Question

Explain the concept of unemployment, paying attention to the variuos types of unemployment, the cost of unemployment and the policies that government may implement to reduce unemployment.

Conclude by evaluating how the Phillips curve explains the tradeoff between inflation and economic activity such as real GDP unemployment.

Answer 1

Ans

Unemployment means the lack of sufficient jobs as compared to the available number of applicants for the job. It can be measured by the unemployment rate .Unemployement can be classified as frictional unemployment, cyclical unemployment, structural unemployment, and institutional unemployment.

The various types of unemployment are discussed below:

1. Frictional Unemployment.

Frictional unemployment results due to the act of people changing their jobs in search of a better job. Since it takes time in searching for the new job, recruiting new workers and selecting the right candidate.

2. Cyclical Unemployment.

Cyclical unemployment results due to the cyclical changes. Unemployment rises during recessionary period and declines during the economic growth period. Government employs various policy tools during recession period to stimulate the economy.

3. Structural Unemployment.

Structural unemployment occurs due to the technological change in the structure of the economy. It leads to replacement of workers with the technology and makes the workers unemloyed.

4. Institutional Unemployment.

Institutional unemployment results due to the long term incentives provided through the government policy in the economy such as high minimum wages, social benefits programs and many other factors.

The various government policies for reducing unemployment are:

1. Government can implement expansionary fiscal policy to increase aggregate demand and economic growth through increased government spending and decreasing taxation.

2. Government can implement expansionary monetary policy to increase aggregate demand and economic growth by cutting interest rates.

Philips curve states that inflation and unemployment has a inverse relationship that is higher inflation leads to lower unemployment and vice versa. But this concept of inverse realationship between inflation and unemployment holds good only in short run and not in long run. Since during short run labour demand increases , which results in decrease in unemployed workers leading to  increase in wages by companies to compete in the market and passing on the increaed wages effect to the ultimate consumer.In the long run workers and consumers expectations about inflation adapt to the new environment thus leading to shift of philips curve outward.