Miscellaneous Microeconomics and Macroeconomics Notes
Employment and Unemployment
Voluntary and involuntary unemployment
• 1930s, at time Great Depression, Keynes argued that deficient AD in economy results involuntary unemployment
• Involuntary unemployment: occurs when workers willing work at current market wage rates but no jobs available
• Voluntary unemployment: occurs when workers choose to remain unemployed and refuse job offers at current market wage
rates
Frictional/transitional unemployment
• Frictional/transitional unemployment: short term + occurs when worker switches between jobs
• Assumes job vacancy exists + that friction in job market, caused by immobility labour, prevents unemployed worker filling
vacancy
• Causes frictional unemployment:
1) Geographical immobility: factors such as family ties + work distances discouraging people from moving to other parts of
the country, ignorance about existing job vacancies
2) Occupational immobility: difficulties training jobs acquiring different skills, restrictive practices such as qualifications +
race, gender + age discrimination in labour markets
3) Imperfect information: jobless unaware available jobs, tends worsen frictional unemployment
4) Incentive issues: may desire be frictionally unemployed or increases taxation/loss benefits
• Long search periods increasing amount frictional unemployment in economy result in part welfare benefit system
➢ Threat of poverty/running down savings in turn creates incentive search job market + reduced aspirational wage levels of
unemployed
➢ Many free-market economists support reduction state safety net + restriction benefits + make labour markets more
efficient
Say’s (Jean-Baptiste Say) Law
• Helps explain difference between pre-Keynesian (free-market) and Keynesian views on existence deficient demand in economy
➢ Say’s law: in popular form supply creates its own demand (true by definition)
➢ Whenever output/supply produced, factor incomes such as wages/profits generated are just sufficient (if spent), purchase
output at existing price level, thereby creating demand for output produced
• Controversial and critical issue concerns whether potential demand or incomes generated actually spent on output produced
➢ Free-marketeers believed that if households save more than firms wish borrow to finance investment spending, rate of
interest falls to equate savings with investment
➢ Adjustment mechanism means Say’s law holds; Keynes disputed: arguing in recessionary conditions, when business +
consumer confidence low, savings will exceed investment (excess savings)
➢ Say’s law therefore breaks down + resulting deficient demand causes unemployment
Consequences of unemployment for the economy
• Waste of human capital: not all economy’s productive resources used produced output (could add to material standards of
livings + economic welfare of whole population)
➢ Economy producing within production possibility frontier + fails operate to its potential
• Reduces economy’s international competitiveness: reduce incentive firms invest new tech
➢ Under-investment associated high unemployment results reduced need invest in capital-intensive technologies when
there are plenty of unemployed workers available high/cheap hire
➢ Employers continue use labour-intensive antiquated technology, particularly when high unemployment accompanies
stagnant economy, low profits + climate business pessimism
➢ High business taxes to help finance welfare benefits paid to unemployed workers
• Economies badly affected long-term unemployment: worker may become effectively unemployable
➢ Erosion job skills + work habits; employers, who might otherwise hire/retrain economically inactive workers, perceive that
workers with more recent job experience present fewer risks/more employable
➢ When inactive workers seen as unemployable, economy behaves as if on PPF, even though plenty unemployed workers
available for work
➢ Increase AD can lead inflation rather than increase outputs/jobs
• Free market economists believe certain amount unemployment necessary to make economy function efficiently:
➢ Provides downward pressure on wage rates + can reduce inflation
➢ Contributes to widening income differentials between better-paid/low paid workers
➢ Some proponents free-market argue this as a positive, believing differences in pay needed promote incentives which
create supply-side conditions in which economy prosper
Consequences of unemployment for individuals
, 1) Low incomes accompanied with unemployment lead low standards living
2) May engage in black economy
3) Destroys hope for future: become marginalised from normal economic/human activity + their self-esteem reduced
4) Families suffer increased health-risks, greater stress + reduction quality diet, increased risk marital break-up + social exhaustion
caused by loss work/income
Government policies to reduce unemployment
• Appropriate policy depends identifying correctly underlying cause of unemployment
➢ If incorrectly diagnosed in terms demand deficiency when real cause structural, policy fiscal or monetary expansion
stimulate AD ineffective
• Long run only effective way reduce unemployment achieve successful economic growth (increases firm’s demand new
employees)
➢ Free-market economists believe growth facilitated by anti-interventionist supply side policies
➢ Keynesian economists argue expansionary fiscal/monetary policy able reduce demand-deficient unemployment
• Reducing frictional + structural unemployment: improve geographical/occupational mobility of labour, reducing worker’s search
periods between jobs by introducing supply side policies
• Improving the geographical mobility of labour:
➢ Make it easier for families to move house into other regions (subsidise removal costs)
➢ Widening difference UK house prices South vs North reducing mobility
➢ Gov spending rented social housing in areas where there are ongoing labour shortages perhaps most effective way
improving geographical mobility of labour (cost/other reasons, policy unlikely be adopted on scale sufficient produce
significant effect)
• Improving occupational mobility of labour: gov provide retraining schemes + introduce laws ban professional + trade union
restrictive practices
➢ Usually less effective than those run by private sector firms; problem that employers in blue collar trades prefer avoid
spending on training their employees + instead hire already trained from other firms
➢ This form market-failure leads too few workers being trained
• Reducing employment search periods: JS allowance 1966 attempt reduce search periods between jobs
➢ 2 types JSA: contribution based and income based (latter merged into universal benefit)
➢ Contributions based allowance (having paid sufficient national insurance) only able claim 1st few months
➢ Creates incentive newly unemployed accept lower wage rates + speed up search for vacancies to meet reduced aspirations
• Supply side policies: try improve quality/quantity factors production, improving competitiveness + efficiency markets, used
reduce frictional + structural unemployment
➢ Deindustrialisation led to large scale unemployment, concentrated in regions of decline
➢ Supply side improvements create conditions in which industries (1980s/90s: service industry) grew to replace
manufacturing
➢ Easier move from declining industries into new industries (‘sunset’ into ‘sunrise’)
Economic growth theories
• Sufficient AD has to be generated to absorb extra output produced by growth process
➢ Immediate supply-side cause LR growth increased labour productivity: results from investment/accumulation capital
goods + human capital+ technological progress
• 2 main theories long-term economic growth: neoclassical growth theory + new growth theory
• Neoclassical growth theory: developed by Professor Robert Solow (1950s); argues sustained increase investment increases
economy’s growth rate (temporarily)
➢ Ration capital/labour increases, marginal product of capital declines + economy moves back to long-term path
(determined by output growing equal rate as workforce, + factor reflect improving labour productivity)
➢ Rate at which labour productivity improves, theory argues, determined by technological progress
❖ Theory doesn’t explain why technological progress occurs (assumed fall on economy ‘like manna from heaven’)
❖ Weakness of the neoclassical theory; causes/determinants ultimate engine economic growth (technological
progress) are exogenous to theory
❖ Neoclassical growth theory fails provide complete explanation economic growth
• New (or endogenous) growth theory: reflects determinants technological progress as main cause economic growth brought
inside theory
➢ 3 main sources technological progress by new growth theory: profit-seeking research, openness to foreign ideas and
accumulation human capital
➢ Profit-seeking research: rate at which technological progress occurs depends stock of ideas
❖ Flow new ideas by current researchers adds to ‘capital stock’ existing ideas
❖ ‘Over fishing’: discovery new ideas makes it harder find new ideas; conversely, opposite effect may be true, as
accumulation ideas may make researchers more productive
❖ ‘Standing on the shoulders’ effect: Paul Romer (most influential developer theory) assumes this effect dominant
(more researchers, more growth)
➢ Openness to foreign ideas: growth derived either domestic innovation or technological transfer from other countries
❖ 1999: Cameron, Proudman + Redding argues rate at which technological progress occurs in country depends 3 factors
Employment and Unemployment
Voluntary and involuntary unemployment
• 1930s, at time Great Depression, Keynes argued that deficient AD in economy results involuntary unemployment
• Involuntary unemployment: occurs when workers willing work at current market wage rates but no jobs available
• Voluntary unemployment: occurs when workers choose to remain unemployed and refuse job offers at current market wage
rates
Frictional/transitional unemployment
• Frictional/transitional unemployment: short term + occurs when worker switches between jobs
• Assumes job vacancy exists + that friction in job market, caused by immobility labour, prevents unemployed worker filling
vacancy
• Causes frictional unemployment:
1) Geographical immobility: factors such as family ties + work distances discouraging people from moving to other parts of
the country, ignorance about existing job vacancies
2) Occupational immobility: difficulties training jobs acquiring different skills, restrictive practices such as qualifications +
race, gender + age discrimination in labour markets
3) Imperfect information: jobless unaware available jobs, tends worsen frictional unemployment
4) Incentive issues: may desire be frictionally unemployed or increases taxation/loss benefits
• Long search periods increasing amount frictional unemployment in economy result in part welfare benefit system
➢ Threat of poverty/running down savings in turn creates incentive search job market + reduced aspirational wage levels of
unemployed
➢ Many free-market economists support reduction state safety net + restriction benefits + make labour markets more
efficient
Say’s (Jean-Baptiste Say) Law
• Helps explain difference between pre-Keynesian (free-market) and Keynesian views on existence deficient demand in economy
➢ Say’s law: in popular form supply creates its own demand (true by definition)
➢ Whenever output/supply produced, factor incomes such as wages/profits generated are just sufficient (if spent), purchase
output at existing price level, thereby creating demand for output produced
• Controversial and critical issue concerns whether potential demand or incomes generated actually spent on output produced
➢ Free-marketeers believed that if households save more than firms wish borrow to finance investment spending, rate of
interest falls to equate savings with investment
➢ Adjustment mechanism means Say’s law holds; Keynes disputed: arguing in recessionary conditions, when business +
consumer confidence low, savings will exceed investment (excess savings)
➢ Say’s law therefore breaks down + resulting deficient demand causes unemployment
Consequences of unemployment for the economy
• Waste of human capital: not all economy’s productive resources used produced output (could add to material standards of
livings + economic welfare of whole population)
➢ Economy producing within production possibility frontier + fails operate to its potential
• Reduces economy’s international competitiveness: reduce incentive firms invest new tech
➢ Under-investment associated high unemployment results reduced need invest in capital-intensive technologies when
there are plenty of unemployed workers available high/cheap hire
➢ Employers continue use labour-intensive antiquated technology, particularly when high unemployment accompanies
stagnant economy, low profits + climate business pessimism
➢ High business taxes to help finance welfare benefits paid to unemployed workers
• Economies badly affected long-term unemployment: worker may become effectively unemployable
➢ Erosion job skills + work habits; employers, who might otherwise hire/retrain economically inactive workers, perceive that
workers with more recent job experience present fewer risks/more employable
➢ When inactive workers seen as unemployable, economy behaves as if on PPF, even though plenty unemployed workers
available for work
➢ Increase AD can lead inflation rather than increase outputs/jobs
• Free market economists believe certain amount unemployment necessary to make economy function efficiently:
➢ Provides downward pressure on wage rates + can reduce inflation
➢ Contributes to widening income differentials between better-paid/low paid workers
➢ Some proponents free-market argue this as a positive, believing differences in pay needed promote incentives which
create supply-side conditions in which economy prosper
Consequences of unemployment for individuals
, 1) Low incomes accompanied with unemployment lead low standards living
2) May engage in black economy
3) Destroys hope for future: become marginalised from normal economic/human activity + their self-esteem reduced
4) Families suffer increased health-risks, greater stress + reduction quality diet, increased risk marital break-up + social exhaustion
caused by loss work/income
Government policies to reduce unemployment
• Appropriate policy depends identifying correctly underlying cause of unemployment
➢ If incorrectly diagnosed in terms demand deficiency when real cause structural, policy fiscal or monetary expansion
stimulate AD ineffective
• Long run only effective way reduce unemployment achieve successful economic growth (increases firm’s demand new
employees)
➢ Free-market economists believe growth facilitated by anti-interventionist supply side policies
➢ Keynesian economists argue expansionary fiscal/monetary policy able reduce demand-deficient unemployment
• Reducing frictional + structural unemployment: improve geographical/occupational mobility of labour, reducing worker’s search
periods between jobs by introducing supply side policies
• Improving the geographical mobility of labour:
➢ Make it easier for families to move house into other regions (subsidise removal costs)
➢ Widening difference UK house prices South vs North reducing mobility
➢ Gov spending rented social housing in areas where there are ongoing labour shortages perhaps most effective way
improving geographical mobility of labour (cost/other reasons, policy unlikely be adopted on scale sufficient produce
significant effect)
• Improving occupational mobility of labour: gov provide retraining schemes + introduce laws ban professional + trade union
restrictive practices
➢ Usually less effective than those run by private sector firms; problem that employers in blue collar trades prefer avoid
spending on training their employees + instead hire already trained from other firms
➢ This form market-failure leads too few workers being trained
• Reducing employment search periods: JS allowance 1966 attempt reduce search periods between jobs
➢ 2 types JSA: contribution based and income based (latter merged into universal benefit)
➢ Contributions based allowance (having paid sufficient national insurance) only able claim 1st few months
➢ Creates incentive newly unemployed accept lower wage rates + speed up search for vacancies to meet reduced aspirations
• Supply side policies: try improve quality/quantity factors production, improving competitiveness + efficiency markets, used
reduce frictional + structural unemployment
➢ Deindustrialisation led to large scale unemployment, concentrated in regions of decline
➢ Supply side improvements create conditions in which industries (1980s/90s: service industry) grew to replace
manufacturing
➢ Easier move from declining industries into new industries (‘sunset’ into ‘sunrise’)
Economic growth theories
• Sufficient AD has to be generated to absorb extra output produced by growth process
➢ Immediate supply-side cause LR growth increased labour productivity: results from investment/accumulation capital
goods + human capital+ technological progress
• 2 main theories long-term economic growth: neoclassical growth theory + new growth theory
• Neoclassical growth theory: developed by Professor Robert Solow (1950s); argues sustained increase investment increases
economy’s growth rate (temporarily)
➢ Ration capital/labour increases, marginal product of capital declines + economy moves back to long-term path
(determined by output growing equal rate as workforce, + factor reflect improving labour productivity)
➢ Rate at which labour productivity improves, theory argues, determined by technological progress
❖ Theory doesn’t explain why technological progress occurs (assumed fall on economy ‘like manna from heaven’)
❖ Weakness of the neoclassical theory; causes/determinants ultimate engine economic growth (technological
progress) are exogenous to theory
❖ Neoclassical growth theory fails provide complete explanation economic growth
• New (or endogenous) growth theory: reflects determinants technological progress as main cause economic growth brought
inside theory
➢ 3 main sources technological progress by new growth theory: profit-seeking research, openness to foreign ideas and
accumulation human capital
➢ Profit-seeking research: rate at which technological progress occurs depends stock of ideas
❖ Flow new ideas by current researchers adds to ‘capital stock’ existing ideas
❖ ‘Over fishing’: discovery new ideas makes it harder find new ideas; conversely, opposite effect may be true, as
accumulation ideas may make researchers more productive
❖ ‘Standing on the shoulders’ effect: Paul Romer (most influential developer theory) assumes this effect dominant
(more researchers, more growth)
➢ Openness to foreign ideas: growth derived either domestic innovation or technological transfer from other countries
❖ 1999: Cameron, Proudman + Redding argues rate at which technological progress occurs in country depends 3 factors
