Unemployment: Criteria, Frictional, Structural, And Cyclical

Criteria for Determining Unemployment

There are different criteria used by the Statistics Bureau to determine unemployment.The topic of unemployment is a contentious issue, particularly when it comes to defining the term ‘unemployed’ mean. Individuals will air their opinions as some will try to make the situation look better for their states. The Australian Bureau of Statistics (ABS) applies the International Labour Organization’s definition of unemployment. ABS defines the unemployed as someone who works less than one hour in the reference week, one who has been actively looking for work in the previous four weeks, and the persons are ready to start the work in the reference week (Abs.gov.au, 2014).

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First, the surveys to acquire the employment status are a small representation of the whole population which may not reveal the right picture of this scenario. Secondly, counting one as employed because they worked for one hour in a week does not sound quite right. This will certainly not fit into many individuals’ idea of employment. It raises the question of what then the policymakers would refer to as underemployed. There is also the case of people who work as contractors. An employee can account for their working time for the money they got paid. It hence becomes relatively easy for an employee to ascertain whether they did pay work than the contractors, authors and such people. Additionally, the criteria do not take into consideration the elderly, disabled and such people in the society.

Frictional unemployment can be inevitable because of the following reason. Frictional unemployment is the movement of people between jobs in the labor market. There is also the possibility of transitioning into and out of the labor force. This kind of unemployment is inevitable in an economy because of various factors both from the business and the unemployed play a role. For instance, companies will have to invest time and effort to fill the right personnel for the relevant job vacancy. Individuals without the requirements will remain unemployed for a specified period.

Structural unemployment exists when there is a discrepancy in the number of people liking for jobs and the available jobs (Rba.gov.au, 2018). Structural employment occurs when there is the industrial introduction of technological advances that render some employees jobless. It raises concern to policymakers on how to position the unemployed people. This will mean the government is initiating more projects or enacting by-laws that could relatively minimize the number of downsized individuals.

Cyclical unemployment is different from structural unemployment in that it is dependent on the economic situation of the firm over the business cycle (Diamond, 2013). For example, an economic downturn will mean that there is low demand for goods and services. The business will, therefore, have to lay off some of its employees so that it can thrive in the current economic environment.

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“The existence of inflation in an economy is due to either demand pull or cost-push factors. Demand-pull inflation arises when the aggregate demand rises beyond the level of goods and services that the economy can supply” (Dwivedi, 2001). The reason for a high demand above the supply level is the monetary and real factors. For example, the German inflation that happened in the year 1922. It was due to monetary expansion. On the other hand, cost-push inflation is the general increase in the prices of goods and services in the market that is brought about by the rise in the prices of production factors like labor and raw material. Shortage of the inputs used in the production process causes the prices of the inputs to increase. Consequently, it results in the shortage of the output that uses these inputs. As a result, the prices for the output rise leading to the cost-push inflation.

Frictional Unemployment

When demand increases, total demand curve shifts from AD0 to AD1. Real output increases from Y0 to Y1. The general prices rise from P0 to P1 leading to demand-pull inflation. In the second diagram, increase the cost of production leads to decrease in output. Hence, the supply curve shifts from AS0 to AS1. Real GDP increases from Y0 to Y1 while the general prices rise from P0 to P1 leading to cost-push inflation.

“Demand-pull inflation is caused by the increase in total demand for goods and services and the decrease in the demand for money” (Mukherjee, 2010). Persistent increase in the demand for products makes the producers raise prices while a decline in the demand for money increases the level of expenditure resulting in higher prices of commodities. Cost-push inflation is caused by the increased cost of factors of production like capital and increase in government expenditure financed through taxes. Increase in the cost of production reduces demand leading to rising in prices while the increase in taxes results to higher cost in an organization. Firms produce less which makes the price of their products to rise.

According to Keynesians, aggregate demand in an economy tends to affect the overall aggregate output. In this case, they argue that this total demand tends to pull away from this output from its full employment in an existing economy. Therefore to remain at full employment, a country may opt to stay at this level, and this triggers involuntary unemployment. In this case, Keynesian economists view intervention by the government by way of creating jobs for the unemployed individuals in need of employment. It means that individuals would have excess money to spend that ultimately leads to inflation. Monetarists on the contrast demand no intervention by the government to counter this unemployment trend. In this case, they argue that the forces of demand and supply would act in a way to lead the economy to full employment (Mushin, 2002). Therefore, they stipulate that automatic forces affect the prices of products and an improvement in consumers taste and preferences shifts the prices of goods upwards thus leading to inflation.

The shape of the aggregate supply curve is imperative to the controversy between the Keynesians and the monetarists in that it depicts the trend when the economy rests on a full employment position when a change in demand of a product is exhibited. The only factors that can trigger aggregate demand are the changes in real GDP and employment. According to Keynesians, a change in demand creates its supply curve which is used as a basis to counter the arguments of the monetarists. On the other hand, the monetarists have a bi-assumption on aggregate supply curve (Tucker, 2011). One of the assumptions is that the economy must operate at full employment while the other states that price of products is susceptible to change due to changes in demand to sustain the economy at full employment level.

I disagree. Despite the function of the Reserve Bank of Australia in creating money, Banks create money through deposits. The creation is money in banks is enhanced through granting of loans. When a bank advances a loan to a borrower, it credits the amount to the customer’s account which creates a liability on the banks’ balance sheet (Baumol & Blinder, 2012). In turn, an individual draws a cheque that they use for the purchase of goods. Banks continue to lend the money to other borrowers. The initial deposits can be advanced to many borrowers. Hence, banks create money.

  1. Deposit of a pay cheque that has been drawn in another bank into your bank does not change the level of money supply. The reason is that that will be a transfer of money rather than the creation of a deposit. Therefore, it will not change the money supply.
  2. Banks lend the excess reserves. The required reserve ratio is 0.1. Hence, the required reserves are $1000 × 0.1 = $100. The amount the bank is allowed to lend is the deposits less the required reserves. It is calculated as shown, $1000 – $100 = $900. Hence, the bank can lend $ 900.
  1. The selling of government securities to banks

Possibly. The sale of government securities to the banks means that the government receives money from the transaction. From there, the intentions of the government are unknown. However, if the government plans on spending the money, then there is the growth of money supply in the economy. On the other hand, it might have different objectives and hence not spend the money. This will mean that the money does not flow into the economy and will have minimal impact on the amount of money in the marketplace.

  1. An increase in government expenditure, financed by borrowing from the banking sector

Yes. An increase in the spending will mean that the government’s budget on expenses has risen (Hailu, 2015). Therefore, the government will spend to attain the goods and services it requires. The supply of money in the economy will have hence increased.

  1. The purchase of government securities by the Central Bank from the banking sector

Possibly. The transaction where there is the purchase of government securities from the banks hands the money to the banks. The increase or the decrease of money in the economy will depend on the bank’s motives. However, the mere act of transacting does not imply the change in the amount of money in the economy. The bank might decide to loan to its clients or make other investments thereby increasing the amount of money in the economy while the bank might opt against the use of that money which does not quite influence the money supply in the economy.

  1. It is agreed by the Treasurer and the Governor of the Central Bank to reduce the target rate of inflation

No. Inflation is brought about by an increase in the amount of money supply in the economy. This is not to mean it is the only factor that can lead to inflation but this answer is about the context of this paper. Reducing the inflation rates will mean the application of policies that minimize the amount of money draining into the economy (Christiano & Fitzgerald, 2003). The consensus will mean that the amount of money in the economy will reduce.

References

Abs.gov.au. (2014). 6105.0 – Australian Labour Market Statistics, July 2014. https://www.abs.gov.au/ausstats/[email protected]/Latestproducts/6105.0Feature Article53July 2014 [Accessed 28 May 2018].

Baumol, W. J., & Blinder, A. S. (2012). Economics: Principles and policy. Australia: South-Western Cengage Learning.

Christiano, L., & Fitzgerald, T. (2003). Inflation and monetary policy in the twentieth century.

Diamond, P. (2013). Cyclical unemployment, structural unemployment. IMF Economic Review, 61(3), 410-455.

Dwivedi, D. N. (2001). Macroeconomics: Theory and policy. New Delhi: Tata McGraw-Hill.

Hailu, F. (2015). The effect of government expenditure on private investment in Ethiopia: A time series analysis. Hamburg: Anchor Academic Publishing.

Mukherjee, S. (2010). Modern economic theory. New Delhi: New Age International (P) Ltd.

Mushin, J. (2002). Output and the Role of Money: An Overview of Macroeconomic Theory. World Scientific Publishing Company.

Rba.gov.au. (2018). https://www.rba.gov.au/education/resources/explainers/pdf/unemployment-its-measurement-and-types.pdf [Accessed 28 May 2018].

Tucker, I. B. (2011). Economics for today. Mason, OH: South-Western Cengage Learning.