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One Day of Notes
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verified elite notetaker
verified elite notetaker
One Day of Notes
verified elite notetaker
This 5 page Study Guide was uploaded by ec on Wednesday August 26, 2015. The Study Guide belongs to ACC 211 at University of Miami taught by Sicre in Summer 2015. Since its upload, it has received 34 views.
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Date Created: 08/26/15
UNEMPLOYMENT KEY TERMS NATURAL RATE OF UNEMPLOYMENT The unemployment that exists when AD for labour equals AS voluntaryfrictional unemployment FRICTIONAL UNEMPLOYMENT Workers moving between jobs STRUCTURAL UNEMPLOYMENT Unemployment due to a change in the pattern of demand and production EQUILLIBREUM UNEMPLOYMENT When AD for labour equals AS of labour GEOGRAPHICAL IMMOBILITY The inability of a factor of production usually labour to move to where jobs exist UNEMPLOYMENT TRAP Where the income tax and benefit system reduces the net increase in income people can expect from taking paid work Therefore they would choose not to take a job REPLACEMENT RATIO Unemployment benefits divided by the income an unemployed worker could receive if in work CASUAL UNEMPLOYMENT A kind of frictional unemployment occurring when workers are laid off on a short term basis SEASONAL UNEMPLOYMENT Casual unemployment resulting from seasonal fluctuations in demand DEINDUSTRIALISATION A fall in the proportion of national output accounted for by the manufacturing sector of the economy TECHNOLOGICAL UNEMPLOYMENT Unemployment due to the introduction of labour saving technology CYCLICALDEMAND DEFICIENT Unemployment due to a lack of AD INVOLUNTARY UNEMPLOYMENT Workers willing to accept a job at the going rate but are not offered one CLASSICALREAL WAGE UNEMPLOYMENT Results from real wages being above their market clearing level creating an excess supply of labour NATURAL RATE OF UNEMPLOYMENT The unemployment that exists when AD for labour equals AS voluntary frictional unemployment HYSTERESIS The tendency for a variable not to return to its original value or state when changed eg unemployment can lead to higher unemployment PHILLIPS CURVE An economic model that shows a tradeoff between inflation and unemployment STAGFLATION The coexistence of high levels of inflation and unemployment ADAPTIVE EXPECTATIONS Where decisions about the future are based upon past information NAIRU The nonaccelerating inflation rate of unemployment the level of unemployment at which there is no tendency for inflation to accelerate GLOBALISATION Worldwide growth of multinational companies international integration the spread of free markets and policies of liberalisation and free trade KEY DIAGRAMS Equilibrium unemployment Cyclical unemployment Classical unemployment The Phillips curve The expectations augmented Phillips curve KEY NOTES MEASURING UNEMPLOYMENT IN THE UK Defined as the number of people of working age who don t have jobs but are actively seeking work at existing wage rates CLAIMANT COUNT Includes people who are eligible to claim Jobseekers benefits Excludes those who don t met all eligible criteria and aren t included in unemployment count eg over 60 s and government training schemes even though may have actively sought work LABOUR FORCE SURVERY Measure includes those people who have looked for work in the past month and start work in the next two weeks Exceeds claimant count by over 500000 recently Is the measure used for international comparison and most used measure in UK EQUILIBREUM UNEMPLOYMENT In dynamic and evolving economy some industries decline and some grow Some workers may decide to take a break between jobs frictional unemployment As new products are developed and consumer tastes change firms labour requirements in terms of skill etc change leading to structural unemployment THESE EQUAL EQUILIBREUM UNEMPLOYMENT WHERE AD for labour AS for labour CAUSES AND TYPES OF UNEMPLOYMENT FRICTIONAL UNEMPLOYMENT Form of voluntarytransitional caused by people moving between or searching for jobs Incomplete or inaccurate info about the job market may lead to frictional unemployment workers may not know where jobs are May lead to geographical immobility of labour Some don t take jobs unemployment rap income tax would leave them worse off than benefits REPLACEMENT RATIO Low paid worker losing their job is a factor influencing length of time spent looking for new one Disposable income out of work disposable income in work High level of benefits relative to income after taxes in work creates disincentive High ratio reinforces employment trap CASUAL AND SEASONAL UNEMPLOYMENT Occurs when workers are made redundant on a shortterm bias in tourism catering and construction Seasonal is casual unemployment resulting from fluctuations in demand throughout year STRUCTURAL UNEMPLOYMENT When there is long run decline in demand for labour relative to supply leading to redundancies Arises due to changes in structure of the economy deindustrialisation Creates a mismatch of skills as workers in declining sectors don t have skills to get the new jobs occupational immobility Concentrated in excoal mining industries Growth of international competition such as china utilising their comparative labour advantages TECHNOLOGICAL UNEMPLOYMENT Form of structural rises as groups of workers are substitute by technology Automation reduces demand or labour mechanisation increases demand for labour CYCLICAL UNEMPLOYMENT During recession due to lack of AD Because of derived demand for labour falling RNO leads to increased unemployment VOLUNTARYINVOLUNTARY UNEMPLOYMENT V occurs when worker chooses not to accept work at existing wage rates eg frictionally unemployed worker IV occurs when worker would be willing to accept work at going wage but cannot get a job offer Cyclical is involuntary unemployment CLASSICALREAL WAGE Result of wages being above market clearing level leading to an excess supply of labour If wages are fixed at a higher real rate employers wish to hire fewer workers but more workers are willing to supply their labour Higher wage encourages supply but discourages hiring excess supply of labour in market ECONOMIC CONSEQUENCES OF UNEMPLOYMENT Waste of scarce resources leads to the opportunity cost of lost potential output Economy operating below maximum output it could achieve Is likely to reduce consumer spending as confidence walls people will build up savings reduce AD Redundancies waste resources invested in training and educating longer out of work loss of skill Government finances worsen higher spending on benefits and revenues from tax will fall Longer they remain out of work more difficult it is to find a job no confidence Few incentives to keep searching for work increased structural and natural rate of unemployment Hysterias effect generates longterm unemployment damage to skills and employability SOCIAL COSTS OF UNEMPLOYMENT Increased crime divorce rates poorer health and lower life expectancy Regions with consistently high unemployment see falling real incomes increased inequalities of income and wealth Financial worriers contribute to poor mentalphysical health breakdown of relationships and suicide POSSIBLE BENEFITS FROM UNEMPLOYMENT Rising unemployment may be helpful in keeping wage rates down reduced bargaining power of workers May help to reduce inflationary pressure Reduced environmental damage and pressure on nonrenewable resources if leads to slower growth of consumption and production GOVERNMENT POLICIES TO REDUCE UNEMPLOYMENT DEMAND SIDE Policies designed to increase AD could be used 0 Fiscal policy to reflate economy by increasing own expenditure or deucing income tax rates 0 Monetary policy make credit more readily available 0 Regional policy to stimulate economic activity in those areas where it is above average offer employment subsidies or tax reductions to firms relocating in such areas SUPPLY SIDE Aimed at reducing occupational immobility of labour and structural unemployment seek to provide skills and incentives to find work 0 Improved education and vocational training will increase skills 0 Geographical immobility of labour reduced by improving process of job search databases and that there is cheap accommodation where the jobs are 0 Supply side believe that reducing welfare benefits increases incentives May not be sole cause of long term unemployed not getting work and lower marginal tax rates could be offered to those who enrol on appropriate training courses RELATIONSHIP BETWEEN INFLATION AND UNEMPLOYMENT THE PHILLIPS CURVE Illustrates a short run trade off between unemployment and wage inflation Falling unemployment might cause inflation to rice reducing inflation might occur with expense of higher unemployment Particular level of unemployment could be traded off against particular rate of inflation Plays a role in identifying the cases of inflation will rise when unemployment falls to reduce unemployment AD must be strong Any excess demand may create inflation At low levels of unemployment group will push for higher wages higher costpush inflation But inflation will fall as unemployment rises due to weak demand and a weaker bargaining position of trade unions As economy moves towards full capacity inflationary pressure is likely to arise EXPECTATIONSAUGMENTED PHILLIPS CURVE 1970 S Relationship broke down as stagflation occurred Curve had shifted to the right higher level of unemployment was compatible with any level of inflation FRIEDMAN accepted short run curve but in long run should be drawn as vertical no stable trade off It is impossible to reduce unemployment in the long run by increasing money supply job market will return to previous level of unemployment but with higher rate of inflation Introduced adaptive expectations If economic agents experience increased inflation in the current period they will expect higher inflation in the future Will prompt higher wage claims increasing labour costs and higher consumer prices Resulting in higher unemployment being required to keep inflation at a certain target level Best control for inflation is tight control of money and credit which has the effect of reducing inflation expectations causing left shift of the SRPC FREE MARKET ECONOMISTS Impossible to reduce unemployment below the natural rate of unemployment except at the cost of accelerating unanticipated inflation Original Phillips curve wrongly took into account only the current rate of inflation ignored influence of expected rate At natural rate of unemployment inflation is zero Expectations of future inflation are based on current so will also be zero If government stimulates AD SRPC moves to point B with unemployment below natural rate inflation rises For workers to supply more labour real wage rate must rise In short run more workers may enter labour market suffering from money illusion increase in inflationary money wages is also real wage Increase Firms also suffering from money illusion may believe that rising prices means sales revenues are rising faster than labour costs Both eventually see through money illusion and refuse to supply and demand labour Economy moves to point C but with inflation expectations of 5 now built in any increase in AD moves along SRPC2 and to higher rates on inflation Each time government try s to reflate demand in this way economy will tend to the natural rate of unemployment EAPC suggests there is no long run trade off between inflation and unemployment as highlighted by the vertical LR PC at UN Any attempt to reduce unemployment below the NRU by stimulating AD is futile and governments will need to tackle the supply side causes if they wish to reduce unemployment NAIRU Nonaccelerating inflation rate of unemployment rate of unemployment when rate of wage inflation is stable Difficult to observe and measure fallen from 10 of labour force to 5 in last ten years Equivalent to the concept of EO unemployment consists of frictional and structural unemployment If unemployment falls below this level if government stimulates AD to reduce unemployment rate of inflation increases If unemployment rises above the NAIRU following government policies to reduce inflation wage rate and inflation rate will fall NATRUAL RATE OF UNEMPLOYMENT Consists of voluntary frictional unemployment Economists treat NRU and NAIRU as interchangeable but NAIRU is more used because natural implies that certain level of unemployment should always exist LONG RUN PHILLIPS CURVE Normally drawn as vertical can shift inwards over time due to supplyside improvements to the economy Labour market reforms which successfully reduce frictional and structural unemployment may lead to reduction in the natural rate of unemployment by improving the occupational mobility of labour INFLATIONUNEMPLOYMENT IMPROVEMENTS IN TRADE OFF FOR THE UK 1 UK LABOUR MARKET FLEXIBILITY firms find it easy to hire and fire labour low structural unemployment reduction in power of unions has reduce bargaining power 2 IMMIGRATION Rise in inward migration helped relieve labour shortages and stopped wage inflation pressures 3 SETTING CREDIBLE INFLATION TARGETS Helped to reduce inflation expectations establishing credible monetary policy framework building low inflation expectations in UK 4 LOW INFLATION IN GLOBAL ECONOMY Until 2007 costpush inflation had fallen Rapid globalisation has increased competition between nations and reduced price of imported products 5 TECHNOLOGICAL CHANGE AND INNOVATION Improved efficiency of economy s raising labour productivity and cutting production costs
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