10.

1 Cost of unemployment
Individuals suffer from losing their jobs
Loss of income
Depression, frustration or self doubt
Cold, hunger or even death
Loss of experience and human development
Discuss unemployment benefits with your e-tutor,
why do developed countries have better
unemployment schemes with better benefits for the
unemployed?

Communities also suffers

Damages social and political structures
Increase in crime
Rioting and strikes increases

Study box
21-1 in
textbook
pg. 403

10.1 Types of unemployment

When moving
from one job
to another
there is
usually a
period that a
person is
unemployed
If there is five
positions
open for
engineers but
only doctors
are
unemployed,
then the
doctors will
still be
unemployed
even if there
are job
openings

Frictional
unemploym
ent

Seasonal
unemploym
ent

Structural
unemploym
ent

Cyclical
unemploym
ent
Discuss the
possible causes
of structural
unemployment
with your e-tutor
if you do not

When the job

you do is only
available in
one season,
you are
unemployed
in the off
seasons

When the
economy is in
a downturn,
production
decreases
and there are
a lot of
people laid off

10.1 Policies to reduce

unemployment
Unemployment = supply of labour > demand for
labour
Decrease in population can improve the unemployment
rate in the long run
Stricter immigration policies can help
Education can help the unemployed to get the necessary
skills to get jobs
If aggregate demand increases, total production
increases and new job opportunities are created
Government can increase spending in
order to AD
Stimulating C or I can also AD
Promoting exports will NX and
therefore AD

10.1 Continue
Also, increasing the labour intensity in the
economy can decrease unemployment
Government could launch special unemployment
programmes
Promoting small businesses and the informal
sector
Give employers tax incentives or subsidies as
incentive to employ more people
Due to strikes and the demand of higher wages,
South Africa has a relative high labour
cost to the cost of machinery. Sadly,
demanding higher wages, increases
unemployment

10.1 Keynesian & AD-AS models

Y
Real production, income

The Keynesian and AD-AS

models do not show
unemployment, to show the
relationship between
unemployment and output,
we use the production
function:
The shape of the graph
illustrates the law of
diminishing returns,
meaning as employment
increases, real output also
increase but at an declining
rate.

N
Level of unemployment
(number of workers)

10.1 Keynesian & AD-AS models

Real production, income

Y
Full employment is shown
MEANING?
at NF
If you want
With the corresponding full
unemployment to
employment level of
YF decrease, the
production.
economy HAS to
An economy can never be
grow!!
at full employment, there
will always be at least
BUT, if the economy
frictional or structural
grows, it does not
unemployment, as these
0
necessarily
thatN
Nmean
F
do not necessarily
Level of unemployment
unemployment
will
decrease when the
(number of workers)
decrease.
economy grows.

10.2 Unemployment and

inflation: Phillips curve
Inflation (%)

Read section
21.2 in
textbook on
pg. 405-408

And so the Phillips curve was

introduced.
EconomistsHi,believed
if you
I am Bill Phillips.
the AD curve shifts to the right it
want Iflower
unemployment
means that the price level and
then you
have
to settle
for
production
increase.
If production
increases it means unemployment
higher
inflation. Meaning, there
DECREASES. Thus, if there is an
in aggregate
demand it
was a increase
trade-off
between
could cause higher inflation and
unemployment
and inflation.
lower unemployment, right? And
vice versa,
if there
is a be
decrease in
Inflation
could
even
aggregate demand then there will be
negativelower
(deflation),
then
inflation but but
higher
unemployment.
unemployment
is very high.

0
Unemployment rate (%)

However, this theory was

proved incorrect in the
1970s when the first signs
of stagflation were seen.
Stagflation showed higher
inflation level WITH higher
unemployment levels.
This could be due to costpush inflation.

Inflation (%)

Read section
21.2 in
textbook on
pg. 406

0
Unemployment rate (%)

Incomes policy
Cost-push inflation is due to changes in the aggregate
supply, not in aggregate demand. So demand management
will not help. A policy that shift the AS-curve rightwards
should be implemented:
Government, trade unions and workers have
to work together.
The government could formulate guidelines
for the determination of wages or
compulsory control measures in order to
decrease production costs.
Increases in the wage rate should be equal to
the increase in productivity, so that the
relative shares of workers (remuneration of
labour) and employers (profit) remain the
same.

Are you able to:

Define the rate of unemployment?
Identify the costs of unemployment?
Distinguish between the different
types
of unemployment?
Suggest policies to tackle the
unemployment problem?
Explain with or without the aid of a
diagram the Phillip curve?
Calculate the unemployment rate?