What this lesson teaches
I can explain the causes of weak growth, unemployment, and inflation or deflation.
Syllabus 8843, 3.2.2(a). Macroeconomic Issues: Macroeconomic issues and their causes; Undesirable economic growth - persistently low or negative, unsustainable, non-inclusive due to factors such as changes in AD or AS, environmental degradation, inequitable income distribution; Unemployment - demand-deficient, structural, frictional due to factors such as lack of AD, technological changes, mismatch of skills, transition between jobs; Price instability - demand-pull inflation, cost-push inflation, deflation due to factors such as changes in AD, costs of production, productive capacity
Make a guess
A graduate spends a month comparing job offers before starting work. Is this unemployment a sign of a weak economy?
- Yes. Any time without a job shows the economy is weak.
- No. Some job search is normal, even in a boom.
- No. She is not unemployed, because she chose to wait.
Show the answer
No. Some job search is normal, even in a boom.
Finding a good match takes time. Suitable jobs exist; she is simply searching between them.
Frictional unemployment is the short period people spend between jobs while they search.
Frictional unemployment happens when people are between jobs: they have left one job, or just finished school, and are searching for the right one.
It exists because finding a good match takes time. Workers compare offers, attend interviews and wait for start dates.
Some frictional unemployment is normal, even in a healthy economy, and it helps workers find jobs that suit them.
Better job-matching information, such as job portals and career fairs, can shorten the search.
Sort these
Sort each case by the type of unemployment it shows.
Groups: Frictional, Structural, Demand-deficient.
- A global recession cuts export orders, and factories lay off staff.
- A nurse quits to look for a hospital closer to home and finds one in three weeks.
- Printing workers are jobless while care homes cannot fill vacancies.
- Bank tellers lose jobs to apps and lack the skills for new tech roles.
- Shops across the island cut staff as households spend less.
- A new graduate spends a month at interviews before accepting an offer.
Show the answer
Frictional
- A nurse quits to look for a hospital closer to home and finds one in three weeks. Suitable jobs exist; the gap is only the time it takes to search and match.
- A new graduate spends a month at interviews before accepting an offer. Jobs are available, so the short gap is part of normal job searching.
Structural
- Printing workers are jobless while care homes cannot fill vacancies. Unemployment and vacancies exist together because of a mismatch of skills.
- Bank tellers lose jobs to apps and lack the skills for new tech roles. The economy changed, and the workers' skills no longer match the jobs on offer.
Demand-deficient
- A global recession cuts export orders, and factories lay off staff. Total spending fell, so firms need fewer workers whatever their skills.
- Shops across the island cut staff as households spend less. Weak spending in many industries at once points to too little aggregate demand.
- Cause
- Time spent searching between jobs.
- Normal
- Exists even in a healthy economy.
Worked example: Three weeks between jobs
A qualified technician leaves one job and spends three weeks comparing vacancies and attending interviews before starting a new one.
- Jobs that suit the technician exist.
- The short gap comes from the time needed to search and match.
- This is frictional unemployment, and it does not signal a problem in the economy.
Watch out for this
All unemployment is a sign that the economy is doing badly.
Frictional unemployment is normal: it is the time people spend moving between jobs.
Check your understanding
Which policy would most directly cut frictional unemployment?
- A cut in interest rates to raise total spending.
- A job portal that matches people to vacancies faster.
- Retraining grants for workers from shrinking industries.
Show the answer
A job portal that matches people to vacancies faster.
Right. Frictional unemployment is time spent searching. Better information shortens the search.