Types of Unemployment
The Australian Bureau of Statistics (ABS) applies three criteria to determine that whether a person is “unemployed” or not. Those are:
- Looking for a job actively for last four weeks;
- Working less than one hour in the reference week; and
- Can start working in the reference week.
The ABS uses standards that are accepted internationally to define unemployment while those above-mentioned key indicators are used to measure unemployment in a consistent way (Abs.gov.au, 2018). However, this measurement contains some problems, for instance, if a person searches for a job for last four weeks and can start to work immediately then he or she is considered as unemployed. This means that carers, fulltime workers, non-working retirees or ill person cannot be considered as unemployed.
The economy is changing always and this in turn makes frictional unemployment as inevitable. Due to this changing nature, some firms increase while others shrink. Moreover, some regions grow faster compare to others (Wulandari & Narmaditya, 2017). As a result, transitions of employees between two regions and two firms cause temporary unemployment or frictional unemployment.
Structural unemployment is a long-term phenomenon. For some economies, this form of unemployment can be a permanent outcome due to non-existence of new jobs. An economy experiences structural unemployment because of insufficient skills among worker for doing existing jobs (De la Rica, S., & Rebollo-Sanz, 2017). Hence, macroeconomics policy-makers have remained concern about it as it can affect the country by large extend. Through promoting economic condition, an economy can get rid of from this structural unemployment.
Cyclical unemployment, on the other side, is a most common form of unemployment that can be seen in developed capitalist economy. During depression phase of a country, this form of unemployment occur (Chen, Kannan, Loungani & Trehan, 2017). Consequently, cyclical unemployment differs from structural one, based on following criteria:
- In structural unemployment, large number of people cannot get job due to mismatched skills or limited job opportunities while cyclical unemployment occurs during recessionary period of unemployment.
- Structural unemployment can be seen chiefly in underdeveloped economy while cyclical one occurs in developed capitalist economies.
- Structural unemployment occurs due to capital shortage along with shortage of other complimentary resources while cyclical unemployment occurs due to deficiency in aggregate demand.
Demand-pull inflation occurs when consumers increase their aggregate demand for goods and services and consequently price for goods increase. Hence, during demand-pull inflation, aggregate demand of an economy exceeds aggregate supply, effecting price level to increase further (Antonelli & Gehringer, 2015). This can be explained with the help of appropriate diagram.
In figure 1, aggregate demand curve (AD) has increased and shifted from AD1 to AD2 while aggregate supply (AS) curve has remained at its initial level. Thus, price level has increased from P1 to P2 and consequently the economy experiences inflation.
Cost-push inflation, on the other side, leads the supply of goods and services to decrease further. This inflation occurs when production cost increases due to increase in factor prices like increasing price of raw materials, wages and indirect tax and so on (Abeles & Panigo, 2015). If a company operates at its optimum capacity then it cannot increase its production and this in turn increase the price of product to meet production costs.
Frictional Unemployment
In figure 2, aggregate supply curve has decreased and shifted towards left from AS1 to AS2. This in turn has increase aggregate price level from P1 to P2 and consequently, the economy experiences cost-push inflation.
Causes for demand-pull inflation:
- Demand-pull inflation can occur due to exchange rate fluctuation. Due to higher price of foreign products, import can be decreased and this in turn can increase demand for domestic products. Consequently, aggregate demand increase.
- Government expenditure can also increase aggregate demand through spending more amount of money.
Causes for cost-push inflation:
- Cost-push inflation can occur due to supply shock. If price of an essential good like oil increases then it can further increase the costs of transport and consequently this higher transport cost can increase costs of production of firms.
- The government sometimes increases taxes on firms though they shift tax on customers through increasing prices of products. As a result, increasing price level causes inflation within the economy.
Due to earthquake, an economy can experience significance destruction in its capital stock. This phenomenon further decreases both short-run and long-run aggregate supply (AS) of the economy. This is because lower level of capital stock affects production of a country adversely through supplying less amount equipments, machineries and tools (Reifschneider, Wascher & Wilcox, 2015). This further decreases labour productivity. As a result, the AS curve shift to the left.
When personal income tax of a person increases, it decreases disposable income of that person and consequently spending on goods and services decreases (Laokulrach, 2018). Consequently, aggregate demand (AD) reduces and shifts the curve downwards.
Increase in export leads the net export of an economy to increase further (Ruhl & Willis, 2017). As a result, aggregate demand increases and shifts the AD curve upwards.
An improvement in the selling and marketing kills of firm managers implies increase in aggregate supply of the economy. Thus, the AS curve can shift to the right to represent this economic phenomenon (Dietrich, Latorre, Olmos & Ramos, 2015). On the other side, due to marketing, aggregate demand can also increase and this can lead AD curve upward.
This statement is not correct because the central bank cannot create money though it has the monopoly power to print currencies. Commercial banks can create money through giving loans to people at a particular rate of interest. Hence, this can be said as one of the chief characteristics of commercial banks (Lainà, 2015). After keeping certain amount of money as cash reserve, a commercial bank can lend its deposited amount to borrowers while the borrower can deposit this money to another bank. Through this process, the bank can create money within the economy.
This process cannot influence money supply. When a person deposits his pay cheque to another bank into his own account, then the bank does not create any bank deposit for this depositor (Lainà, 2015). The bank only transfers the money and the bank cannot lend this money to any person. Thus, this process does not follow the process of money creation of commercial banks.
The person deposits $ 1000 to the Westpack banks through creating its own account. However, the bank cannot lend this entire amount to another customer, as the required cash reserve ratio for every commercial bank is 10%. Hence, after keeping 10% of $ 1000, that is, $ 100, the bank can lend remaining $ (1000-100) = $ 900 to a person (Xiong & Wang, 2017).
Structural Unemployment
Selling of government securities to bank does not increase money supply. This is because banks purchase those securities through spending their excess amount of cash reserved (Blanchard, Ostry, Ghosh & Chamon, 2017). As a result, they cannot lend more money further and this in turn can decrease the money supply within economy. Selling government securities is a tool of contractionary monetary policy to control money supply within economy.
Increase in government expenditure leads money supply to increase further through borrowing from the banking sector. Increase in government expenditure can influence aggregate demand to increase and consequently inflation occurs (Bianchi & Ilut, 2017). The government borrows money from banking sector and this forces money supply to increase within economy.
When central bank purchases government securities from commercial banks, then their stock of excess money increases and they can lend that money to people. As a result, money supply increases within the economy (Bianchi & Ilut, 2017).
Through decreasing the target rate of inflation, the government of an economy implies that they need to reduce inflation level strictly within the economy by applying effective and contractionary monetary policy through decreasing money supply within this economy (Blanchard, Ostry, Ghosh & Chamon, 2017).
References:
6105.0 – Australian Labour Market Statistics, July 2014. (2018). Abs.gov.au. Retrieved 7 June 2018, from https://www.abs.gov.au/ausstats/[email protected]/Latestproducts/6105.0Feature%20Article53July%202014
Abeles, M., & Panigo, D. (2015). Dealing with cost-push inflation in Latin America: Multi-causality in a context of increased openness and commodity price volatility. Review of Keynesian Economics, 3(4), 517â-535.
Antonelli, C., & Gehringer, A. (2015). The competent demand pull hypothesis: which sectors do play a role?. Economia Politica, 32(1), 97-134.
Bianchi, F., & Ilut, C. (2017). Monetary/fiscal policy mix and agents’ beliefs. Review of Economic Dynamics, 26, 113-139.
Blanchard, O., Ostry, J. D., Ghosh, A. R., & Chamon, M. (2017). Are capital inflows expansionary or contractionary? theory, policy implications, and some evidence. IMF Economic Review, 65(3), 563-585.
Chen, J., Kannan, P., Loungani, P., & Trehan, B. (2017). Cyclical or Structural? Evidence on the Sources of US Unemployment. In Globalization (pp. 245-264). Springer, Berlin, Heidelberg.
De la Rica, S., & Rebollo-Sanz, Y. F. (2017). Gender differentials in unemployment ins and outs during the great recession in Spain. De Economist, 165(1), 67-99.
Dietrich, K., Latorre, J. M., Olmos, L., & Ramos, A. (2015). Modelling and assessing the impacts of self supply and market-revenue driven Virtual Power Plants. Electric Power Systems Research, 119, 462-470.
Lainà, P. (2015). Proposals for full-reserve banking: A historical survey from David Ricardo to Martin Wolf. Economic Thought, 4(2), 1-19.
Laokulrach, M. (2018). Impacts pf fiscal and monetary policies on employment. AU Journal of Management, 9(1), 33-42.
Reifschneider, D., Wascher, W., & Wilcox, D. (2015). Aggregate supply in the United States: recent developments and implications for the conduct of monetary policy. IMF Economic Review, 63(1), 71-109.
Ruhl, K. J., & Willis, J. L. (2017). New exporter dynamics. International Economic Review, 58(3), 703-726.
Wulandari, D., & Narmaditya, B. S. (2017). Readers Theater as a Tool to Understand Difficult Concept in Economics. International Education Studies, 10(5), 144.
Xiong, W., Fu, H., & Wang, Y. (2017). Money creation and circulation in a credit economy. Physica A: Statistical Mechanics and its Applications, 465, 425-437.
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