Essay on Unemployment and Demand

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UNIT 3: Unemployment and the Labour Market

Textbook Reference: Chapter 3

Question 1
Go to statistics on the RBA Website at
From Table G7 summarise the main tends in Australia over the last 20 years for:
(i) Unemployment rate (column I)
(ii) Participation rate (column D)
(iii) The relative proportions of part-time and full-time workers in total employment (columns E, F & G)

Question 2
Use the demand and supply of labour model to analyse the effects on income inequality of: * Globalisation and * Technological change
See Bernanke Sections 3.2. 1 and 3.2.2 Students need to be able to explain this using Figure 3.8 (page 86) for globalisation and Figure 3.9 (page 89) for technological change. It is important that students can correctly draw the demand and supply of labour model – and understand what determines the slope and position of each of the demand and supply of labour curves. In brief globalisation—which includes increased international trade—increases the demand for workers in export industries but lowers the demand for workers in industries that compete with imports due to an increase in the relative prices of goods produced in export industries and a decrease in the relative price of goods produced in import industries. The demand curve for workers in export industries shifts to the right, and in import industries, shifts to the left. Wages rise in export industries but fall in industries that compete with imports, increasing wage inequality. Skill-biased technical change has increased the productivity of more skilled workers relative to that of unskilled workers. Therefore, the increase in the marginal product of skilled workers increases the demand for skilled workers (relative to unskilled workers) – shifts the demand curve for skilled workers to the right (while the demand curve for unskilled workers may remain unchanged or shift to the left) – and increases the difference in wages between the skilled and unskilled.

Question 3
List three types of unemployment and their causes. Discuss the likely economic and social costs of each form of unemployment.
See Bernanke Sections 3.3.3
The three types of unemployment are: * Frictional unemployment is the short-term unemployment associated with the process of matching workers with jobs in a dynamic, heterogeneous labour market. May be voluntary as workers opt to leave jobs and look for other jobs. * Structural unemployment is the long-term and chronic unemployment that exists even when the economy is producing at a normal rate. Structural unemployment results from factors such as language barriers, discrimination, structural features of the labour market, lack of skills, or long-term mismatches between the skills workers have and the available jobs. * Cyclical unemployment is the extra unemployment that occurs during periods of recession.
As well, some unemployment may be due to seasonal factors – seasonal unemployment. Overall frictional unemployment is the least costly type of unemployment, because it is both usually of short duration and often economically beneficial, being part of the process by which productive matches of workers and jobs are formed. In aggregate the costs of unemployment are: * Lower output * Loss of human capital * Psychological * Social impact * Budgetary impact (lower tax revenue, higher expenditures)
The different types of unemployment have different costs.
Costs of frictional unemployment - very low (and may be negative) as may lead to a better fit between worker and job and greater long run output.
Costs of structural unemployment - much greater as out of work for much longer periods – lower output, loss of skills (human capital), psychological costs, social costs, significant budgetary costs.
Costs of cyclical unemployment – high very short periods (mainly lower output,