Unemployment

Measuring Unemployment Working Definitions of Unemployment y This is quality or state of being unemployed. Economically this is the proportion of those actively seeking work but unable to find it; to the total labor force, expressed as a %. People able, available and willing to find work and actively seeking work but not employed The unemployed are included in the labour force Types of Unemployment

y y y

1. Seasonal y y Regular seasonal changes in employment / labour demand Affects certain industries more than others y y y y y y Catering and leisure Construction Retailing Tourism Agriculture

Types of Unemployment

2. Frictional y Transitional unemployment due to people moving between jobs: Includes people experiencing short spells of unemployment

Structural Unemployment

3. Structural y Arises from the mismatch of skills and job opportunities as the pattern of labour demand in the economy changes Occupational immobility of labour Often involves long-term unemployment

y y

y y 4. Cyclical y

Prevalent in regions where industries go into long-term decline Good examples include industries such as mining, engineering and textiles

There is a cyclical relationship between demand, output, employment and unemployment Caused by a fall in aggregate demand leading to a loss of real national output and employment A slowdown can lead to businesses laying off workers because they lack confidence that demand will recover

5 Real Wage Unemployment Real Wage Unemployment y Created when real wages are maintained above their market clearing level leading to an excess supply of labour at the prevailing wage rate Some economists believe that unemployment can be created if the national minimum wage is set too high

Economic and Social Costs of Unemployment The private costs for the unemployed y y y Loss of income Fall in real living standards Increased health risks y y y y Stress Reduction in quality of diet Social exclusion because of loss of work and income

Loss of marketable skills (human capital) and motivation y The longer the duration of unemployment, the lower the chances of finding fresh employment - the unemployed become less attractive to potential employers

Economic Consequences for Businesses

Negative consequences y y y Fall in demand for goods and services Fall in demand for businesses further down the supply chain Consider the negative multiplier effects from the closure of a major employer in a town or city

Some positive consequences y Bigger pool of surplus labour is available but still a problem if there is plenty of structural unemployment Less pressure to pay higher wages Less risk of industrial / strike action fear of job losses leading to reduced trade union power

y y

Consequences for the Government (Fiscal Policy) y Increased spending on unemployment benefits and other income related state welfare payments Fall in revenue from income tax and taxes on consumer spending Fall in profits reduction in revenue from corporation tax May lead to rise in government borrowing (i.e. a budget deficit)

y y y

Consequences for the economy as a whole y Lost output (real GDP) from people being out of work the economy will be operating well within its production frontier Unemployment seen as an inefficient way of allocating resources labour market failure? Some of the long-term unemployed may leave the labour force permanently fall in potential GDP Increase in the inequality rise in relative poverty

Policies to reduce unemployment Demand and supply side approaches Demand side Policies to Reduce Unemployment

These are mainly measures to boost total labour demand (reduce cyclical unemployment) y y y y Lower interest rates (a monetary policy stimulus) A lower exchange rate (helps exporters) Lower direct taxes (fiscal stimulus to spending power) Government spending on major capital projects (e.g. improving the transport infrastructure) Employment subsidies (including the New Deal programme) designed to reduce the cost to a business of employing additional workers Incentives to encourage flows of foreign investment in the UK particularly in areas of above average unemployment

Supply-side policies to reduce Unemployment Supply-side policies y These are measures to improve labour supply (reduce frictional and structural unemployment) y Increased spending on education & training including an emphasis on lifetimelearning ) Improved flows of information on job vacancies Changes to tax and benefits to improve incentives Measures designed to make the labour market more flexible so that workers have the skills and education that gives them improved employment options

y y y

Consequences of falling unemployment The circular flow and the multiplier: y y Incomes flowing into households will grow Falling unemployment adds to demand and creates a positive multiplier effect on incomes, demand and output.

The balance of payments: y When incomes and spending are growing, there is an increase in the demand for imports. Unless this is matched by a rise in export sales, the trade balance in goods and services will worsen

Consequences of falling unemployment y Government finances: y With more people in work paying income tax, national insurance and value added tax, the government can expect a large rise in tax revenues and a reduction in social security benefits

Inflationary effects y Falling unemployment can also create a rise in inflationary pressure particularly when the economy moves close to operating at full capacity However this is not really a risk when the economy is coming out of recession, since aggregate supply is likely to be highly elastic because of a high level of spare capacity

Causes Of Unemployment In the set up of a modern market economy, there are many factors, which contribute to unemployment. Causes of unemployment are varied and it may be due to the following factors:  Rapid changes in technology  Recessions  Inflation  Disability  Undulating business cycles  Changes in tastes as well as alterations in the climatic conditions. This may in turn lead to decline in demand for certain services as well as products.  Attitude towards employers  Willingness to work  Perception of employees  Employee values  Discriminating factors in the place of work (may include discrimination on the basis of age, class, ethnicity, color and race).

 Ability to look for employment  External factors; inflation Exchange rates, Interest rates, government legslation, the business cycle, unemployment & technology impact on business

Inflation
Definition Situation of rapid general increase in price level.Inflation is a general rise in prices across a wide range of goods and services. Decline in the value of money.

Methods of measuring inflation

 RPI-retail price index

This is measure by the Central Statistics Office and published each month, and quotes the change in retail prices of a typical basket of consumer goods and services over the previous 12months  Data is collected from retail outlets and weighed according to their relative importance.

Causes of inflation       Increases in money supply. Deficit financing Black money. Demand pull Cost push Population growth.

EFFECTS ON BUSINESS AN INCREASE IN UNCERTANITY REDUCTION IN INVESTMENT LABOUR FORCE BARGAINS FOR HIGHER WAGES LACK OF COMPETITIVENESS

INACCURATE ACCOUNTS EXCHANGE RATES REDUCTION IN PROFIT MARGINS WAGE PRICE SPIRAL

How do governments deal with inflation?

Monetary policy--- increasing the interest rate in order to make borrowing more expensive for companies and mortgages more expensive for individuals This will mean there is reduction in discretionary income and therefore a reduction in spending, which tends to reduce inflation. Fiscal policy--- increasing the taxation rate, either direct or indirect. This will reduce income or make goods more expensive in the short term with a view to reducing demand. Exchange rate policy--- intervening on the foreign currency in order to make imports cheaper will reduce costs of businesses that import. This will hopefully lead to a reduction in inflation as the cost savings are passed on to the customer in the form of lower prices.

Effect on economy as well as our selves  Inflation affects you directly when you go to the grocery store but find that a hundred dollars doesn't get you the same amount as it did last year.  Many people hang on to their money & stop spending on many non-essential items because of fear. Houses & Cars begin to depreciate. Business starts to dry up & employers find themselves cutting down on staff. Our fixed income gets depleted & we find ourselves having to survive on even less. The quality or standard of life that many have grown, downgrades as a direct result of inflation.

   

Deflation
   A general decline in price often caused by a reduction in the supply of money or credit. Deflation can be caused also by decrease In government , personal or investment spending. Deflation has the side effect of increased unemployment.

Causes of deflation     Decreasing money supply. Increasing supply of goods. Decreasing demand of goods. Increasing demand for money.

INTEREST RATES What is an interest rate ? The interest rate is the cost of borrowing  Effects of interest rates on business

If the interest rates rise, a business will be less willing to borrow. This is because the cost of servicing the debt(paying interest) will become more expensive. This will have an effect on other parts of the: The business may postpone or cancel major investment projects, preferring to aim for improvements in productivity because the cost of borrowing would be too high in relation to the expected return on the investment The business will be more concerned to reduce its overall level of borrowing. This is because higher interest rates will increase costs and reduce profit. This reduction in retained profit means a fall in internal finance available for expansion.  Short-term borrowing will also become more expensive, so business will need to concentrate on managing cash flow carefully Customers may decide to defer spending and save the money. If the interest rates rise, this makes investing in the bank relatively more attractive, so there is usually a shift of capital into banks---investors will take the view that the bank is reasonably safe , and will move their money accordingly. This will mean share are sold, pushing the price of shares downward

EXCHANGE RATES   Exchange rate is the value of a currency measured in how much foreign currency it can buy. The exchange rate is determined by the pattern of international trade--- supply and demand for imports and exports . In the short term, however, speculation can cause wide variations in a currency s value. This speculation can be based upon: Expectations about the future level of interest rates Expectations about a country s future trade performance

   

Political uncertainties.
 If the Botswana exchange rate increases it means the pula is stronger and other currencies are weaker. This will mean any imported raw material will be cheaper but any exports will appear dearer in foreign markets.  As the extra demand is coming from other countries, the firm will have a difficult decision to make. Keeping its pula price the same will make the product appear dearer abroad and possibly lead to a fall in sales.  The alternative is to reduce its prices and accept a lower profit margin. It will all depend on whether the company believes the increase in the exchange rate is temporary or long term.

The impact of exchange rate changes

 Business which are exporting and importing on a regular basis find fluctuations in exchange rates a source of considerable uncertainty. This can be enough to stop them from developing export markets. It is not too much of a problem for exporters if the exchange rate falls because the effect is to increase competitiveness. But if the exchange rate rises, the loss of competitiveness erodes profit margins. This makes exporting unattractive The reverse effect can be expected for importers. If the exchange rates rises, the price they have to pay in PULA for the goods they import will fall. They can either cut prices in pula or maintain prices and increase their margins. If they cut prices sales revenue may rise Technological Change and its effects on business

Technology is changing at an extremely fast rate. New products and new processes are being developed all the time. This rapid rate of change creates both threats and opportunities for firms.

Firms which do not adopt competitive technology will: Struggle to keep their units costs down Be unable to provide goods or services of sufficient quality relative to their competitors   Problems of introducing new technology Unfortunately, because of the costs,it is not always possible for a firm to acquire the technology it wants New technology can represent a significant investment for afirm and cannot always be undertaken as and when the managers feel like it. The diffiiculty is knowing when to buy.Buy too late and you may well have lost the competitive advantage your rivals will already be producing better quality,more cost competitive work Buy too early and you may find yourself committed to technology which is no longer relevant Technological change can create industrial relations problems. In some case new technology may mean some employees lose their jobs It also speeds up production through the use of machinery and problem solving made easier. Technology also creates new markets eg telephone banking, these markets create huge opportunities for firms that are able to exploit them and for people with skills that are in demand NB---- the management of technological change , therefore, needs careful handling

BUSINESS CYCLE
1. What is a business cycle? 2. Stages of business cycle 3. Effects of business cycle 4. Causes of business cycle 5. The business cycle

WHAT IS A BUSINESS CYCLE? DEFINITION y Is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in Real GDP and other macroeconomic variables such as unemployment rate. The periods of growth (expansions or booms) and decline (recessions or depressions) in an economy. The combination of expansions and recessions, the ebb and flow of economic activity.

The business cycle STAGES OF BUSINESS CYCLE The business cycle has been divided into four (4) stages, which are as follows; y y y y Contraction Trough Expansion Peak

CONTRACTION y y y At contraction stage, is when the economy starts slowing down When the businesses starts to loss profits Is where businesses starts to look on areas to cut cost

TROUGH y y Is when the economy hits the bottom, e.g. during recession time. Is the declining of the economy when businesses losses or do not make any profit from their productions

EXPANSION y y It is when the economy starts to grow again. Is when the businesses starts to recover from the recession.

 PEAK y y y Is the upper turning of the business cycle When the business is now at a stable stage, doing well in the market At this stage, there are more employment opportunities, investments do occur, expansion of the business

EFFECTS OF BUSINESS CYCLE CONTRACTION STAGE y TROUGH STAGE y y y y y y Employment falls Unemployment increases Retrenchment of employees Closure of some businesses Output of goods and services declines New constructions are put at halt Low income to the business

EXPANSION y y y y y y Employment opportunities rises New constructions More profit to businesses Salary increment to employees Productions rises CAUSES OF BUSINESS CYCLE

There are many factors that can cause the fluctuations in the business market to make it unstable.

 Recessions: The cause of the recession e.g. in 2008 will be: Falling house prices causing negative wealth effect and lower consumer spending Credit crunch causing an increase in cost of borrowing and shortage of funds Volatile stock markets and money markets undermining business and investment confidence.

Government Legislation
Governments create the rules and frameworks in which businesses are able to compete against each other. From time to time the government will change these rules and frameworks forcing businesses to change the way they operate. Business is thus keenly affected by government policy. Key areas of government policy that affect business are:

Economic policy
A key area of government economic policy is the role that the government gives to the state in the economy. The government increasingly interfered in the economy by creating state run industries which usually took the form of public corporations Privatisation in which industries were sold off to private shareholders to create a more competitive business environment. Taxation Taxation policy affects business costs For example, a rise in corporation tax (on business profits) has the same effect as an increase in costs. Businesses can pass some of this tax on to consumers in higher prices, but it will also affect the bottom line. Other business taxes are environmental taxes (e.g. landfill tax), and VAT (value added tax). VAT is actually passed down the line to the final consumer but the administration of the VAT system is a cost for business. Another area of economic policy relates to interest rates

Another area of economic policy relates to interest rates. In this country the level of interest rates is determined by a government appointed group - the Monetary Policy Committee which meets every month. A rise in interest rates raises the costs to business of borrowing money, and also causes consumers to reduce expenditure (leading to a fall in business sales). Government spending policy also affects business. For example, if the government spends more on schools, this will increase the income of businesses that supply schools with books, equipment etc. Government also provides subsidies for some business activity - e.g. an employment subsidy to take on the long-term unemployed. Legal changes

The government of the day regularly changes laws in line with its political policies. As a result businesses are continually having to respond to changes in the legal framework.

Examples of legal changes include: i. ii. The creation of a National Minimum Wage The requirement for businesses to cater for disabled people, by building ramps into offices, shops etc iii. Providing increasingly tighter protection for consumers to protect them against unscrupulous business practice. iv. Creating tighter rules on what constitutes fair competition between businesses.

iii.

iv.