SAJC 2024 Full Employment Students

ST ANDREW’S JUNIOR COLLEGE JC2 H2 ECONOMICS 2024 FULL EMPLOYMENT In this set of notes, we will examine the next macroeconomic goal – full employment. We examine the different types of unemployment, their causes, and consequences to different economic agents. We look at how unemployment may affect standard of living and the macroeconomic policies to deal with unemployment to improve the standard of living of a country. Important concepts and tools and analysis  Full employment  Unemployment  Demand-deficient unemployment  Structural unemployment  Frictional unemployment Key questions to consider 1. How does a country measure the level of unemployment in their economy? 2. Why does a government want to achieve full employment in a country? 3. What are the different types of unemployment? Are they all caused by the same thing? 4. How does unemployment affect the microeconomic goals of the government? 5. How does unemployment affect the macroeconomic goals of the government? 6. How does unemployment affect the standard of living? 7. Can all types of unemployment be solved with the same policy? Are there particular circumstances that will make certain policies more effective in reducing unemployment levels?

St. Andrew’s Junior College Economics Department 2024 2 Contents 1. Unemployment Basics ....................................................................................................................................................... 3 1.1. Unemployment rate ................................................................................................................................................. 3 1.2. Factors affecting the unemployment rate ........................................................................................................... 4 1.3. Natural Rate of Unemployment ............................................................................................................................ 4 2. Types and Causes of Unemployment ............................................................................................................................ 6 2.1. Demand-Deficient Unemployment ........................................................................................................................ 6 2.1.1. Causes of Demand-Deficient Unemployment ................................................................................................ 6 2.1.2. Explanation using the AD/AS framework: ..................................................................................................... 6 2.2. Structural Unemployment ....................................................................................................................................... 7 2.2.1. Causes of Structural Unemployment ................................................................................................................ 7 2.3. Frictional Unemployment ........................................................................................................................................ 9 2.3.1. Causes of Frictional Unemployment ................................................................................................................. 9 3. CONSEQUENCES OF UNEMPLOYMENT .................................................................................................................... 10 3.1. Microeconomic Aims of the Government: .......................................................................................................... 10 3.2. Macroeconomic Aims of the Government:......................................................................................................... 10 3.3. Impact on Government Budget ........................................................................................................................... 12 3.4. Impact on Standard of Living .............................................................................................................................. 12 3.5. Why do governments aim to achieve low unemployment rates? ................................................................. 14 4. MACROECONOMIC POLICIES TO ACHIEVE FULL EMPLOYMENT ........................................................................ 15 4.1. Government Intervention to Achieve Full Employment .................................................................................... 15 4.1.1. Demand-Deficient Unemployment ................................................................................................................. 15 4.1.2. Structural Unemployment ................................................................................................................................. 19 4.1.3. Frictional Unemployment .................................................................................................................................. 20

CIRCULAR FLOW OF INCOME AND AGGREGATE DEMAND & AGGREGATE SUPPLY MODELS St. Andrew’s Junior College Economics Department 2024 3 How does a country measure the level of unemployment in their economy? 1. Unemployment Basics Before we begin to try and measure unemployment, we need to know how economists define unemployment. Unemployment refers to a situation where people who are actively looking for work (willing and able to work) are unable to find suitable jobs. We will now look at how countries measure the extent of unemployment in an economy. Recall that you learnt the way we calculate the unemployment rate when we first looked at different macroeconomic indicators in your Standard of Living notes. 1.1. Unemployment rate The unemployment rate is used as a measure of the extent of unemployment in an economy.  The unemployment rate is calculated as the percentage of the labour force which is out of work.  The labour force is the total number of workers, including both the employed and the unemployed (but are willing and able to work) in the reference period. It does not refer to the whole population.  The common international definition used for unemployed persons is that they are 15 years old and older, not currently working but are actively looking for a job and are able to work if offered. Try to answer the following question: What would the unemployment rate be like in the following scenario? If 3.5 million people were employed and 0.2 million people were unemployed, what would the unemployment rate be? Unemployment Rate = No. of unemployed in the labour force Labour force x 100%

FULL EMPLOYMENT St. Andrew’s Junior College Economics Department 2024 4 1.2. Factors affecting the unemployment rate The unemployment rate could be influenced by the following: a) The demand for labour Labour is a derived demand – it is not demanded for its own sake, but because of the output that it produces. If aggregate demand rises, firms will demand more labour to produce more output. This causes the unemployment rate to fall. b) Labour productivity A rise in labour productivity makes using labour more cost efficient than using capital equipment. This may increase the demand for labour and hence lead to fall in unemployment rate. c) The size of the labour force Factors affecting the size of the labour force include 1) working age, 2) population size, 3) female labour force participation rate and 4) level of educational attainment in the economy. A rise in working age population (the common international standard for working age is 15 years), female labour force participation rate and level of educational attainment would result in an increase in size of labour force. Howev