Inflation and unemployment both have a relative negative impact on the economy as a whole, if either factor is high. The costs can be further highlighted if unemployment or inflation are inaccurately forecast or anticipated. Both issues also have a negative impact on economic growth. Unemployment is the existence of a section of the labour force who are willing and able to work, but cannot find work. The Goodman definition of unemployment sets three criteria, to be unemployed; the individual has to be registered as unemployed; the individual has to be in receipt of benefit; the individual has to be deemed to be actively seeking work.
Unemployment is measured in the UK using two methods, the Claimant count, where all those seeking unemployment benefits are classed as unemployed, and the Survey, where market research techniques are used instead. Five main causes of unemployment have been identified and analysed: Frictional unemployment is caused by those people who are between jobs.
Most people who lose their jobs move into anther job relatively quickly, but this transition is far from smooth and their will always be some short term unemployment, e. g.due to immobility of labour. Structural unemployment is unemployment which rises because of changes in the structure of the economy. In a dynamic economy there will always be industries that are expanding and declining as a consequence of structural decline.
There are three areas of structural unemployment: the industries in structural decline may be regionally concentrated resulting in regional unemployment, technological unemployment may arise due to a change in the structure of a particular industry as it accepts new technology e.. the financial sector, finally, sectoral unemployment is when one industry collapses leaving skilled workers unemployed, e. g. the shipbuilding trade.
Some industries, because of their nature are highly seasonal and companies in this sector may well only employ people in season, an example is the tourist industry, employment will peak in the summer months and fall away during the winter period. Real wage unemployment exists when the real wage is above that needed to clear the labour market even when the economy is booming.
Jobs exist, but workers choose not to take them because they are not prepared to accept the wage rates being given or they are unable to take them due to union power or government legislation. Finally, there is Keynsian unemployment which results from the existence of a deficient aggregate demand which is not enough to support full unemployment. A fall in wages, which should cause an increase in the demand for labour, merely reduces aggregate demand further since it reduces the spending power of the unemployed and thus fails to clear the excess of workers.
Much economics debate has centred on whether cuts in wages cannot increase demand and therefore, Keynsian unemployment a special case of classical unemployment. Inflation is a sustained rise in the general level of prices (as measured by the retail price index), or, a sustained fall in the purchasing power of money. Inflation can exist at three general rates. Hyper inflation is when the rate of inflation is so high that all confidence in the currency is lost. In effect, money becomes worthless and in time a new currency will have to be introduced an example of this is in Germany during the early 1920 s.
Creeping inflation which is a rate of inflation so low, that it is barely noticed. This rate of inflation is not sufficient to significantly influence the behaviour of economic actors. This is the case when inflation is less than five percent, which was the case during the 1950i?? s and 60i?? s, and to a large extent, now. Strato inflation is a relatively new term.
It is higher than creeping inflation, but lower that hyper inflation, but it is a rate that economic actors can tolerate and accommodate e. g. the UK at 27% in the mid 1970 s, Croatia at 1150% pa in 1993 and Bulgaria at 339% in 1991. As previously mentioned, both inflation and unemployment impose costs upon the economy and effects iti?? s rate of growth. A high rate of unemployment in the economy mostly affects the taxpayer. On the one hand, government has to pay out increased benefits. On the other hand, the government loses revenue because these workers would of paid taxes if they had been employed. For instance, they would have paid income tax and National Insurance contributions on their earnings.
They would also have paid more in VAT and excise duties because they would of been able to spend more. So taxpayers not only have to pay more taxes to cover for increased government spending but they also have to make up the taxes that the unemployed would of paid if they had been in work. This increase in taxes would lead to a decrease in take home pay of the taxpayer and this eventually would lead to a decrease in living standards. Costs to the economy as a whole should not be under estimated. Firstly, Taxpayers paying money to the unemployed is not a loss of the economy as a whole.
It is a transfer payment which redistributes existing resources within the economy. The actual loss to the whole economy is two-fold. Firstly there is the loss of output which those workers now unemployed could have produced had they been in work. The economy could have produced more goods and services which would then have been available for consumption. Secondly there are the social costs such as increased violence and depression which are borne by the unemployed and the communities in which they live.