Question

Effects of Unemployment and Inflation This Discussion focuses on how to measure the cost of living and rate of unemployment in the economy. Specific discussion areas include the various forms of unemployment and how they are measured, debates on measuring unemployment rate, and the imperfections of official unemployment rate. Moreover, consumer price index (CPI), rate of inflation, and their impacts on the cost of living. Read Chapter 8, and remember to include references and links to the websites that are important contributors to your posts (comments). There are various forms of unemployment. There are also ongoing debates on the effectiveness of measuring the rate of unemployment and its policy implications. What are the different types of unemployment and how are they related to the condition of the economy during a given period? Is it possible for the number of employed workers to increase while the unemployment rate rises? Explain Does an increase in the minimum wage rate result in a higher unemployment rate? What is your opinion on the relationship between unemployment benefits and labor market participation of the unemployed people?

Answer 1

Broadly there are three types of unemployment:

1) Frictional unemployment: This is a natural state of labor force in an economy as people change their jobs, are fired or young people join the workforce.

2) Structural unemployment: This is the unemployment that results from the structural change in an economy. It could be a technological shift as workers have to re-skill themselves. Or it could be because of a deep recession or major policy change, such as opening a closed economy.

Both of the above are often called NATURAL UNEMPLOYMENT

3) Cyclical unemployment: This is caused by the expansionary and contractionary business cycle. As businesses expand capacities in a boom, new jobs are created. Reverse happens during contraction.

It is possible that number of employed workers rise and so does the unemployment rate. This would happen in the case when a demographic cohort joins the workforce. This significantly increases the employable work force and hence the unemployed even when new jobs may be getting created. The difference between the the two will affect how the unemployment rate changes

An increase in minimum wage rate may result in firms employing less than at a market determined wage. It can be illustrated with a partial equilibrium diagram where minimum wage acts as a wedge between demand and supply.

While unemployment benefits ensure welfare duties of the State, it might negatively affect the labor force participation. This is because of the unemployment benefits some people will choose to work less or not at all thus reducing labor supply.But it is in some ways better than minimum wage as here individual firms are free to employ as per labor market or economy changes.