Cyclical unemployment is involuntary unemployment due to a lack of aggregate demand for goods and services. This is also known as Keynesian unemployment. When there is a recession or a slowdown in growth, we see a rising unemployment because of businesses closing factories. It can be solved by the government by boosting ad – eg through expansionary fiscal policies that reduce tax and increase G spending.
. What is structural unemployment – give 3 causes and examples of each?
Structural unemployment occurs when people are made unemployed because of capital-labour substitution (which reduces the demand for labour) or when there is a long run decline in demand in their particular industry. Also, globalisation with increase competitiveness and lower wages in international countries may see businesses moving abroad. Structural unemployment exists where there is a mismatch between their skills and the requirements of the new job opportunities.
Eg – Tesco replacing checkout workers with Automatic machines (capital labour substitution)
Eg – The closure of the coal mines in Durham due to decline in demand for the industry
Eg – The closure of the Ford factory making ‘Transit’ vans in 2013 while moving operations to Turkey (due to globalisation).
. Give 3 ways government may try to reduce structural unemployment?
Give greater incentives for businesses to operate – lower corporation tax. They can also give tax reliefs for businesses. Also, they may also have training programs to help with reducing the occupational immobility of labour.
. Give is the problem with long term unemployment?
Long term unemployment means that there is spare capacity within an economy that could be used, therefore it seems as a waste of resources. By having long term unemployment, the government will be paying out more welfare benefits (such as Job seekers allowance) and will therefore be collecting less tax which may reduce in a greater budget deficit.
. Explain the link between AD and unemployment?
Unemployment Increases – AD Decreases, vice versa. If an economy is in a recession, there will be lower demand for goods and services, businesses will invest less, may cause structural unemployment and more people will be made unemployed.
. What is current level of unemployment in UK + Eurozone?
UK – 7.2% - 2.34 million
Eurozone- 12.1% - 19 million people
. State 2 situations where you can reduce unemployment without suffering from rising inflation?
Situation 1- There is spare capacity within an economy, as shown in the diagram below: (AD1 to AD2)
Situation 2 – AD may rise yet lower costs of production can affect prices. Therefore, if costs of production decrease and AD increases, AD will shift to the right, and also SRAS will shift to the right too.