2010). During the seasons, when the jobs are not on, the workers are considered unemployed. When there are certain structural changes in the status of the economy, there are kinds of changes that take place, which lead to loss of jobs and a reduction of opportunities for work.

This situation is referred to as structural unemployment. It is brought about by structural changes in the economy. Unemployment caused by personal reasons is called hardcore unemployment.

These reasons might be mental, psychological, or physical in nature. Individuals who engage in two different careers can find themselves unemployed due to the nature of their occupation. This kind of unemployment is called frictional unemployment. It is brought about by the conflict between two different jobs rendering people unemployed.

Unemployment is caused by several factors, and there is no single factor that is responsible for unemployment. As a result, there are a number of factors that combine to bring about a lack of opportunities and the fact of qualified people remaining unemployed (Symes 1995).

Fundamentally the causes of unemployment are economic in nature. As such, the plight of unemployment is brought about by factors that are inherently economic in nature. Economic forces and activities, to a large extent, determine the nature and cause of most unemployment problems. Also, factors that deal with labor and personnel are responsible for a large number of unemployment cases.

The following are causes of unemployment;

• Economic growth
• Microeconomic policies
• Constraints in economic growth

The process of economic growth has a lot of relevance to the plight of unemployment. Under normal circumstances, unemployment is an economic problem. The forces that bring about unemployment are economic in nature.

Economic growth, for instance, has a lot of significance to the whole situation of unemployment. The level of economic activity prevailing at any given moment has a lot of significance on the state of unemployment at the time.

During the process of economic growth, there is a trend that follows; this normally involves a decrease in employment opportunities. This automatically leads to a rise in the levels of unemployment. Therefore economic growth has a negative effect on the rate of unemployment in the economy. Technology also leads to high levels of unemployment; this is primarily due to the replacement of humans with machines.

With the increase in the innovation of technology, more tasks are performed by machines making it unnecessary to employ people. This makes people lose their jobs to machines since it becomes cheaper to use machines than employ people. Another factor in the same vein of technology is the use of the capital intensive mechanism. As a result, the jobs that can be performed by people are done by machines (Stretton 1999).

The role played by policies of microeconomic nature in the creation of unemployment in society cannot be underestimated. These policies normally lead to a sudden change in the economic environment making certain adjustments that lead to unemployment.

This happens when new policies are set out in place. During the initial times of implementation, the economic environment responds with fear and panic, thus causing a sudden disappearance of opportunities for career.

Constraints in economic growth lead to uncertainty among various economic players making the chances of unemployment to reduce. There is usually rampant unemployment during times of economic uncertainty. Two reasons, first, most companies won’t employ anyone during the times of economic constraints. Secondly, many companies lay off their staff during times of slackness and low economic activity.

Unemployment is a problem that is economic in nature. Most of the factors that bring about unemployment have an economic connotation. However, the effects of unemployment go beyond the economic arena. There are several types of unemployment that are grouped according to various factors that cause the plight.

Furthermore, unemployment is not caused by one single factor; there are several forces that cause unemployment in different ways. The paper has taken an analytical look at the whole concept of unemployment. Priority has been given to the causes and types of unemployment.

The paper thus found out that unemployment is caused by various forces that are economical, social, and political in nature. At the same time, the paper found out that there is a different categorization of unemployment. This is normally done with the purpose of defining the essence of the unemployment problem in question.

Abbot, L. (2010). Theories of the Labour Market and Employment: A Review. Washington: Industrial Systems Research.

Harris, N. (2001). Business economics: theory and application. London: Butterworth-Heinemann.

Hooks, J. (2003). Economics: fundamentals for financial services providers. Washington: Kogan Page Publishers.

Stretton, H. (1999). Economics: a new introduction . Washington: Pluto Press.

Symes, V. (1995). Unemployment in Europe: problems and policies. New York: Routledge.

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StudyCorgi. (2020, January 12). Economics: Unemployment, Its Causes and Types. https://studycorgi.com/economics-unemployment-its-causes-and-types/

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Macro Economic Essays

These are a collection of essays written for my economic blogs.

Exchange Rate Essays

• Effects of a falling Dollar
• Why Dollar keeps falling
• Discuss Policies to Stop the Dollar Falling
• Does Devaluation Cause Inflation?
• Benefits and Costs of Falling Dollar
• Reasons for Falling Dollar
• The Dollar as the World’s Reserve Currency

Economic Growth Essays

• Evaluate Benefits of Economic Growth
• Essays on Recessions
• Causes of Recessions
• Problems of Recovering from a Recession
• What can Increase Long-Run Economic Growth?
• Discuss Effect of a fall in the Savings Ratio

Inflation Essays

• Discuss the Difficulties of Controlling Inflation
• Should the aim of the Government be to Attain Low Inflation?
• Explain What Can Cause a Sustained Increase in the Rate of Inflation
• Reasons for low inflation in the UK
• Inflation Explained
• Difficulties of Inflation targeting
• Hyperinflation

Unemployment Essays

• Explain what is meant by Natural Rate of Unemployment?
• Should the Main Macro Economic Aim of the Government be Full Employment?
• The True Level of Unemployment in the UK
• What explains low inflation and low unemployment in the UK?

Demand Side Policies

• Discuss effect of Expansionary demand-side policies on Balance of Payments and Environment
• Effects of a Falling Stock Market
• How do Mortgage Defaults affect and Economy?
• Discuss the effect of increased Government spending on education
• Phillips Curve – Trade-off between Inflation and Unemployment

Development Economics

• Why Growth may not benefit developing countries
• Does Aid Increase Economic Welfare?
• Problems of Free Trade for Developing Economies

Fiscal Policy

• Will US Economy benefit from Tax Cuts?
• Can Fiscal Policy solve Unemployment?
• Explain Reasons for UK Current Account Deficit
• Benefits of Globalisation for Developing and Developed Countries

Monetary Policy

• Discuss Effects of an Increase in Interest Rates
• How MPC set Interest Rates
• Benefits of High-Interest Rates (and recessions)
• Who Sets interest rates – Markets or Bank of England?

Economic History

• Economics of the 1920s
• What Caused Wall Street Crash of 1929?
• UK economy under Mrs Thatcher
• Economy of the 1970s
• Lawson Boom of the 1980s
• UK recession of 1991
• The great recession 2008-13

General Economic Essays

• The Dismal Science
• Difference Between Economists and Non Economists
• War and Recessions
• The Economics of Fear
• The Economics of Happiness
• Can UK and US avoid Recession?
• 3 Of the Worst Economic Policies
• Overvalued Housing Markets
• What Went Wrong with US Economy?
• Problem with Bailing out financial sector
• Problems of Personal Debt
• Problem of Inflation
• National Debt in the UK
• How To Survive a Recession
• Can A recession be a good thing?

Chinese Economy

• Problems of Chinese Economic Growth
• Should we worry about a strong China
• Chinese Growth and Costs of Growth
• Chinese Interest Rates and Economic Growth

Model essays

• A2 model essays
• AS model essays
• Top 10 Reasons For Studying Economics
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• Funny Exam Answers
• Humorous look at Subprime crisis

Unemployment in the United States Essay

Introduction, definition of unemployment, current unemployment rate in the united states of america, reasons for unemployment in the united states of america, consequences of unemployment in the united states of america, possible solutions to the issue, works cited.

Unemployment is one of the fundamental economic and social problems in the world. Every country once in a while experiences a lack of working places available on the labor market. It could be said that unemployment rate is constantly changing, as it depends on the variety of social and economic factors. It could be assumed that unemployment is a critical issue in the United States of America, as it has a strong impact on the society and other spheres of everyday life.

Firstly, the essay provides the definition of unemployment. Secondly, it describes a current situation regarding unemployment rate in the United States of America. Thirdly, it focuses on the explanation of reasons for this phenomenon. Fourthly, negative and positive consequences and effect of unemployment on American society are discovered. Moreover, possible solutions to the problem are discussed. Lastly, the conclusions are made.

Unemployment could be defined as an amount of people, who are not involved in any working activities (Gupta 334). However, it has to be mentioned that this definition is vague and unspecified. In order to give a clear understanding of the term a vehement categorization has to be made, as it will help to avoid ambiguity. Firstly, people have to be divided into two groups, as employed and unemployed, where people who are not eligible to perform work tasks such as pensioners and children are excluded (Gupta 334).

The second step is to categorize potential workforce into two groups, such as employed and unemployed (Gupta 334). However, one more distinction has to be made. The unemployed people are divided into two more groups such as involuntary and voluntary (Gupta 334).

It could be concluded that the definition of unemployment includes only a rate of voluntary unemployed population, as other people are considered irrelevant to this phenomenon. Moreover, it could be said that the categorization is necessary, as it helps to avoid ambiguity and confusion while defining the term.

It could be said that high unemployment rate is one of the most important issues, which the United States currently experiences (Tong, Tong, and Tong 75). It could be said that some people, who are not able to find a job increased due to the situation in the world.

However, it could be said the situation regarding unemployment has changed over past several years. It has been noticed that the unemployment rate decreased to 5.4%, as American employers introduced 223,000 job offers in April 2015 (Schwartz par. 2). However, the wages were not dramatically increased due to the decrease in the unemployment rate. Some conservatives claim that delay in salary’s increase occurred due to the weak economic condition of the country and insufficient Obama’s actions (Schwartz par. 8).

American economists predict the unemployment rate will significantly drop by the end of the year and may be lower than 5.4% (Schwartz par. 18). However, it has to be mentioned that a number of people, who are obliged to take part-time jobs, remains high (Schwartz par. 19). It could be concluded that the situation on the American market is relatively better now. However, changes have to be made in order to improve a current condition of the unemployment rate in the United States of America.

One of the primary reasons for high unemployment in the United States of America is a financial crisis (Tong, Tong, and Tong 75). The economic recession causes problems for job seekers, as many enterprises experienced bankruptcy during these years. Moreover, a current situation will remain unchanged, as there are many factors, which have a dramatic influence on it, such as competitive pressure from Europe and China and expensive health care system maintenance (Tong, Tong, and Tong 75).

Another cause of unemployment is “the US government’s neoliberal policies” (Li 218). It could be said that these governmental actions are the primary causes of severe financial conditions, which lead to the increase of unemployment rate in the country. The main goal of neoliberalism is to create “asset bubbles” (Li 218). Despite positive intentions, the creating of ‘bubbles’ leads to structural unemployment, and destruction of any of them leads to the global financial crisis.

Imports to exports ratio is another aspect, which has a strong influence on the development of the high unemployment rates. In case of the United States, a number of imports significantly outnumbers the exports (Tong, Tong, and Tong 75). This factor creates the imbalance in the American economy, weakens a position on the global market, and increases external debt and unemployment rates.

It could be said that all of these factors have a substantial impact on the American economy. However, a combination of all aspects dramatically increases the unemployment rate, as a high correlation between these phenomena can be noticed. Evaluating factors together helps see a full image of the current situation in the United States.

It has to be mentioned that unemployment has not only negative but also positive impacts on American economics. Firstly, it has to be mentioned that a rise in unemployment increases the level of proprietorship in the society (Gohmann and Fernandez 289). American economists have noticed this consequence and actively utilized it to decrease the unemployment rate. The main reason for the popularity of this approach is the fact that proprietorship reduces unemployment by creating new job offers (Gohmann and Fernandez 289).

Firstly, the entrepreneurship occurs, when individuals are unable or experience difficulties while seeking for a new job offer (Gohmann and Fernandez 289). Consequently, they have to establish new businesses and enterprises. In turn, this fact leads to a creation of new products, innovation development, and an establishment of new vacancies. It could be concluded that the unemployment leads to the development of entrepreneurship, which, in turn, leads to the reduction of unemployment.

As for the negative effects, unemployment has an adverse impact on the psychological state of an individual. As basic psychological and social needs such as well-established everyday routine and ability to financially support family members are not satisfied, one experiences negative attitude and depression (Hoye and Lootens 85). It could be said that a person lives in constant stress and feels hopeless until he/she is able to fix this problem.

Unemployment also has adverse effects on the family establishment and social roles. A high interdependence between a rise in unemployment and an increased divorce rate is noticed (Dolen, Weinberg, and Ma 172). Children are the ones, who experience violence, and an amount of attention paid to children has to be increased during seasons of high unemployment (Dole, Weinberg, and Ma 172).

It could be said that this economic phenomenon has an adverse impact on family formation and relationship between its members. Moreover, violence might be a cause of mental and physical trauma among children, and might be a reason for social isolation in future.

There are several solutions to a problem such as a high-quality training, introduction of new jobs, and development of favorable economic and social conditions for the companies (Hong, Hong, and Hong 76). These actions will help to improve a current negative situation on the labor market and provide people with positions. Moreover, a combination of these factors will create favorable conditions for development and sustainability of the enterprises to avoid a high unemployment rate in future.

Lastly, improvements in American political and economic structures have to be made. These changes will help enhance a global reputation. Moreover, the advancements and innovations will help avoid a similar issue in the near future.

In conclusion, it could be said that the situation regarding the unemployment rates has experienced changes in a positive direction. It is not as high as it was before due to the introduction of new job offers. Possible reasons for unemployment were economic and political actions implemented by the government of the United States of America. It might seem that unemployment has only negative effects on society. However, the proprietorship is one of the positive influences of unemployment, which helps create new job opportunities. Furthermore, a current situation is unfixed, as advancements in governmental policies may help decrease the levels of unemployment in the country.

Dole, Willemijn, Charles Weinberg, and Leiming Ma. “The Influence of Unemployment and Divorce Rate on Child Help-Seeking Behavior about Violence, Relationships and Other Issues.” Child Abuse & Neglect 37.2-3 (2013): 172-180. Print.

Gohmann, Stephan and Jose Fernandez. “Proprietorship and Unemployment in the United States.” Journal of Business Venturing 29 (2014): 289-309. Print.

Gupta, Gypuzur. Macroeconomics: Theory and Applications , New Delhi: Tata McGraw-Hill Publishing Company Limited, 2006. Print.

Hoye, Greet and Hanne Lootens. “Coping with Unemployment: Personality, Role Demands, and Time Structure.” Journal of Vocational Behavior 82.2 (2013): 85-95. Print.

Li, Jinhua. “Analysis of High Unemployment Rate in the USA.” World Review of Political Economy 4.2 (2013): 218-229. Print.

Schwartz, Nelson. “U.S. Economy Added 223,000 Jobs in April; Unemployment Rate at 5.4%.” The New York Times 8 May 2015. Web. 25 Aug. 2015.

Tong, Carl, Lee-Ing Tong, and James Tong. “High Unemployment in the United States: Causes and Solutions.” Competition Forum 10.2 (2012): 74-79. Print.

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IvyPanda. (2020, April 17). Unemployment in the United States. https://ivypanda.com/essays/unemployment-in-the-united-states/

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IvyPanda . "Unemployment in the United States." April 17, 2020. https://ivypanda.com/essays/unemployment-in-the-united-states/.

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Home — Essay Samples — Economics — Unemployment — Understanding Unemployment: Types, Causes, and Solutions

Understanding Unemployment: Types, Causes, and Solutions

• Categories: Unemployment

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Words: 792 |

Published: Feb 12, 2024

Words: 792 | Pages: 2 | 4 min read

Unemployment

• Hidden unemployment: This refers to cases of unemployment that are not officially recorded. Many instances of unemployment go unreported, and government statistics do not accurately represent the true extent of the problem.
• Cyclical unemployment: This type of unemployment occurs as a result of fluctuations in the economy. During periods of economic downturn, there is a decrease in job opportunities, leading to a rise in unemployment rates.
• Seasonal unemployment: Some jobs are only available during specific seasons and are not available year-round. Individuals working in such seasonal jobs are considered unemployed during the off-season (Abbot, 2010).
• Long-term unemployment: This refers to individuals who have been unemployed for an extended period, usually six months or more. Long-term unemployment can have severe consequences for individuals and society as a whole.
• Underemployment: Underemployment occurs when individuals are employed in jobs that do not fully utilize their skills and qualifications. They are often working in positions below their educational or experiential level.
• Hardcore unemployment: This type of unemployment is caused by personal reasons such as mental, psychological, or physical barriers that prevent individuals from securing employment.
• Structural unemployment: Structural changes in the economy, such as technological advancements or shifts in industries, can lead to job losses and a reduction in work opportunities. This type of unemployment is referred to as structural unemployment.
• Frictional unemployment: Frictional unemployment occurs when individuals become unemployed due to conflicts or incompatibility between two different jobs or occupations.
• Economic growth: Economic growth can have both positive and negative effects on unemployment. While economic growth indicates a thriving economy, it can also lead to a decrease in employment opportunities. As the economy grows, certain industries may become obsolete, resulting in job losses.
• Technology: Technological advancements often lead to job displacement as machines and automation replace human labor. This trend is particularly evident in industries where capital-intensive mechanisms are used, making it more cost-effective to employ machines than humans.
• Seasonal fluctuations: Certain industries, such as agriculture and tourism, experience seasonal variations in demand. During off-peak seasons, workers in these industries may face unemployment.
• Microeconomic policies: Changes in microeconomic policies can impact employment levels. The implementation of new policies may lead to economic uncertainty, causing businesses to reduce their workforce or delay hiring.
• Constraints in economic growth: Economic constraints and uncertainties can discourage companies from hiring new employees. During periods of economic downturn, companies may lay off staff to cut costs.
• Abbot, L. (2010). Theories of the Labour Market and Employment: A Review. Washington: Industrial Systems Research.
• Harris, N. (2001). Business economics: theory and application. London: Butterworth-Heinemann.
• Hooks, G. (2003). Unemployment: Causes and Solutions. New York: Routledge.
• Symes, E. (1995). Unemployment: A Social Analysis. London: Routledge.

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The Best Essay on Unemployment | Macroeconomics

Here is an essay on ‘Unemployment’ for class 8, 9, 10, 11 and 12. Find paragraphs, long and short essays on ‘Unemployment’ especially written for school and college students.

Unemployment can be divided into different types according to the reasons for its occurrence. For example, there is frictional unemployment, which arises when a person is temporarily unemployed while moving between jobs. Similarly, there is structural unemployment, when people find their skills are not employable because they have become technologically redundant or there is no demand for them in certain regions of the country where they live.

These types of unemployment are easy to explain. By comparison, there is an enduring controversy associated with the attempts to unravel what, if any, are the differences between classical and Keynesian unemployment. The classical economists believed in the Say’s Law of Markets and in wage-price flexibility. The operation of the Say’s Law (which states that demand creates its own supply) and sufficient wage-price flexibility, they believed, would ensure automatic full employment.

Thus, in the classical theory, there was no possibility of unemployment. If there occurred any unemployment it would be of a purely temporary nature. The cause of such unemployment was too high a real wage. And such unemployment would disappear quickly due to fall in real wage.

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The intuition behind the classicists’ analysis of unemployment comes from the standard apparatus of supply and demand curves. They have reached the conclusion that if the labour market does not equilibrate, it must be because the price, i.e., the real wage, is set at an inappropriate (and not at the market-clearing) level.

The demand for labour originates from the profit-maximising decisions of firms. Under competitive conditions, this leads firms to equate the real wage with the marginal product of labour. Hence the demand for labour schedule is a direct reflection of the marginal physical product of labour (MPP L ) function.

With a well-behaved aggregate production function, the MPP L will be a decreasing function of the level of employment, and so the demand for labour varies inversely with the real wage. Consequently, if the supply of labour exceeds the demand and there is a problem of unemployment, then the solution lies with a fall in the real wage as this will increase the quantity of labour demanded and close the unemployment gap.

In his General Theory Keynes disputed the classical analysis of unemployment and the associated policy prescriptions. He introduced the concept of involuntary unemployment that had something to do with inadequate demand in final commodity markets and which could be remedied with the management of demand by fiscal policy and possibly by monetary policy too.

In explaining the cause of unemployment, Keynes focuses on the role of nominal wage inflexibility. In his view, unemployment results from an inflexible money wage which prevents the real wage from adjusting downwards to increase the demand for labour. Thus the unemployment problem originates from an inappropriate real wage.

According to Keynes, the equality of the real wage to the marginal disutility of employment corresponds to the absence of ‘involuntary’ unemployment. (Keynes makes the simplification that the marginal utility of income is constant so that the marginal disutility of employment is the same as the marginal rate of substitution of income for leisure.) Keynes excluded frictional unemployment from involuntary unemployment.

However, it is important to note that Keynes also excluded unemployment “due to the refusal or inability of a unit of labour, as a result of legislation or social practices or of a combination for collective bargaining or of a slow response to change or of mere human obstinacy, to accept a reward corresponding to the value of the product attributable to its marginal productivity”.

Thus, Keynes chose to exclude union wage differentials as well as minimum wage legislation as sources of involuntary unemployment. Clearly, Keynes wanted to focus on a particular type of involuntary unemployment.

Don Patinkin also used the static labour supply definition in his well-known analysis of involuntary unemployment:

The norm of reference to be used in defining involuntary unemployment is the supply curve for labour as long as workers are ‘on their labour supply curve’—that is, as long as they succeed in selling all the labour they want to at the prevailing real wage rate—a state of full employment will be said to exist in the economy.

The above definition of involuntary unemployment based on the labour supply curve was used by the ‘classical’ economists. For example, in 1914 A. C. Pigou proposed measuring involuntary unemployment of a group of persons by the number of hours that these persons would have been willing to provide at the current rate of wages under current conditions of employment.

According to Keynes, however, classical theories (such as Pigou’s) did not admit the possibility of involuntary unemployment by union wage differentials or minimum wage legislation. But Keynes chose to classify this as voluntary.

The Natural Rate of Unemployment (NRU) :

There are two conceptually’ separate reasons why the real wage may fail to adjust to the competitive equilibrium value. Firstly, the institutions of the economy may not correspond to those of a competitive economy: information may be costly, there may be traces of monopoly, etc.

Within this institutional context, markets are assumed to clear and the associated level of unemployment is termed as the ‘natural’ rate of unemployment.

In the language of Milton Friedman:

“The ‘natural rate of unemployment’ is the level that would be ground out by the Walrasian system of general equilibrium equations, provided there is embedded in them the actual structural characteristics of the labour and commodity markets, including market imperfections, stochastic variability in demands and supplies, cost of gathering information and so on”.

Consequently, one way that unemployment might be tackled is through policies which attempt to lower the ‘natural’ rate by removing market imperfections.

A ‘natural’ rate of unemployment is the level of unemployment where inflation is anticipated. For this reason the term the non-accelerating inflation rate of unemployment (NAIRU) is often preferred to the title ‘natural’ to describe the level of unemployment.

The current view is that the natural rate of unemployment is the rate towards which the dynamic system is converging for a given underlying general equilibrium stochastic structure. It takes into account the actual structural characteristics of the labour and commodity markets, including market imperfections, search and mobility costs.

In simple terms, it may be regarded as that level of unemployment which nonetheless remains at full employment.

In truth, NRU is essentially a long-term phenomenon. It is the rate of unemployment towards which the economy gravitates in the long run, subject to the existing imperfections in the labour market which make it difficult for workers to find jobs easily and quickly.

According to Milton Friedman who introduced the term ‘natural rate’ argues that the term ‘natural’ is useful in separating the real forces from the monetary sources. Viewed from this perspective an important feature of the natural rate as emphasised by Friedman (1968) and E. Phelps (1967, 1970) is that it does not correspond to any particular rate of inflation. For any appropriately defined long run, the key implication of this is that there is no long-run trade-off between inflation and unemployment.

Following the Friedman lead, the natural and cyclical rates of unemployment are most often treated as separate and independent components. According to this view, cyclical unemployment is characterised as being included by temporary fluctuations in conditions resulting in temporary deviations of the actual rate from the natural rate of unemployment.

Empirical evidence, however suggests considerable covariance between cyclical and structural unemployment. For example, structural unemployment is likely to increase during recessions since firms in declining industries may find it optimal to accelerate eventual reductions in their labour force at such times. Significant covariance’s of this sort raise fundamental questions about the causality of unemployment as well as whether the natural rate of unemployment is an operative concept.

Since structural unemployment is most often interpreted as a component of the natural rate, this raises serious questions about whether natural and cyclical rates of unemployment are separate, independent and indentifiable components.

To sum up, there are two features of the NRU. Firstly, it is an inherently dynamic concept. Secondly, the natural rate is clearly not a fixed and immutable constant. Variations in the composition of the labour force, the rate of structural change, the flow of information and other factors affecting labour force mobility will change the natural rate.

There is widespread agreement in macroeconomics that when there are informational inadequacies leading to sticky prices and difficulties in forming expectations, unemployment may deviate from its ‘natural’ level.

According to Friedman, the government’s demand management policies may influence the ‘natural’ rate. He argues that the variability of inflation is directly related to the level of inflation.

So, more noise enters into price signals at higher rates of inflation with the result that the ‘natural’ rate rises with the rate of inflation,

In 1980 Tobin argued that “the operational NAIRU gravitates towards the average rate of unemployment actually experienced. Among the mechanisms which produce that result are improvements in unemployment compensation and other benefits enacted in response to higher unemployment, loss of on-the-job training and employability by the unemployed, defections to the informal and illegal economy, and a slowdown in capital formation as business firms lowers their estimates of needed capacity.”

If such hysteresis effects are accepted, then an expansionary demand policy — which leaves unemployment ‘temporarily’ below the ‘natural rate — will have a permanent influence because it contributes to reducing the ‘natural’ rate itself.

Job Search and Frictional Unemployment :

In recent years economists have been concerned with frictional unemployment. One proximate cause of unemployment is the mismatch between workers and jobs. Since labour is not homogeneous, a job loss does not immediately lead to job finding. Workers who are laid-off do not find a job easily and quickly.

Job finding itself is a resource-consuming and a time-consuming endeavour. The unemployment caused both the time required by a worker is called frictional unemployment. Such unemployment occurs because we do not live in the wonderful world of the classical economists.

It occurs because information about job availability is not freely available to workers and, even when it is available, it is imperfect. Moreover, workers are not geographically mobile. There are various barriers to labour mobility.

These two factors conjointly reduce the rate of job finding. Moreover, since workers differ in their abilities and performances and jobs also differ in their characteristics (in terms of rewards and sacrifices) different jobs require different skills and offer different wages. This is why an unemployed worker prefers to spend time and money to search out a job of his liking rather than accepting any job that comes along the line.

Frictional unemployment is also related to shift unemployment. Some unemployment occurs due to shifts in demand for consumer goods used by households and producer (capital) goods used by firms.

Since the demand for labour is an indirect (derived) demand, change in the pattern of demand for goods leads to a change in the demand for labour that is required to produce those goods.

Likewise, since different regions of a country produce different goods, the demand for labour may rise in one region (such as Maharashtra or Gujarat) and fall in another region (Orissa or Bihar). Such unemployment caused by a change in the composition of demand among industries or regions is called shift unemployment.

This is another type of frictional unemployment. Since sectorial shifts are occurring all the time in a dynamic economy, and since workers take some time to move from one sector to another due to lack of marketable skill or adequate information, frictional unemployment is a rule rather than an exception.

Frictional unemployment occurs for various other reasons, for example, when old firms face problems of demand recession (such as the workers of Hindustan Motors), when workers’ job performance is inadequate when judged by any standard, and when workers’ particular skills are not in demand any more. This has happened in cases of silent movie actors or typists or tram drivers in most parts of the world.

Frictional unemployment also occurs when workers voluntarily leave their jobs or move from one part of the country to another part (and try to search out better jobs).

Frictional unemployment occurs due to inter-sectoral imbalance between demand and supply forces, i.e., where there is excess supply of labour in one sector offering higher wages due to the fact that some workers from numerous low-paying sectors have crowded the few high- paying sectors.

Efficiency Wage :

A proximate cause of real wage rigidity and involuntary unemployment is associated with the efficiency wage theory. This concept is based on the famous Marshallian concept — the economy of high wages. Marshall first hypothesized that high wages promote efficiency and low wages retard it.

The idea was put into effect in the American manufacturing industry by Henry Ford who followed the practice of giving higher than the prevailing market wage so that the rate of labour turnover came down to a minimum. Ford’s basic objective was to ensure that his most productive workers did not quit after a short association with the organisation.

The efficiency wage theory explains why firms do not cut wages even when there is excess supply of labour. The theory is based on the belief that a wage cut would lower a firm’s wage bill no doubt, but it would also reduce a firm’s profits by lowering worker efficiency.

Various explanations have been offered to explain how wages affect labour productivity:

(i) Improved Health and Enhanced Productivity:

In less developed countries like India, high wages enable workers to improve their health by having a more nutritional diet. Healthy workers are usually found to be more productive than half-fed worker. So, it is in the Tightness of things to give workers a wage above the equilibrium level in order to maintain a healthy work force.

(ii) Low Labour Turnover:

The higher the wage rate, the stronger the incentive of workers to stay with the firm. If the quit rate can be reduced to a minimum, a firm can achieve economy in terms of the time spent recruiting and training new workers.

(iii) Reducing Adverse Selection:

The overall quality of a firm’s labour force depends on the wages it pays to its employees. A wage cut will force a firm’s best workers to take jobs elsewhere in other firms, leaving the firm with inferior employees who have hardly any opportunity outside the firm. This is an example of adverse selection since workers are more informed about their alternative opportunities outside the firm than the firm (the employer).

This is also known as hidden characteristics. So by paying a low wage, a firm may take the risk of hiring inferior workers (who do not have any opportunity outside the firm). One way of reducing adverse selection is to pay a wage above the equilibrium level. This improves the average quality of the work force. So, labour productivity automatically improves.

(iv) Overcoming the Moral Hazard Problem:

High wages also improve worker effort. The truth is that it is not always possible to monitor the work effort of employees. It is the task of the employees themselves to decide how hard to work. This is known as moral hazard, also known as the hidden action.

This refers to the hidden tendency of workers to put sub-optimal effort if their activities are not perfectly monitored. One way of reducing this moral hazard problem is to pay a high wage. The higher the wage, the higher the cost of the worker of being dismissed.

One way of increasing labour productivity is to pay a higher than market wage. This induces more and more of a firm’s employees not to shirk. The common theme of various efficiency wage theories (presented above in a summary form) is that by paying its workers a high wage, a firm can operate more efficiently.

This is why many firms choose to pay more than the market clearing wage. This induces workers to stay with their firms and not to engage in job search activities. But efficiency wage increases the magnitude of involuntary unemployment and creates real wage rigidity.

Economic Insight: Four Models of Efficiency Wage:

There are four models of efficiency wage. The common feature of all the models is that higher than competitive wage can be profitable. All the models are based on the hypothesis that output depends on worker effort and effort, in its turn, varies directly with the wage rate. The more a firm pays, the more effort it gets.

The models originating from the presumed source of positive effort-wage relationship are of the four types:

1. Shirking Models:

In most jobs, workers enjoy some discretion in deciding how hard they work. Piece rates are often impractical because it is not only difficult but virtually impossible to count the “pieces” and counting is costly. In the shirking models, firms pay above the market wages, engage in some monitoring and fire those workers caught shirking.

By paying above market wages, firms decrease the incentive to shirk, since defection then entails loss of rents. According to shirking models, high wage industries are those with high monitoring costs and/ or industries which bear a relatively high cost of employee shirking.

2. Turnover Models:

Firms may also wish to pay above market clearing wages to reduce turnover. High wages are paid to reduce quits. So it follows, by deduction, that the high-wage industries are those in which turnover costs are the highest.

3. Adverse Selection Models:

According to these models, employers cannot gain an insight into the ability of workers, either as potential entrants or on the job, in a costless fashion. It is assumed that the average quality of the applicant pool increases with the wage rate. The main prediction of these models is that industries which are more sensitive to quality differences, or have higher costs of measuring quality, will offer higher wages.

4. Fair-Wage Models:

The premise of these models is that workers will exert more effort if they feel that they are being treated fairly. This premise gives firms an incentive to pay wages above competitive levels whenever their workers’ perceived fair wage exceeds the competitive wage.

If workers believe that fairness requires firms to share rents with employees, then fair wage models predict that industries with high profits will be those which pay high wages. In Fig. 1, we show profit-wage trade-off. In short, industries’ high wages lead to low profits as is shown by the profit-wage curve pw 1 .

If the wage rate is pushed up from w 1 to w 2 , the rate of profit falls from π 1 to π 0 . In other industries high wages lead to high profit as shown by the curve pw 2 . If the wage rate is pushed up from w 1 to w 2 , the rate of profit goes up from to π 0 to π 1 .

The fair wage models also predict high wages in industries where teamwork and worker expectations are particularly important. However, the four models are not mutually exclusive. Firms might well pay above competitive wages to reduce shirking and, thus, attract high-quality applicants and improve worker morale.

Effect of Minimum Wage on Employment :

Since the government does not hire surplus labour in the way it buys surplus agricultural output, a labour surplus takes the form of unemployment which tends to be higher under minimum wage laws than in a free market. In general, those whose employment prospects are reduced most by minimum wage laws are the young, less experienced and less skilled.

As in all cases, a ‘surplus’ is a price phenomenon. Unemployed workers are not surplus in the sense of being useless or in the sense that there is no work for them. Most of these workers are perfectly capable of producing goods and services, even if not to the same extent as more skilled workers. The unemployed are made idle by wage rates artificially set above the level of their productivity.

Moreover, unemployed youth are prevented from acquiring the job skills and experience which could make them more productive—and, therefore, higher earners—in near future. Due to minimum wage laws, unemployment in European countries is higher than that in the USA. Since Switzerland and Hong Kong do not have minimum wage laws, they have very low unemployment rates. In recent years, some countries have allowed their real minimum wage levels to be eroded by inflation.

Related Articles:

• Major Causes of Unemployment: Job Search and Wage Rigidity
• Difference between Voluntary and Involuntary Unemployment
• Keynes’ Money-Wage Rigidity Model of Involuntary Unemployment
• Unemployment Rate Calculation Formula

Unemployment | A-Level Economics Model Essays

Discuss the view that falling unemployment will inevitably lead to trade-offs with other macroeconomic policy objectives (25 marks).

Unemployment is the percentage of people who are willing and able to work but are unable to find work. Trade-offs from lower unemployment can include some of the other policy objectives , such as a stable price level and a stable balance of payments on the current account.

If there is lower unemployment, it is likely that AD has shifted to the right. This is especially the case if cyclical unemployment has fallen, as it is the unemployment caused by a lack of AD in the economy, for example during the financial crisis or COVID. If AD shifts to the right, real GDP rises and unemployment falls, but there would be an increase in price levels, from P1 to P2, as seen below.

Inflation (rise in average price levels) happens because higher AD (C+I+G+X-M) is linked to more spending from consumers, firms and the government. For example, if more people have jobs then more people will have a higher disposable income, which will lead to greater spending in the UK economy. Also, to reduce cyclical unemployment in the first place, it is possible that the government introduced fiscal policy, which means more government spending, also leading to higher AD and higher inflation. Also, if there is higher inflation, relative prices will be lower abroad, so more people may buy goods and services from abroad, leading to higher imports and lower exports (as goods are more expensive in the UK). This means that the current account deficit may also worsen due to lower unemployment. Overall, lower unemployment has trade-offs with the inflation and balance of payments objectives.

In evaluation, we only considered reducing cyclical unemployment by increasing demand so that doesn't mean that trade-offs are inevitable. Also, if there is a high amount of cyclical unemployment, there may have been a recession before, suggesting we are in a negative output gap and have high spare capacity. Increasing employment from a low output does not cause a large increase in inflation, as inflation was already low.

Unemployment can also be reduced in another way without causing any major trade-offs. This can be done by using supply-side policies. Supply-side policies are policies that aim to increase LRAS by improving incentives. For example, if new infrastructure and roads are built, then this can lead to an increase in LRAS. This is the case in real life with HS2, which itself creates jobs to implement, but increases mobility of labour even further by easily allowing people to travel across the UK. If the government are able to increase LRAS at the same time that AD rises, then this will reduce the strain on the economy as there would be greater capacity and productive potential.

The diagram above shows that we would be able to increase employment from y1 to y2, while only seeing a small rise in inflation because the supply-side policies can complement short-run economic growth by increasing capacity and reducing strain on price levels. Overall, there would be little conflict between macroeconomic objectives.

However, it is important to consider that supply-side policies are not easy to implement as they require a lot of spending and time. This means there is a high opportunity cost, which can lead to worse outcomes in relation to health, policing, or equality. Also, supply-side policies can take years to put in place, with HS2 being planned to launch after roughly 10 years.

Overall, lower unemployment can often lead to other issues such as inflation or worsened balance of payments but this is not inevitable, as the conflict can be prevented by using supply-side policies.

Intro: definitions and objectives

AD goes up. Diagram. Main trade-off is inflation. Inflation can lead to more imports.

We only considered reducing cyclical unemployment (AD going up), we don't know where the economy was before (was there spare capacity?)

Argument 2: lower UE does NOT always lead to trade offs e.g. ...

Overall, falling unemployment often leads to trade-offs such as higher inflation but this is not inevitable, for example (refer to something that you said).

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11 charts that show how covid changed the U.S. economy

After a pandemic-fueled roller coaster, the U.S. economy is finally steadying.

Four years ago this week, the first wave of what would grow to be 20 million job losses set in, although most Americans were more terrified of catching a new, very transmissible, and sometimes fatal, virus. Toilet paper was nowhere to be found, but at least it was cheaper than it is now, along with most groceries.

In the months to follow, the pandemic recession was largely recognized by global and political leaders as a severe economic trauma. And the swift and almost miraculous recovery of the U.S. economy has been the envy of the world .

The one lasting challenge for the U.S. economy that permeates nearly every benchmark of economic health is inflation. Price increases are finally easing, but not before taking a toll on all Americans, shaping how they feel about everything.

A new normal has settled into the U.S. economy — one that nobody could have predicted four years ago. Here’s what it looks like now, in 11 charts.

1. Unemployment

The labor market imploded as layoffs spiked at the beginning of the pandemic, fueling sky-high unemployment, as many businesses closed or dramatically slowed operations.

In the years that followed, the labor market defied expectations with a vigorous recovery, thanks in large part to consumers opening up their wallets in different ways. The economy added 275,000 jobs last month — extending the longest stretch of an unemployment rate below 4 percent since the 1960s. Still, not all industries have been affected equally. While the health-care industry has steadily grown over the past four years, to accommodate those who got sick during the pandemic and also the growing aging population, the tech industry has shed tens of thousands of workers, after overstaffing to accommodate users flocking online in 2020.

The unemployment rate is expected to climb slightly in 2024 as high interest rates slow business expansion. But data shows that employers are staying committed to investing in their workforces, especially as the Federal Reserve is expected to lower rates, which makes business loans cheaper.

Many Americans got large pay increases after the pandemic, when employers were having to one-up each other to find and keep workers. For a while, those wage gains were wiped out by decade-high inflation: Workers were getting larger paychecks, but it wasn’t enough to keep up with rising prices.

That’s starting to change, as worker shortages are no longer plaguing employers and the costs of running a business settle down. Wage growth is outpacing inflation again, which means workers are back to seeing steady gains in their spending power.

With sudden lockdowns forcing Americans to cancel plans and stay home, families were able to save an eye-popping 32 percent of their incomes in April 2020, an all-time high.

More savings spikes followed, as government stimulus checks and enhanced unemployment benefits made their way into bank accounts. But as the world reopened — and people resumed spending on dining out, travel, concerts and other things that were previously off-limits — savings rates have leveled off. Americans are also increasingly dip into rainy-day funds to pay more for necessities, including groceries, housing, education and health care. In fact, Americans are now generally saving less of their incomes than they were before the pandemic.

4. Credit card debt

As Americans drastically pulled back on spending early in the pandemic, they relied less on loans and credit cards. A mix of stimulus money and other measures, like a pause on student loan repayments, helped keep indebtedness low for a while, even as the economy opened back up.

But now, debt loads are swinging higher again as families try to keep up with rising prices. Total household debt reached a record $17.5 trillion at the end of 2023, according to the Federal Reserve Bank of New York. And, in a worrisome sign for the economy, delinquency rates on mortgages, car loans and credit cards are all rising, too.

5. Immigrant visas

When the pandemic hit, the State Department cut back on processing visas except in certain cases, such as those for emergency and “mission critical” situations, with more limited services starting again in July 2020.

That led to a precipitous drop in the number of immigrant visas approved during the early months of the pandemic. It took years, but the agency caught up to its previous rate — and said it reduced its overall backlog by 15 percent last year.

A lack of foreign-born workers in the United States hamstrung employers back in 2021 and 2022. But their return to the U.S. labor force, due to both legal and illegal immigration, helped propel economic growth in 2023 beyond expectations.

6. Groceries

Grocery prices began their ascent early in the pandemic, when supply chain disruptions and labor shortages collided with a sudden rise in demand, as Americans hunkered down at home.

Since then, a mix of factors, including Russia’s invasion of Ukraine, extreme weather related to climate change and a massive Avian flu outbreak, have kept costs elevated. Overall, grocery prices are up 25 percent from four years ago.

However, there’s good news: Those increases have started to level off. Rice, milk, meat and fruit have all gotten cheaper this year. Economists generally expect grocery inflation to keep cooling — which means prices will stabilize, though in a healthy economy they’re unlikely to drop back down to pre-pandemic levels.

7. Gas prices

Gas prices dipped during the beginning of the pandemic, as people stayed home and business operations slowed. But skyrocketing prices hit American’s wallets in 2022 — caused in part by the Russian invasion of Ukraine.

Prices have eased in recent months, due in part to increased oil production in North America. The United States is producing more oil than any country ever has.

“The global refining picture continues to improve, providing more capacity and peace of mind that record-setting prices will stay away from the pump in 2024,” wrote GasBuddy’s head of petroleum analysis, Patrick De Haan, in an annual fuel price report. Analysts don’t expect major spikes in gas prices this year, beyond expected seasonal waves.

8. Home prices

The pandemic set off a home-buying frenzy. Americans were stuck at home, hankering for more space — and had the extra cash to buy their first homes or upgrade to larger ones.

It also helped that rock-bottom interest rates made it cheap to borrow. The result was a stunning 48 percent surge in home prices that lifted the average U.S. sales price to over $552,000.

But lately, demand has cooled, thanks to a mix of high prices and rising borrowing costs, as the Federal Reserve raised interest rates to curb inflation. That’s helped bring down average home prices by 11 percent from their 2022 peak.

Home builders are catching on that consumers want more affordable houses, driving a shift toward construction of smaller new homes with lower price tags.

9. New restaurant openings

Many restaurants were forced to close during the pandemic. Others shifted to takeout food and to-go cocktails but still had to cut staff. When things opened up again, diners rushed into restaurants but the industry took a while to get back on track, due to labor shortages and rising prices for everything.

Now, optimism has returned. Restaurant openings last year saw a nearly 2 percent bump over 2019, according to data from Yelp, which tracks restaurant openings by calculating new listings on its site. “In 2024, we expect to see this positive momentum continue,” said Cliff Cate, Yelp’s vice president and general manager, restaurants. And restaurants aren’t the only new businesses in town: For the first time since the onset of the pandemic, overall business openings last year in every U.S. state beat out pre-pandemic numbers, according to Yelp.

10. Air travel

Air travel plummeted during the early months of the pandemic, as people sheltered in place and borders closed around the world.

It rebounded faster than many expected as passengers exercised their pent-up demand to travel.

But the recovery came with challenges caused by staffing changes and industry shifts . When covid hit, airlines encouraged some staff to take early retirement or voluntary separation packages, leading to senior staff departures. That left airlines with less experienced staff, and sometimes a shortage of workers — issues that have led to delays for travelers and potential safety challenges, according to some industry leaders.

11. Consumer sentiment

Mass uncertainty early in the pandemic caused consumer sentiment to dip, as measured by the closely watched survey by the University of Michigan. Another drop in sentiment followed during peak inflation prices. But consumers are finally feeling better about the economy.

The number has been improving in part because of easing inflation rates. Consumers seem to feel that inflation will “continue on a favorable trajectory,” Joanne Hsu, an economist at the University of Michigan and director of its consumer surveys, wrote about the February consumer sentiment numbers.

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Unemployment and Policy Trade-Offs (Revision Essay Plan)

Last updated 4 May 2019

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Here is a revision essay plan on this title: “Evaluate the view that falling unemployment inevitably has trade-offs with other macroeconomic objectives. Discuss with reference to a country or countries of your choice.”

KAA Point 1

Falling U – may cause an acceleration in wage inflation in labour market – leads to a rise in cost-push and demand-pull inflationary pressures – this is a trade-off suggested by the short-run Phillips Curve analysis. Bargaining power of workers rises + skilled labour shortages & increased demand for raw materials and components can all drive variable costs higher – inward shift of SRAS, leading to a higher rate of inflation.

EVAL Point 1

Not automatic that inflation will rise. Improved supply-side flexibility of the labour market might have caused a fall in the NAIRU (non-accelerating inflation rate of unemployment) – this means that U can fall further without threatening rising wage inflation. External factors (e.g. lower commodity prices, impact of global competition) can also act as off-setting factors even if wages are rising more quickly.

KAA Point 2

Falling U – leads to rising real wages – increased household incomes – causes surge in demand for imports of goods and services – especially if the marginal propensity to import is high – in the absence of offsetting factors, a rise in M will lead to a worsening of the current account of the BoP. E.g. unemployment in UK now less than 4%, in 2016 the UK ran a record current account deficit of more than 5% of GDP.

EVAL Point 2

Falling U might be result of improved supply-side performance e.g. increased labour productivity which makes UK export industries more competitive. Or export sales might have grown because of a depreciation of the exchange rate (e.g. 2016) which (assuming Marshall-Lerner condition holds) will improve the net trade balance whilst also stimulating output and employment in sectors such as cars and tourism.

FINAL CONCLUSION

Phillips Curve for the UK seems to have flattened i.e. improving trade-off between unemployment and inflation. UK might be able to get close to full-employment and stay within the 2% inflation target. But weak productivity and low investment (17% of GDP) mean that strong GDP growth often associated with a worsening of the external trade accounts.

• Phillips Curve

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Unemployment Essay

500+ words essay on unemployment.

Unemployment is a serious problem among young people. There are thousands of people who do not have any work to do and cannot find work for themselves. Unemployment refers to the situation where a person wants to work but cannot find employment in the labour market. One of the major reasons that contribute to unemployment is the large population of India and the limited availability of resources. In this essay on unemployment, we will discuss all these issues responsible for unemployment in India and how we can overcome this problem. Students must go through this unemployment essay to get ideas on how to write an effective essay on the topic related to unemployment. Also, they can practice more CBSE essays on different topics to boost their writing skills.

Unemployment is measured by the unemployment rate, defined as the number of people actively looking for a job as a percentage of the labour force. The unemployment rate for the year 2013-14 in rural India was 4.7%, whereas it was 5.5% for urban India. In the short term, unemployment significantly reduces a person’s income and, in the long term, it reduces their ability to save for retirement and other goals. Unemployment is a loss of valuable productive resources to the economy. The impact of job loss in rural and regional areas flows through the local community, damaging businesses.

Reason for Unemployment

An unemployed person is one who is an active member of the labour force and is seeking work but is unable to find any work for himself. There are multiple reasons behind the unemployment of a person. One of them is the slow economic growth, due to which jobs in adequate numbers are not created. Excessive dependence on agriculture and slow growth of non-farm activities also limit employment generation. Unemployment in urban areas is mainly the result of substantial rural migration to urban areas. This has also resulted in a labour workforce in cities. The lack of technology and proper machinery has also contributed to unemployment.

The present educational system is based on theoretical knowledge instead of practical work. Thus, it lacks the development of aptitude and technical qualifications required for various types of work among job seekers. This has created a mismatch between the need and availability of relevant skills and training. This results in unemployment, especially among the youth and educated people with high degrees and qualifications. Apart from it, the lack of investment and infrastructure has led to inadequate employment opportunities in different sectors.

Steps to Eliminate Unemployment

Various strategies and proposals have been implemented to generate employment. Many Employment programmes and policies have been introduced and undertaken to boost self-employment and help unemployed people engage in public works. The Government of India has taken several policy measures to fight the problem of unemployment. Some of the measures are the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), National Skill Development Mission, Swarna Jayanti Shahari Rozgar Yojana (SJSRY), Regional Rural Banks (RRBs).

Despite the measures taken by the government, India remains a country experiencing severe unemployment problems. It can be resolved by imparting education in such a way that youth get the necessary skills so as to get employment easily. Setting up various vocational training and vocational courses for undergraduate and postgraduate students will help in finding employment for youth. The government needs to emphasise these courses at the primary level and make them a compulsory part of the curriculum to make students proficient in their early stages of life. Career counselling should be provided within schools and colleges so that students can choose a better career option based on their interests and ability. Government should create more job opportunities for the youth and graduates.

India is a fast-growing economy. There is an enormous scope for improvement in the unemployment sector. The various measures and steps taken by the government to increase the employment rate have succeeded to a great extent. The widespread skill development programmes have gained popularity across the nation. With better enforcement of the strategies, the employment level can be significantly improved. Although, we have to go a long way before we can say that all the people in India will get employment.

We hope this essay on unemployment must have helped students in boosting their essay-writing skills. Keep learning and visiting the BYJU’S website for more study material.

Frequently Asked Questions on Unemployment Essay

Is unemployment still an existing problem in india.

Yes, unemployment is still a serious issue in our country. Steps need to be taken by the government and also by the youngsters in India to improve this situation.

Is it necessary for schoolchildren to be informed about unemployment?

Students at this young age should definitely be informed about this topic as it will motivate them to study and aim for higher scores in exams.

What points are to be added to an essay topic on Unemployment?

Add details about different age groups of people suffering from this state of employment. You can focus on the fact that poverty is an indirect reason for unemployment and vice-versa. Then, suggest steps that can be taken to bring about an improvement in education and increase the percentage of literacy.

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US labor market cooling; unemployment rate rises to two-year high of 3.9%

• Nonfarm payrolls increase 275,000 in February
• December, January payrolls revised lower by 167,000
• Unemployment rate rises to 3.9% from 3.7%
• Average hourly earnings gain 0.1%; up 4.3% year-on-year

BROAD JOB GAINS

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Guest Essay

America’s Largest Minority Is Also Its Most Misunderstood

By Marie Arana

Ms. Arana is the author, most recently, of “LatinoLand: A Portrait of America’s Largest and Least Understood Minority.” She is Peruvian American.

History is being made on the Rio Grande. Hundreds of thousands of migrants braved the journey across it last year, setting records and contributing to an urgent border crisis. As spectacle, it has been transfixing.

Yet misconceptions abound. It’s as if the sight of a migrant scaling a wall or wading ashore is now a Rorschach test, our Rashomon. Depending on where we sit on the political spectrum, we perceive different truths: Some see a brown “invasion,” others an unremitting drug war, a humanitarian crisis, a political failure, a symptom of societal collapse. The politicizations are legion, and the distortions dire.

More than anything, these images cloud two key realities: Not all migrants crossing the southern border are Latin Americans; Chinese newcomers are now the fastest growing group coming in from Mexico. And most Latinos are not rootless, illegal transients — burdens on the society — as some citizens may think, but a force for American progress.

The majority of Latinos in this country were born here and are English speakers. Some of us have families who inhabited this continent long before the Pilgrims set foot on its shores. Hispanics have fought loyally in every American war since the Revolution. The Army’s eighth chief of ordnance, Brig. Gen. Stephen Vincent Benét, was Hispanic. The first admiral of the Navy, David Farragut (“ Damn the torpedoes, Full speed ahead! ”), whose commanding statue dominates Farragut Square only steps from the White House, was Hispanic. Roughly one out of every four U.S. Marines today is a Latino. Invasion, indeed.

We are Americans. We have served America since its foundation; we have contributed richly to its culture, its science. Little to none of that history is taught in American public schools; and in the media and entertainment industries, the image of the Latino has historically been roundly negative, if present at all. This, too, needs to change. A vigorous antidote to border fever is in order.

Take the economy. Research has shown that immigrant workers pay taxes and have a net zero effect on government budgets. Whether behind a pupusa stand or a polished desk in a major corporation, Latino workers occupy every rung of the economy and own a considerable stake in the financial success of this country.

Much of that work ethic and entrepreneurship has been spirited for centuries, starting with sixteenth-century traders in the Spanish settlement of St. Augustine, Fla.; or the first Dominican in Manhattan, Juan Rodríguez, who, by 1613, was trading weapons for furs and serving the Dutch as well as the Native Americans. In the 1800s, Mexican vaqueros, the continent’s first cowboys, trained an emerging class of white buckaroos, furnishing them with saddles, 10-gallon hats, chaps and lassos. A century later, during the 1950s and into the 1970s, waves of Cubans and Puerto Ricans arrived on the East Coast, bringing bodegas, paladares (family-run restaurants) and other vibrant Latino enterprises.

Within a generation, Wall Street analysts — and an American president — were marveling at the business acumen of Latinos. But the explosion in the years that followed was even more astonishing. Though Hispanic owners often have difficulty getting financing, in the decade from 2012 to 2022, their small businesses multiplied by 44 percent (more than 10 times the rate of other similarly sized businesses). This is an incursion of a different kind.

Surprisingly, almost 90 percent of immigrant Latino ventures earning at least $1 million a year are owned by millennials (people in their late 20s to early 40s) who came to the United States as youths. That is certainly true for the Argentine businessman Ezequiel Vázquez-Ger and his Venezuelan wife, Mafe Polini, who flew into Washington from their respective homelands when they were 24 years old and began at the bottom of the economic ladder. In time, they dreamed of owning a restaurant, used their savings to help fund their first, and ended up owning six establishments in the capital (one of them earning a Michelin star).

It is also true for José, a Honduran I interviewed for this piece, who asked me to drop his surname because of his undocumented status. After five serial deportations from both the United States and Mexico, José finally crossed the border as a teenager, started work as a lowly bricklayer, and now, at 43 and still without papers, owns his own home in a major American city, as well as a robust plumbing business.

The contributions — by those with families who have been here for centuries and those who arrived only last year — are monumental. Every year, Latino businesses generate about $800 billion for the U.S. economy. Few, if any, entrepreneurial groups in the United States have experienced as much growth.

But that doesn’t tell the whole story. Those small establishments — the housecleaning operations, construction companies, trucking enterprises, beauty shops, ethnic markets and restaurants from Manhattan to Los Angeles — employ millions. Hispanics were responsible for 73 percent of the growth in the U.S. labor force between 2010 and 2020. Today, if Latinos in the United States were their own separate nation, they would represent the fifth-largest G.D.P. in the world.

And yet there is that apparently majority impulse to think that a figure jumping a wall represents us. The lie now supersedes the reality. According to a 2021 poll , Americans of all backgrounds believe that the share of Latinos who are undocumented is more than two times as high as it actually is.

If Latino contributions to the economy are so ubiquitous, if our history on this soil is age-old and honorable, why are those perceptions so skewed? Why are the antipathies so profound? Why do non-Hispanic Americans incorrectly believe that one out of every three of us is deportable?

It’s not just racism. It’s our invisibility. Even as we fill the classrooms, feed the nation and help keep the economy afloat, too often, we are overlooked — unjustly erased from school curriculums, from the media, from corporate boardrooms, from history. Maybe it’s time for America to take a good look.

Marie Arana is the author, most recently, of “LatinoLand: A Portrait of America’s Largest and Least Understood Minority.”

The Times is committed to publishing a diversity of letters to the editor. We’d like to hear what you think about this or any of our articles. Here are some tips . And here’s our email: [email protected] .

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Wednesday, June 9, 2021

Why deflation is bad.

There are several reasons why deflation is considered to be harmful to the economy.

• Discourage buying. When general prices are falling, consumers tend to delay purchasing. For example, rather than buy a flatscreen today, they wait a year when they will be cheaper. The effect of falling prices is to depress consumer spending leading to lower economic growth.

• Monetary Policy Becomes ineffective . With deflation, zero interest rates may be too high. Even quantitative easing may be insufficient to get people spending. ( deflation and monetary policy )  The problem is that it is difficult to cut interest rates below zero and so the monetary authorities cannot adequately deal with the slow growth and deflation.
• Inflation vs Deflation
• Deflationary spiral
• What is more likely inflation or deflation?
• Definition of deflation

Friday, March 20, 2020

How much can the government borrow.

• Historical precedents . In WWII, the OBR said the UK ran a budget deficit of nearly 27% of GDP. By the early 1950s, UK national debt had risen to 240% of GDP. Yet this was not a significant problem. In the post-war period, the UK enjoyed a long period of economic expansion, where debt to GDP ratios fell. In March 2020, UK debt to GDP ratio was around 80% of GDP, so there is significant room for an increase in government debt.

• Government's have the ability to create money . Some economists (especially those believing in MMT ) argue the only constraint to government borrowing is inflation. In other words, higher government spending financed by printing money is only a problem when it causes inflation. In a severely depressed economy, with inflation falling (and possibly deflation) it maybe desirable for the government to create money and target a positive inflation rate. In 2009/10 recession, US and UK financed some borrowing through quantitative easing .
• In a recession , most economists accept that a rise in government borrowing is necessary to offset the fall in private sector investment and spending. Keynesian economics says expansionary fiscal policy can help an economy recover. But austerity (cutting spending) can make the recession worse, worsening tax revenues and be counter-productive in cutting borrowing.
• During a period of economic growth when the economy is close to full capacity, government borrowing can cause many problems such as crowding out of the private sector, pushing up interest rates, and possible inflationary pressures.
• Does it print its own currency?
• Do markets trust the government to maintain low inflation and not default?
• What are the interest rate on government bonds?
• What is the state of the economy?
• What is the purpose of government borrowing?
• To what extent is the government borrowing from domestic or foreign investors?

Levels of government debt

• US 117% of GDP in 1945 (gross federal debt (1)
• UK 240% of GDP in the early 1950s 
• Japan has national debt over 230% GDP

How does the government finance its debt?

• Selling government bonds to the private sector - either domestic or foreign. The private sector buy bonds because the security and interest rate on them.
• The Central Bank can finance shortfall in revenue by increasing the money supply and buying bonds itself. This is sometimes known as quantitative easing.

Factors which influence how much a government can borrow

• Domestic savings. If consumers have a high savings ratio, there will be a greater ability for the private sector to buy bonds. Japan has very high levels of public sector debt, but with high domestic savings, there has been a willingness by the private sector to buy the government debt. Similarly, during the Second World War, the government was able to tap into the high levels of domestic savings to finance UK debt. 

• In a depression, we tend to see a rise in private sector saving (the paradox of thrift) because households fear being made unemployed and firms don't want to invest. Therefore, in a recession, there is often surplus private sector savings. A surplus of unused savings means there is an advantage for the government to borrow, invest, create jobs and make use of these surplus savings. As Greg Mankiw said in March 2020. "There are times to worry about the growing government debt. This is not one of them."
• Relative interest rates. If government bonds pay a relatively high-interest rate compared to other investments, then ceteris paribus , it should be easier for the government to borrow. Sometimes, the government can borrow large amounts, even with low-interest rates because government bonds are seen as more attractive than other investments. (e.g. in a recession government bonds are often preferred to buying shares (which are more vulnerable in a recession). This is why US bond yields fell 2008-11, despite growth in US government borrowing. 

• Lender of last resort . If a country has a Central Bank willing to buy bonds in case of liquidity shortages, investors are less likely to fear a liquidity shortage. If there is no lender of last resort (e.g. in the Euro during 2011/12) then markets have a greater fear of liquidity shortages and so are more reluctant to buy bonds.
• Confidence and security. Usually, governments are seen as a safe investment. Many governments have never defaulted on debt payments so people are willing to buy bonds because at least they are safe. However, if investors feel a government is too stretched and could default, then it will be more difficult to borrow. Therefore, some countries like Argentina with bad credit histories would find it more difficult to borrow more. Political uncertainty can make investors more concerned.
• Foreign Purchase . A country like the US attracts substantial foreign buyers for its debt (Japan, China, UK). This foreign demand makes it easier for the government to borrow. However, if investors feared a country could experience inflation and a rapid devaluation, foreigners would not want to hold securities in that country and it could lead to capital withdrawal.
• Inflation. Financing the debt by increasing the money supply is risky because of the inflationary effect. Inflation reduces the real value of the government debt, but, that means people will be less willing to hold government bonds. Inflation will require higher interest rates to attract people to keep bonds. In theory, the government can print money to reduce the real value of debt; but existing savers will lose out. If the government creates inflation, it will be more difficult to attract savings in the future. A crucial factor is whether inflation is likely. In a recession, inflationary pressures vanish so it is much easier to finance a deficit by borrowing.

Why did Eurozone countries experience more debt problems than UK and US in 2012?

• EU debt crisis explained
• National debt UK

Wednesday, March 11, 2020

Paradox of thrift.

• The paradox of thrift is a concept that if many individuals decide to increase their private saving rates, it can lead to a fall in general consumption and lower output.
• Therefore, although it might make sense for an individual to save more, a rapid rise in national private savings can harm economic activity and be damaging to the overall economy.
• In a recession, we often see this 'paradox of thrift'. Faced with the prospect of recession and unemployment, people take the reasonable step to increase their personal saving and cut back on spending. However, this fall in consumer spending leads to a decrease in aggregate demand and therefore lower economic growth.

Paradox of thrift during 2020 corona recession

• In 2020, the economic shutdown will lead to an unprecedented rise in savings. Partly because people are very nervous about the future economy but also because opportunities to spend are severely limited.
• On the other hand, people who see a large fall in income will have to dip into their savings and borrow to stay afloat.

Paradox of thrift during 2009 Recession

Paradox of Thrift in 1930s

Keynes and paradox of thrift.

Who coined the term paradox of thrift?

"For although the amount of his own saving is unlikely to have any significant influence on his own income, the reactions of the amount of his consumption on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to save add up to a figure exactly equal to the amount of investment. —  John Maynard Keynes, The General Theory of Employment, Interest and Money , Chapter 7, p. 84

"Had the whole population been alike bent on saving, the total saved would positively have been much less, inasmuch as (other tendencies remaining the same) industrial paralysis would have been reached sooner or oftener, profits would be less, interest much lower, and earnings smaller and more precarious. This ... is no idle paradox, but the strictest economic truth." —  John M. Robertson, The Fallacy of Saving , pp. 131–132

Paradox of thrift and government borrowing

Criticisms of paradox of thrift.

• Higher saving increases bank balances and can lead to an increase in bank lending - and hence investment.
• A fall in demand from higher saving, will cause lower prices, which encourage demand to increase. This is related to Say's Law which states supply creates its own demand.
• Higher domestic savings can lead to lower domestic inflation and therefore increase exports. Higher exports can boost demand.

Responding to criticisms

• In a recession, banks may not want to lend, and even if banks do want to lend, firms do not want to borrow and invest. In fact, in a recession, firms may do the same as consumers and try to save more and pay back dent. 
• Prices may be sticky downwards and not fall, even if there is lower demand. Also, if prices fall, deflation can discourage spending because real value of debt rises.
• Not every country can 'export' its way out of a recession.
• Impact of expansionary fiscal policy

Friday, June 14, 2019

Understanding uk housing market.

• House prices are volatile with frequent booms and busts.
• Despite volatility, and even adjusted for inflation - UK house prices have been on a strong upward trend since the 1930s.

Main factors affecting house prices

• Supply. UK house prices have stayed relatively high (despite recession and credit crunch) because of a shortage of supply. Ireland and Spain have seen much bigger house price falls because they have large excess supply.
• Interest rates. The UK housing market is sensitive to changes in interest rates. Higher interest rates in the early 1990s made mortgages unaffordable and caused a big drop in house prices.
• Economy / unemployment. A recession and rising unemployment usually causes lower demand for buying houses and a fall in price. (falling house prices also tend to deepen the recession)
• Mortgage availability. In the boom years of 2000-07, banks were keen to lend and they relaxed their lending criteria, enabling more people to get a mortgage. But, the credit crunch meant banks had to tighten their lending criteria making mortgages difficult to get (even though interest rates were low)
• see more at: factors affecting housing market

Why are UK house prices so volatile?

• Inelastic supply. It takes time to build houses - with rising demand, supply often can't keep up. This pushes prices up.
• Change in credit conditions. Mortgage availability can vary depending on the state of the banks and financial markets.
• Changing interest rates. Interest rates are used to control inflation, but a rise in interest rates has a big effect on demand and affordability.
• Changes in confidence. In the boom years, we see landlords buying to let and demand rises. When prices fall, people don't want to buy for fear of negative equity.

Why are UK house prices so expensive?

Housing market crashes

How does the housing market affect the rest of the economy, government intervention in the housing market.

• Increasing supply to overcome fundamental shortage.
• Protecting green belt land
• Ensuring minimum standards of house building and ensuring tenants get a fair deal
• Seeking to avoid house price volatility.
• Market failure in housing
• Cause of falling house prices
• Latest stats and graphs on the housing market
• Problems of UK housing market
• Impact of falling house prices

Monday, May 13, 2019

Advantages and disadvantages of trades unions.

Advantages of Trades Unions

Potential disadvantage of Trades Unions

• The UK economy under Mrs Thatcher 1979-1984
• Trade Unions

Friday, March 8, 2019

7 common economic fallacies.

• Immigrants increase the supply of labour but they also increase aggregate demand in the Economy. This means that they buy more goods and create additional demand in the economy. They provide labour supply and increase labour demand.
• If immigration caused unemployment why did America not have high unemployment during times of mass immigration? Because the immigrants created as many jobs as they took.
• Often immigrants take jobs that native workers just don’t want to do. – You won’t see big multinationals cueing up to stop immigration.
• Furthermore, immigrants tend to be of working age. Therefore they tend to contribute more tax than receive in benefits. Without immigration, US demographics would have a larger % of dependent old people.
• War does create more output, but only in some industries related to war. Arms manufacturers do very well out of the war. But the total output of the economy doesn’t increase instead there is a change in economic priorities. Resources are diverted from peaceful industries to industries for creating the mechanisms of war.  This is similar to the broken window fallacy.
• If a butcher's window is smashed, the window repairer sees new work. He gains more income. But, the broken window hasn't increased economic welfare. It just means the butcher has to spend money repairing a window rather than investing in a bigger premise.
• Increase in government spending for wars create either taxes and or higher debt payments. This is a burden on current and future taxpayers. Note The UK is still paying off debt from second world war.
• Ronald Reagan’s economic advisers told him something along the lines of “cut taxes” and you can increase total tax income. This theory is based on the laffer curve which states that if taxes are 100% people won’t work. Therefore if you cut taxes more people work and you can increase tax revenue. This is based on the Laffer Curve.

• The problem is that this may work if you cut taxes from 95% to 90%. But when you cut income tax from 25% to 23% it doesn’t make any difference.
• Some people want a target income of say £20,000. Thus if taxes fall they can earn the same by working less. Empirical evidence suggests there is little if any supply-side incentive for cutting US or UK tax rates.
• The instinctive reaction of politicians is that if one country places a tariff barrier on our exports, we should respond by doing the same. However economic theory suggests that placing a tariff barrier on imports leads to a loss of economic welfare. It is better to not retaliate.
• Retaliation may help one small domestic industry, but it causes costs to all consumers in the form of higher prices. There is a net welfare loss, that is not recovered by some domestic industries gaining benefit.
• Another justification given for cutting income tax is that it will increase aggregate demand and hence increase economic growth. However this is not always true because:
• If you cut income tax for high-income earners, they are likely to save a high % of their extra disposable income. Their marginal propensity to consume is low.
• If you cut income tax the government has to either cut government spending or borrow. If the government has to borrow from the private sector then they will have less income to spend causing a decline in private sector spending. This is called crowding out. 
• (Although there are certain times when a government deficit can boost AD - like in a recession.)
• The broken window fallacy
• The Luddite Fallacy
• Lump of labour fallacy
• Some misconceptions about how the economy works

Monday, May 7, 2018

Problems with the euro.

• A single currency within the Eurozone area.
• A common monetary policy. Interest Rates are set by the ECB for the whole Eurozone area.
• Growth and Stability Pact. In theory there are limits on government borrowing, national debt and fiscal policy. However, in practice member countries have often violated the strict limits on government borrowing.

Problems and costs of the Euro

• Interest rates not suitable for whole Eurozone . A common monetary policy involves a common interest rate for the whole eurozone area. However, the interest rate set by the ECB may be inappropriate for regions which are growing much faster or much slower than the Eurozone average. For example, in 2011, the ECB increased interest rates because of fears of inflation in Germany. However, in 2011, southern Eurozone members were heading for recession due to austerity packages. The higher interest rates set by the ECB were unsuitable for countries such as Portugal, Greece and Italy.
• The Euro is not an optimal currency area . If a state in the US, such as New York ,was in recession, workers in New York could move to New England and get a job. However, in the Eurozone this is much more difficult; it involves moving country and possibly learning a new language. There are more barriers to the movement of labour and capital within a diverse region like Europe. Therefore, an unemployed Greek can't easily relocate to Germany. see: Two Speed Europe
• Limits Fiscal Policy . With a common monetary policy it is important to have similar levels of national debt, otherwise countries may struggle to attract enough buyers of national debt. This is a growing problem for many Mediterranean countries like Italy, Greece and Spain who have large national debts and rising bond yields.
• Lack of Incentives . It is argued that being a member of the Euro protects a country from a currency crisis. Therefore, there is less incentive for countries to implement structural reform and fiscal responsibility. For example, in good years Greece was able to benefit from very low bond yields on its debt because people felt Greek debt would be secured by rest of Europe. But, this wasn't the case, and Greece were lulled into a fall sense of security.
• No scope for devaluation . Since the start of the Euro, several countries have experienced rising labour costs. This has made their exports uncompetitive. Usually, their currency would devalue to restore competitiveness. However, in the Euro, you can't devalue and you are stuck with uncompetitive exports. This has led to record current account deficits, a fall in exports and low growth. This has particularly been a problem for countries like Portugal, Italy and Greece.

• No Lender of Last Resort . The ECB is unwilling to buy government bonds if there is a temporary liquidity shortage. This makes markets more nervous about holding debt from eurozone economies and precipitates fiscal crisis. See: Problems of Italy - why Italian bonds increased despite having a much lower budget deficit than UK.
• However it is worth noting that since Mario Draghi took over and promised to 'do whatever it takes, the ECB has effectively acted as lender of last resort.
• Deflationary Bias I would argue there is a deflationary bias in the Eurozone which increases the risk of recession and higher unemployment

• Divergence in bank rates . In theory, the Eurzone creates a common interest rate. However, in the credit crisis of 2010-13, we see rising bank rates for peripheral Eurozone countries, like Italy and Spain. Small and medium sized firms faced higher borrowing costs than in 2005, even though the ECB cut the main base rate. This suggests that the ECB was unable to loosen monetary policy when needed. See more on credit policy 
• Asymmetric Shocks . If one country experienced an external shock it might need a different response. But this is not possible with a common currency. E.g. German reunification required higher interest rates in order to help reduce inflation but this was not good for many other countries.
• An oil shock would affect net importers like France more than Norway and the UK who export a lot. Monetary Policy will have different effects in different countries. For example, the UK is sensitive to changes in the interest rate because many people have mortgages.

Problems for UK Economy

• Housing market. Many in the UK have a mortgage which is a big % of their disposable income. This is related to the high cost of buying houses in the UK.
• Variable Mortgages In the UK more homeowners have variable mortgages. These two factors means UK consumers are very sensitive to changes in the base rate. If the ECB kept interest rates higher than the UK needed it would create serious problems in the UK. Arguably to join the UK would need to reform its housing market and reliance on variable mortgages.
• Why it's very hard to leave Euro
• European fiscal crisis
• Benefits of Joining the Euro
• Danger Ahead for Mighty Euro at Economist

Tuesday, April 3, 2018

Predictions for the dollar as the reserve currency.

Will the Euro Replace the Dollar as the World’s Reserve Currency?

• Since 1999, the Dollar’s share of the world’s currency reserves have fallen from 70.9% to 64%
• In the same period, the Euro has increased from 17.9% to 25.8%
• (the 3rd biggest reserve currency is the Pound sterling 4%
• (the 4th biggest reserve currency is the Japanese Yen 2.8%)

Why the Euro May soon Replace the Dollar

• The Dollar has been very weak in the past 8 years. Against the Euro, the Dollar has fallen by over 30% since 2001. The Dollar has also fallen against the Yen and other currencies. This means that countries holding reserves in dollars are seeing a decline in their value. For example, China has over $1,400 billion of dollar reserves. A 20% devaluation represents a significant loss for them. Therefore, the rational step is to diversify out of the dollar.
• Countries dropping the Dollar Peg . Many middle eastern Countries such as Saudi Arabia, Kuwait and Syria used to maintain a dollar peg. However, there are signs that they no longer want to keep a peg against a devaluing dollar. Kuwait and Syria have dropped their peg and Saudi Arabia recently decided not to follow the US in cutting interest rates.
• Dollar’s weakness may continue. The US economy is continuing to slow down as it remains hard hit by the housing slump. US interest rates have fallen and may continue to fall by more than the Eurozone. As interest rates in the US are low it becomes less attractive to buy US dollars so the devaluation will continue.
• US Trade Deficit (current account deficit of 5%). In recent years, the US has built up a large current account deficit. This has caused an outflow of currency and is a factor in maintaining the weakness of the dollar. (although the recent devaluation though has helped reduce the deficit from over 6% to 4.7%)
• The Euro is a real alternative . The Euro economy is now as large as the US. The Euro may also be seen as more politically desirable. European countries were less willing to get involved in Iraq and many accuse the US of an ‘imperial overreach’ with too many foreign bases and interference around the world. The European Union, by contrast, provides greater diversity and is politically more attractive, especially to middle eastern countries.
• Better inflation performance of the Eurozone to the US. There was a marked contrast in response to the recent credit crisis. The US slashed rates to 2.25%, the ECB barely cut rates at all. The lower rates and devaluation of the dollar makes future inflation in the US more likely, this will only make the US less attractive.
• Effects of a falling dollar
• Why do foreigners hold US dollars?
• Will the Euro Replace the Dollar at Economist's view
• Why the Euro will soon replace the dollar as the world's reserve currency

Wednesday, November 1, 2017

Importance of economic growth, why economic growth is important.

• Reduction in poverty . Increased national output means households can enjoy more goods and services. For countries with significant levels of poverty, economic growth can enable vastly improved living standards. For example, in the nineteenth century, absolute poverty was widespread in Europe, a century of economic growth has lifted nearly everyone out of this state of poverty. Economic growth is particularly important in developing economies.
• Reduced Unemployment . A stagnant economy leads to higher rates of unemployment and the consequent social misery. Economic growth leads to higher demand and firms are likely to increase employment.
• Improved public services . Higher economic growth leads to higher tax revenues (even with tax rates staying the same). With higher growth, incomes and profit, the government will receive more income tax, corporation tax and expenditure taxes. The government can then spend more on public services. 

• Political aspect . Elected politicians have a vested interest in higher economic growth. Higher growth enables vote pleasing policies such as tax cuts and/or more public spending.

Virtuous cycle of economic growth

• Countries with positive rates of economic growth will create a virtuous cycle
• Economic growth will encourage inward investment as firms seek to benefit from rising demand
• Higher growth leads to improved tax revenues which can be spent on long-term public sector works, such as improved transport and communication. This helps long-term growth.
• Confidence to invest. Higher growth encourages firms to take risks - innovate and invest in future products and productive capacity.

Limitations of economic growth

• Inequality and distribution . Economic growth doesn't necessarily reduce relative poverty, it depends on the distribution of incomes. Economic growth could bypass the poorest in society. For example in the 1980s, the Gini coefficient rose sharply - the richest 1% gained dis proportionality more.
• Negative externalities . Economic growth can cause negative externalities such as pollution, higher crime rates and congestion which actually reduce living standards. For example, China has experienced very rapid economic growth but is now experience very serious levels of air pollution in major cities.
• Economic growth may conflict with the environment . e.g. increased carbon production is leading to global warming. Economic growth may bring benefits in the short-term, but costs in the long-term.
• It depends on what is produced . The Soviet Union has fantastic rates of economic growth, but, often through producing a lot of steel and pig iron that was not actually very useful.
• Economic growth can be unsustainable . If growth is too rapid, it will cause inflation, current account deficit and can lead to boom and bust.
• Does happiness actually increase? Theories of hedonistic relativism suggest (beyond a certain level) increasing output has no effect on changing life quality or happiness.
• Causes of Economic Growth
• Benefits of economic growth

The Importance of Economics

Saturday, october 21, 2017, wednesday, october 11, 2017, interest rates explained.

Effect of an Increase in Interest Rates

• Cost of borrowing is more expensive. If borrowing is more expensive consumers will take out fewer loans. Firms will borrow less. Therefore consumer spending and investment will fall (or increase at slower rates)
• Mortgage and loan repayments increase. This reduces consumer disposable income and consumer spending further.
• Return on savings increase. More attractive to save and this will reduce consumer spending
• Higher interest rates cause an appreciation in the exchange rate due to hot money flows. (It is more attractive to save in the UK, if UK interest rates are higher than other countries)
• An appreciation in the exchange rate makes more expensive, leading to less export demand
• Fall in asset prices. Higher interest rates can make it less attractive to buy a house with a mortgage leading to lower house prices.

Macro effects

• If consumer spending and investment falls, this will lead to lower AD. Therefore this causes a fall in Real GDP or at least a fall in the rate of economic growth.
• Lower growth will tend to increase unemployment. With less output, firms demand less workers.
• Lower growth will also help to reduce inflation.

How does Bank of England decide whether to increase interest rates?

• Inflation target of 2%. But Bank has to consider other objectives such as
• economic growth and inflation.
• It also has to consider the type of inflation. Is it temporary cost-push inflation or underlying inflationary pressures.
• Is the economy reaching full capacity?

Example of interest rate dilemma Nov 2017

Real interest rates

• Interest rates and the economy
• Essay on Effects of Rising interest rates
• Interest Rate Swaps explained

Thursday, October 5, 2017

The economy of the 1970s.

Barber Boom 1970-73

• The Bank of England deregulated the mortgage market - meaning High Street Banks could now lend mortgages (not just local building societies). This helped fuel a rise in house prices and consumer wealth.
• Barber Boom of 1972. In the 1972 budget, the chancellor Anthony Barber made a dash for growth - with large tax cuts against a backdrop of high economic growth.
• Growth of Credit. It was in the 1970s, we saw the first mass use of credit cards (Access). This helped create a consumer bubble.

Inflation Crisis

• Rising wages, partly due to strength of unions.
• The inflationary budget of 1972.
• Growth in credit and consumer spending.
• Oil price shock of 1973, leading to 70% increase in oil prices.

Trying to deal with inflation

• blue line - nominal oil prices
• Yellow line - Real oil prices, adjusted for inflation

1976 IMF Bailout

Saturday, June 17, 2017

• What to produce? - Is it worth spending more on health care?
• How to produce? - Should we leave it to market forces or implement government regulations.
• For whom to produce? - How should we distribute resources, should we place higher income tax on the wealthiest in society?
• Policies to reduce unemployment
• Policies to reduce inflation
• The over production of negative externalities (e.g. pollution/congestion)
• The underproduction of goods with positive externalities (e.g. education, health care, public transport).
• Non-provision of Public Goods - (national defence, law and order)
• Tax negative externalities
• Subsidise public services like health care and education.
• Carbon Tax - should we implement a carbon tax to reduce global warming?
• Should we tax fatty foods?
• Efficiency v equality
• GDP and Happiness
• Economics - The Dismal Science
• How to deal/combat global warming?
• Does globalisation help or hinder developing countries?
• How to live in a society without oil?

A surprise recession could strike after an unexpected jump in the unemployment rate, economist says

• An unexpected rise in the unemployment rate suggests a surprise recession could hit the US economy, according to David Rosenberg.
• The unemployment rate is now 0.5 percentage points above its cycle low to 3.9%, which Rosenberg says is a worrying sign.
• "It messes up the soft landing narrative because once it rises this much from the lows, the recession nobody ever sees coming arrives," he said.

Economist David Rosenberg is growing increasingly concerned that a surprise recession could hit the US economy.

Rosenberg's concern stems from the February jobs report, which showed the unemployment rate unexpectedly rise to 3.9% from 3.7%. That reading puts the soft landing narrative at risk, according to Rosenberg.

"Now that the jobless rate is up 0.5 of a percentage point from the January 2023 cycle low, it messes up the soft landing narrative because once it rises this much from the lows, the recession nobody ever sees coming arrives," he said in a Friday note.

Rosenberg's nod to a 0.5 percentage point rise in the unemployment rate likely refers to the Sahm Rule, created by economist Claudia Sahm, which suggests that when triggered, the economy is in the early months of a recession.

But the Sahm Rule isn't triggered until the three-month moving average of the national unemployment rate is 0.5 percentage points or more above its low over the past year, not the absolute unemployment rate.

The Sahm Rule is currently 0.27 percentage points above its one-year low, so the unemployment rate would have to continue to trend higher to trigger the recession indicator.

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"PSA: - The Sahm rule did *not* trigger. - We are NOT in a recession. - Three-month averages are your friend." Sahm posted to X on Friday.

But the rise in the unemployment rate is not the only factor concerning Rosenberg.

Parsing through the jobs report, Rosenberg said that negative revisions of 167,000 to the December and January payroll reports suggest that the US jobs market isn't growing. 

When accounting for the Birth-Death model on a seasonally-adjusted basis, "then with the revisions, the survey itself dropped -3,000 in February. The labor market, contrary to popular opinion, is contracting," Rosenberg said.

Rosenberg also highlighted that while there was strength in hiring in health care, government, and restaurants, net layoffs continued to pick up steam in the technology and banking sectors. 

"Meanwhile, one of the best leading job market indicators out there in employment in the temp-help agency subsector, and payrolls here sank -15,000 last month," Rosenberg said, adding another worry to the February jobs report.

All-in, Rosenberg continues to take a defensive stance in his views on the US economy and stock market.

"I will still not be chasing this thing," Rosenberg said of the soaring stock market. "As I recall as a child, the tortoise was the one who won the race."

Watch: How tech layoffs could affect the economy

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