• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Demand-deficient Unemployment article commentary.

Extracts from this document...

Introduction

Commentary 3 Demand-deficient unemployment is a type of unemployment associated with a cyclical downturn of the economy. If an economy is in recession, a period of negative growth over two or more consecutive quarters, aggregate demand (AD) falls, as consumers are less willing to spend on goods and services, leading to a fall in demand for labour, as firms decrease their production. Inflation is the persistent increase in the average price level in the economy over a given period of time, usually measured through the Consumer Price Index (CPI). It is the rate at which prices of goods and services are increasing and the value of money decreases. A minimum wage is the lowest wage an employer may legally pay to employees. In the article, the minimum wage of low-paid workers has not been increased, although this means that 'their wages fail to keep pace with inflation'1, in order to stave off demand-deficient unemployment caused by the economic crisis. ...read more.

Middle

The average price level also decreases from Pl to Pl. This reduction in real output may lead to a diminishing demand for labour leading to demand-deficient unemployment, as illustrated in Figure 2. If the economy is working at a high level, the labour market is in equilibrium, with wages at W for Q workers. If there is a recession, firms will decrease their demand for labour from AD to AD. However, as minimum wages are unlikely to decrease, the average real wage will remain at W meaning that the aggregate supply of labour, AS, is greater than the aggregate demand for labour, creating unemployment a-b. When evaluating the economic theory, it can be seen that keeping minimum wages low has a positive effect on unemployment in an economy in recession. Although aggregate demand may decrease, lowering the real output of the economy, firms may be more willing to retain labour if there are no extra costs of production associated with it. ...read more.

Conclusion

Using fiscal policy, income taxes can be decreased, increasing the disposable income of the consumer, or decrease corporate taxes, leaving firms more of their profits which they can reinvest in the economy. Using monetary policy, the interest rates can be decreased, reducing the cost of borrowing and increasing consumption and investment. If the aggregate demand increases due to these policies, production would increase as well and more workers would be needed, decreasing the level of unemployment. Moreover, if the Australian economy started doing well again, the freeze on minimum wages would most likely be revoked, giving the low-paid workers more disposable income and increasing their standards of living. However, these policies would only work in the long-term, because a change in the aggregate demand cannot occur from one day to the other, making these policies ineffective in the short-term. 1 'Low-paid workers hit by freeze on wages', The Age, 08/07/2009 2 ibid 3 ibid 4 ibid ?? ?? ?? ?? ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Is it possible to reduce unemployment without increasing inflation

    This was in a revolutionary analysis which confirmed during the economic crisis of the second half of the 1970�s and beginning of the eighties. Thus, even confronted with the existence of this trade-off, the monetarists will answer, yes, if the Phillips curve shifts leftwards as a consequence of lower inflation expectations in the economy.

  2. Rising unemployment and inflation commentary. The above article Bah Humbug talks about the ...

    sector sheds jobs because of the harsh spending cuts it has announced. But that didn't happen this autumn and, as a result, overall employment also fell by 33,000 over the same period. That is an ominous sign, given the fact that the OBR expects a marked slackening in GDP growth

  1. Economics Commentary - demand for lactose free milk.

    Unfortunately, children and teenagers (these are the ones who belongs to the new generation) do not consume the daily minimum require doses of milk for the health and development of their bodies which is three cups per day, this problem is mainly caused by the creation of new meals that

  2. Unemployment - measurement, different types and the problems caused by unemployment

    If they are unemployed simply because they are lazy, then the crime, ill-health etc. is not a result of them being unemployed but of their laziness and unwillingness to work and play a part in society Frictional unemployment - This is good efficient unemployment - This is when people are

  1. Microeconomics Coursework - Minimum wage

    The UK government has levied an average tax of 75 - 90% on a packet of cigarettes whereas the tax on roll-up tobacco is 'just below 70 percent'.

  2. Macroeconomics Commentary - Japan's consumer prices fall on weak domestic demand

    Recession is two consecutive quarters of negative GDP growth. During a recession, consumption and investment fall. Falling aggregate demand leads to unemployment. If more people are unemployed, there will be even less consumption and deflation. At some point the recession came to an end. Output cannot continue to fall as there would be some people with jobs to maintain consumption, foreigners demand exporters and government spending.

  1. Macroeconomics Economics Commentary - patterns in America's unemployment statistics

    Another policy could be to fundamentally ensure that every teenager is granted some type of access to good education/training programme. Lastly, as teenagers in school are not recorded as part of the unemployment rate, the rate of unemployment could be reduced if the government were to provide some type of incentive for teenagers to go back to/attend school.

  2. Notes on the aggregate demand and aggregate supply curves

    money * businesses must be willing to borrow money * consumers must be willing to buy the goods, businesses are producing What sectors of the economy are sensitive to interest rate changes?

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work