• 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

    How to achieve it? We know it: by a prudent monetary policy as well as no government or trade union interventions in the labor market. Later on during the eighties, the monetarist developed a new core concept which reflects their (successful)

  2. Economics Commentary - demand for lactose free milk.

    are fast foods and beverages such as hamburgers, pizzas, french fries, fried chicken, cokes and all of those foods that are made from chemicals and artificial flavorings which contains large quantities of fats, oils and sugars, this is one of the causes of premature obesity, a severe problem of children and teenagers that provoke fatness at a young age.

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

    The latest figures cast a shadow over that bright picture since they showed the jobless rate rising from 7.7% to 7.9%. That took the total back to 2.5m, the peak in this cycle that it had reached in early 2010.

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

    If the education became more flexible, offering courses in a wider range of subjects, the creation of a possibly more productive workforce is probable and more importantly, having acquired many skills and talents, these teenagers would be capable of finding new jobs in case of a structural change in the economy that demands different skills.

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

    The fall in domestic demand was due to last year's cigarette tax rise. Government rose cigarette tax to increased government revenue. Cigarette tax charged on producers instead of consumers. Tax increased the costs of production to producers. This shifted the supply curve form S1 to S2 while the demand curve did not change.

  2. Discuss how demand side policies and supply side policies may be used to increase ...

    Direct support for business policies ? the govt may use some policies to improve the competition in some markets through anti-monopoly laws and by helping small and medium size firms to grow through financial means. This also acts as an incentive for more entrepreneurs to start up their own business.

  1. 15 Historical Economic Questions on Mercatilism and the Development of European Countries.

    As a result of these improvements, the production of iron greatly increased. Eventually, enough iron was being produced to manufacture machine frames, water pipes, rails etc. These changes fed European economic growth because of the emergence of an entirely new and autonomous industry, which would soon see large profits and stimulate the economy.

  2. Notes on the aggregate demand and aggregate supply curves

    According to Keynes how can the government control investment? increase the money supply, interest rates decrease, investment rises According to Keynes, the way the government can change investment is to change the money supply. The government (through the agency of the Federal Reserve Bank) can increase or decrease the money supply.

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