Aims and Objectives Aim: • To understand employment policy Objectives: • Define different types of unemployment • Analyse the inflation/unemployment trade off • Evaluate demand supply side unemployment policies
Starter • Re-call the different types of unemployment in an economy. • Draw the diagram to show unemployment • Draw the diagram to show cyclical unemployment
Trade Off Between Employment and Inflation PRICE LEVEL AS AD 2 AD 1 AD FE • Cant have full employment without inflation occurring, especially beyond AD 1. • However the level that represents FE may fall over time, meaning that unemployment can fall without inflation occuring. REAL GDP
Policy Conflict Low Inflation Full Employment
Demand Side Causes of Unemployment • Cyclical unemployment • Pt A occurs as level of AD below the FE level, experiencing a negative output gap • Remedy = Increase AD maybe by reducing interest rate • At AD 2 low unemployment and positive output gap • Danger of high inflation • Remedy = increase interest rate PRICE LEVEL AD 1 AS AD 2 LRAS AD 2 AD 1 AD P 1 A Y 2 Y 1 REAL GDP FE REAL GDP
AD Affects Unemployment C X-M AD G I
Supply Side Causes of Unemployment • Frictional unemployment • Structural unemployment • http: //www. youtube. com/watch? v=0 v. UDr. UYTs. HQ&feature=results _video&playnext=1&list=PL 4 CEC 0 4390392 C 406 • http: //www. youtube. com/watch? v=4 ubgig 29 l 4 k&oref=http%3 A%2 F %2 Fwww. youtube. com%2 Fresults %3 Fsearch_query%3 Dminers%2 Bs trike%26 oq%3 Dminers%2 Bstrike% 26 aq%3 Df%26 aqi%3 Dg 4%26 aql% 3 D%26 gs_sm%3 D 3%26 gs_upl%3 D 40934 l 42833 l 0 l 43483 l 13 l 0 l 3 l 3 l 0 l 219 l 1208 l 0. 9. 1 l 10 l 0&has_verifie d=1
Supply Side Causes of Unemployment PRICE LEVEL • Equilibrium pt A, OP, OE LRAS 1 • Structural unemployment occurs SRAS – SRAS 1 B P 1 SRAS P A AD 0 F E REAL GDP • Reduced level of output OF • Higher Prices OP 1 • Decreases in capital equipment shift the LRAS left – potential output fallen.
Evaluation: Government Intervention • http: //www. youtube. com/wat ch? v=n. Dv. Gx. Nk. X 4 AU • You are part of the Thatcher government, tasked with reducing unemployment, which is ever rising due to the voluntary/ frictional/ structural unemployment in the economy. • Decide on supply and demand side policies which could be used to combat it!
Demand Side & Supply Side Policies Demand Side Supply Side Fiscal Policy Improved education Make Credit More Available Increase funding on vocational training Use regional policy to combat structural unemployment Subsidise housing in cities where accommodation is expensive Offer firms subsidies to hire workers in depressed regions Provide tax breaks and tax credits
Demand Side Policy Fiscal Policy Make Credit More Available Use regional policy to combat structural unemployment Offer firms subsidies to hire workers in depressed regions Explanation of How Affects Employment Evaluation of Policy: To what extent does the policy affect employment?
Supply Side Policy Improved Education Increase funding on vocational training Subsidise housing in cities where accommodation is expensive Provide tax breaks and tax credits Explanation of How Affects Employment Evaluation of Policy: To what extent does the policy affect employment?