Wages Levels too High Cause Unemployment
- Discuss the view that the main cause of unemployment is that wage levels are too high. [20 marks]
Unemployment is defined as those who are able, available, willing and actively seeking work at the going wage rates, but who cannot find paid employment and are eligible to claim the Job Seekers Allowance (JSA).
The government use the claimant count (JSA) as their form of measuring unemployment but there are other ways of measuring unemployment. Unemployment can also be measured by the Labour Force Survey and is a questionnaire which is handed out to a number of households; they also interview people to find out their employment status. What you find is that the Labour Force Survey’s results come back with a higher rate of unemployment compared to the Government’s claimant count.
Unemployment is one of the Government’s key economic objective, they have designed and implemented different policies in a strategically way in which to look at dealing with unemployment and problems associated with it, such as the minimum wage which looks at being an incentive to get the unemployed back into work etc.
There are lots of different types of unemployment as unemployment can be caused by different factors and goings on in the economy.
Frictional Unemployment also called transitional unemployment is due to the movement of workers between jobs. You find that newly redundant workers or people entering the labour market take time to find jobs at wage rates that are prepared to accept, many are unemployment for a short time when seeking work.
Structural unemployment occurs because of structural changes that take place in the economy. These can be affects caused by the changing pattern of demand of supply within certain industry markets. An example of this is the decrease in demand for product X where the industry may lay off workers or where supply of a business is affected by new technology where a business invests in machine which can do the job of 5 workers, workers are then made redundant as their job is no longer required.
The classical school of economics believe in real wage unemployment. This is where wages are above the market clearing level which leads to an excess supply of labour. Some economists believe that the national minimum is an example of this where in some industries the minimum wage is higher than the equilibrium wage rate (clearing rate) and so leads to unemployment as more people are willing to work for that higher wage but businesses aren’t willing to take on any extra workers. You can see this from the diagram below:
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http://www.rhys.eu/blog/wp-content/uploads/2009/07/wagelevels.pdf
