Chapter 43
Full employment
• Full employment is when the economy is
operating at an output level considered to be
at full capacity.
• Full employment is often considered to be
achieved when the unemployment rate falls to
3%
Equilibrium and disequilibrium
unemployment
• Equilibrium unemployment is unemployment
which exists when the aggregate demand for
labour equals the aggregate supply of labour.
At this point there will be no pressure for the
real wage rate to change
Aggregate supply of labour exceeding the aggregate
demand for labour. This disequilibrium unemployment
is equivalent to cyclical unemployment
Unemployment in the macroeconomy with a
negative AD shock
• If unemployment arises because of a fall in aggregate demand
and is slow to recover, it is possible that some workers will
find it difficult to get back into work even when aggregate
demand picks up again. A long period of unemployment on a
worker’s CV may discourage employers from hiring. This
means that unemployment may persist, even when the
original cause of it has disappeared. This phenomenon is
known as hysteresis. In the extreme, some workers may
become discouraged, and stop searching for jobs even when
jobs become available.
• Another form of disequilibrium unemployment is cyclical
unemployment, where real GDP departs from its long-run
trend on a regular cycle, falling below the full-employment
level during the slump/recession phase, causing
unemployment in this part of the business cycle.
• Involuntary unemployment:
Situation arising when an individual who would like
to accept a job at the going wage rate is unable to
find employment.
Cyclical unemployment, Structural Unemployment
• Voluntary unemployment:
Situation arising when an individual chooses not to
accept a job at the going wage rate. Frictional
Unemployment
• natural rate of unemployment: the
unemployment rate that will be present when
the economy is in long run equilibrium.
• The natural rate of unemployment exists when
the labour market is in equilibrium with the
aggregate demand for labour equaling the
aggregate supply of labour
The factors that determine the natural rate of unemployment in a
country at a particular time are supply-side factors. They relate to the
causes of voluntary, frictional and structural unemployment. Supply
side
factors include:
• the value of unemployment benefits relative to the value of low pay
• national minimum wage legislation
• the quality of education and training
• how workers are affected by periods of unemployment
• the quantity and quality of information about job vacancies and
workers’ skills and qualifications
• the degree of labour mobility
• the flexibility of workers and firms.
Policies to correct unemployment
• a reduction in indirect or direct taxation to increase consumer
expenditure
• a cut in corporate taxes to stimulate investment an increase in
government spending.
• reducing the rate of interest to increase consumer
expenditure and investment
• increasing the money supply to, again, increase consumer
expenditure and investment
• lowering the exchange rate, either through a formal
devaluation or through intervention in the foreign exchange
market in the case of a managed float, to increase net exports.
• Improving education and training
• Reducing expenditures such as unemployment benefits
Patterns and trends in employment and
unemployment
Employment Unemployment
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Mobility of worker
• Geographical mobility
Occupational mobility