Unemployment & Income Inequality
In this lesson, you’re expected to:
– learn about the conditions required to maintain full employment in an economy
– understand the different types of unemployment
– explore how the distribution of income affects poverty and income equality
The basic goals of the public and private sectors are to achieve both the full employment of resources and a stable price level.
Two major methods exist to track and measure economic performance of a country: unemployment and inflation.
Full Employment
Full employment refers to when the economy is producing at its optimum capacity. It occurs when cyclical unemployment is not present in the economy.
Economists associate full employment with the natural rate of unemployment. The natural rate hypothesis advanced by economists Milton Friedman and Edmund Phelps suggests that in the long run, there is a level of unemployment that the economy maintains independent of the inflation rate. The idea is that left alone, the economy will maintain full employment and experience the natural rate of unemployment most of the time.
Full employment means that all people above the legal age are employed or are actively seeking employment.
Inflation occurring during a period of full employment is most likely to be demand-pull inflation.
In an economy that is near full-employment, a decrease in the money supply is likely to decrease the price level.
When does Unemployment arise?
Unemployment is defined as the part of the labor force that is without a job and has been seeking employment within the last four weeks.
Unemployment results when either private sector or public sector spending does not measure up to expectations.
https://www.thebalance.com/what-is-unemployment-3306222
The unemployment rate is a relative indicator independent of country size and thus facilitates cross-country comparisons.
Unemployment Rate = (No. of Unemployed / Labor Force) * 100
(Number of Employed + Number of Unemployed).
Not necessarily. It is possible for the unemployment rate to increase at the same time that the number of employed is increasing.
A demographic shift in the labor force like the entrance of women during World War II or the return to civilian life of members of the military can create a condition where the ratio of unemployed to the labor force increases even while overall employment is increasing.
Enlarged version: http://bit.ly/2mxpQit
http://www.tradingeconomics.com/country-list/unemployment-rate
Some types are actually positive for an individual and the economy while other types are bad for an individual but benefit society.
There are three main types of unemployment that exist in an economy:
There will always be some unemployment at all times caused by workers changing jobs. Frictional unemployment occurs when both jobs and the workers qualified to fill them are available.
Generous unemployment benefits give workers an incentive to spend more time searching for a job and thus increase the rate of frictional unemployment for the country.
Structural changes prevent certain people from obtaining jobs because of their geographic location, age, race or inadequate education.
The classification of unemployment is not an exact science. A person who voluntarily leaves a job to search for another job for which he is unqualified would be both frictionally and structurally unemployed.
In a recession, this person might be frictionally, structurally, and cyclically unemployed.
1) Voluntary Unemployment
2) Seasonal Unemployment
In certain regions, unemployment may be seasonal. For example, unemployment rises in winter when there are no tourists.
3) Disguised Unemployment
This is when people do not have productive full-time employment, but are not counted in the official unemployment statistics.
In pure economic terms, income poverty is when a family’s income fails to meet a federally established threshold that differs across countries. Typically it is measured with respect to families and not the individual, and is adjusted for the number of persons in a family. Economists often seek to identify the families whose economic position falls below some minimally acceptable level. Similarly, the international standard of extreme poverty is set to the possession of less than $1 a day.
Frequently, poverty is defined in either relative or absolute terms.
Absolute poverty
measures poverty in relation to the amount of money necessary to meet basic needs such as food, clothing, and shelter. The concept of absolute poverty is not concerned with broader quality of life issues or with the overall level of inequality in society. It therefore fails to recognize that individuals have important social and cultural needs.This, and similar criticisms, led to the development of the concept of relative poverty. Relative poverty defines poverty in relation to the economic status of other members of the society: people are poor if they fall below prevailing standards of living in a given societal context.
Deprivation is the consequence of a lack of income and other resources, which cumulatively can be seen as living in poverty.
The relative deprivation approach to poverty examines the indicators of deprivation, which are then related back to income levels and resources.
Unfortunately, while absolute standards of poverty are of some use in a domestic context, it is difficult or even impossible to define useful standards when making comparisons on an international scale. This is because the basic necessities of life differ markedly between nations.
For example, housing, clothing and nutritional needs vary greatly with climate.
Income inequality refers to the extent to which income is distributed in an uneven manner among a population. It can also be described as the gap between the rich and everyone else.
The equality or inequality of income in a particular country during an interval of time can be measured by a single number, known as the Gini Coefficient.
It is a way of comparing how distribution of income in a society compares with a similar society in which everyone earned exactly the same amount. Inequality on the Gini scale is measured between 0, where everybody is equal, and 1, where all the country’s income is earned by a single person.
The Gini ratio is the shaded area between the Lorenz curve and the sloping straight line to the total area below the sloping straight line. If every family earns the same income, the Gini ratio is zero – the Lorenz curve will be the sloping straight line.
Enlarged version: http://bit.ly/2mK6IKZ