Tuesday 10 July 2012

Unemployment

The Unemployment has increased dramatically since the 2008 recessions and is still increasing with redundancies due to higher costs and lower fundings.
Unemployment rate in Britain has increased to: 
8.4% in December 2011
Unemployment
Unemployment is a key indicator for economic growth (actual and potential); it is when someone from the labour force is out of work and is actively seeking work.
Measuring unemployment is worked out as a percentage of how what percent of the labour force is unemployed, it is worked out by the unemployed divided by the total labour force, times one hundred.
Negative growth in Aggregate Demand, is actual growth declining (shifting back); this is when AD moves away from full capacity.

The graph on the left shows Aggregate Demand shifting backwards to Y2, increasing the output gap from the economy operating at full capacity; this is due to a decrease in the components of AD: C+I+G+(X-M).
Due to the economy not operating closer to full capacity, there is an increase is fiscal unemployment, unemployment in areas due to a lack of AD.
Fiscal Unemployment can arise during recessions as there is negative active growth in the economy and so firms are not making enough profits, due lack in consumer expenditure and confidence and so cannot afford to remain with as much employees, and so there is an increase in unemployment. However unemployment can rise accidentally by contraction-ary fiscal policy applied to the economy to reduce inflation, where government spending decrease and consumers pay more tax, so leaving them with less discretionary income to spend, but reduces inflation.
This policy reduces inflationary prices but on a Keynesian point of view, moves AD away from full capacity, meaning that there are areas of the economy not being used and so increases inflation. 
This shows that when AD has a negative growth, there is always an increase in unemployment as the economy is not working closer to/at full capacity as it was before so fewer workers are required and so unemployment increases with actual negative growth.
On the other hand when there is a actual positive growth when AD increases and gets closer to full capacity, more of the economies resources are being used more efficiently and most of all the labour force are being used alongside resources and capital, which means that unemployment is decreasing with respect to how close AD is getting to full capacity.
Potential growth, is growth caused by a shift in the LRAS curve to the right, increasing full capacity and so has a different effects o the level of unemployment, according to the two main view points: Classical and Keynesian.
Classical Economists argue that we are always working at full capacity, so in terms of employment, we are currently employing as many workers as we can, due to the fact we are at full capacity and in the short run, when unemployment rates increase it is said that the market will clear.
This means that if Price levels have increased the SRAS on the graph will shift back to equilibrium, and relating this to unemployment, it means that wages will decrease, from the increased price level, so more workers are employed and the economy is working at full capacity again.

The graph shows a short run aggregate supply curve. The SRAS curve shows the price levels increased due to inflation and so it’s moved below full capacity, classical economists below that this only occurs in the short run and that the market will clear. This graph related to employment shows that the cost of labour cost has increased and that firms have to make workers redundant, so resources of the economy are not being used to the markets full capacity and for the market to clear, classical economists believe that wage costs will decrease and the SRAS curve will move back to full capacity position.
This means that in the long run the long run aggregate supply curve stays the same.





The graph on the right shows the Classical view on the Long Run Aggregate Supply Curve, it show the LRAS curve shifting to the right to LRAS2, this means that supply side policies have been used and increase full capacity.
As Classical Economists believe that the economy is working at full capacity, so when the potential labour force becomes the labour force and the unemployment rate decreases and there are more workers it means that full capacity increases and the labour force quantity and participation rate increases as well.

However a Keynesian Economist would believe that potential growth would increase full capacity same as the classical view, however Keynesians believe that the economy is that it can be between full capacity and below it, and if the economist is not operating at full capacity, there would be unemployment, and so supply side policies would increase full capacity would shift the LRAS curve out, so more unemployed can gain better training and go into high demanding occupations, but this also has high risks due to the time lag, and it may not have any effect on unemployment rates. 
Potential growth however would be good for combating geographical and immobility of labour, especially with growing populations, full capacity has to increase to accommodate the larger labour force.

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