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1 LOW UNEMPLOYMENT
Unemployment - people of working age who are actively looking for a job but are not employed
Underemployment - people of working age with part-time jobs when they would rather work full
time
The economy is wasting resources by not using them fully.
MEASURING UNEMPLOYMENT
Labor force - number of employed people + number of unemployed people of working age
Excludes: children, retired, people who cant work, and people who dont want to work
unemployment rate = (number of unemployed)/(labor force) x 100
An accurate rate is hard to get because of hidden unemployment.
Unemployment figures:
include unemployed people actively looking for work. It excludes discouraged workers
(unemployed workers who have given up job-searching).
dont distinguish between full-time and part-time employment and counts part-time workers
as full-time
doesnt distinguish on type of work
dont include people on retraining programs or those who retire early
dont include people working in the underground/informal economy
The national unemployment does not account for differences that arise due to population groups
region, gender, ethnic groups, age, occupation/skill
CONSEQUENCES OF UNEMPLOYMENT
Loss of real output - output produced is less
than what the economy is capable of
producing
Loss of income for unemployed workers -
workers worse off financially
Loss of tax revenue - unemployed people
have no income, so they dont pay income
taxes
Costs to the govt - less tax revenue for
other goods/services and social problems will
cost tax revenue.
Unequal distribution of income -
unemployed become poorer and employed
maintain income
Difficulties finding work - unemployed may
lose skills and jobs require new skills
(hysteresis)
Personal problems - unemployed will be
stressed and will result in problems
Greater social problem - high rates of
unemployments can cause serious social
problems
TYPES OF UNEMPLOYMENT
Structural unemployment - demand changes, location changes, and labor market rigidities
Changes cause demand for new skills; leads to mismatch between supplied/demanded skills
Firms relocate to foreign countries, because the production costs may be cheaper there.
Labor market rigidities - factors preventing supply and demand forces from working in labor
market: minimum wage, labor union/wage bargaining, employment protection laws,
unemployment benefits
Frictional unemployment - workers between jobs; fired, quit, or wanting a better job
certain amount of frictional unemployment inevitable, due to incomplete information
Seasonal unemployment - demand for labor changes due to seasonal changes
The 3 types of unemployment above are considered inevitable & make up natural unemployment
macroeconomic objectives page 1
IB ECONOMICS SL MACROECONOMIC OBJECTIVES
LOW UNEMPLOYMENT, LOW AND STABLE RATE OF INFLATION
In the PPC, outward shifts cause growth relating to increasing possibilities, and the movement of
production points is the results of increasing efficiency.
11.2 EQUITY IN THE DISTRIBUTION OF INCOME
Equity - condition of being fair or just
Equality - equal with respect to something
Some think that it is fair to have income equality, but others think that it is more equitable for
those who work more to get more income.
Ownership of factors of production is unequal, and the prices vary enormously. Some people in
the labor market earn more than others because of special skills.
Results in the distribution of income being unequal because some people have more factors of
production than others.
THE LORENZ CURVE
A quintile is a 20% portion of a countrys population. Income is distributed by quintiles, and if
income were equally distributed, every quintile will receive 20% of the income.
To be more realistic, the poorest quintile receives less than 20% of income, and the richest
20% receives more than 20% of income.
Can also be split into deciles (10%), or quartiles (25%).
A Lorenz curve shows degree of income equality in an
economy.
The percentages are cumulative: 40 shows the lower
40%.
The closer the Lorenz curve is to the income equality
line, the greater the equality of income distribution.
The Gini coefficient is (area between diagonal and Lorenz
curve)/(entire area under 45 line).
It has a value between 0 and 1. Zero means perfect
income inequality. The closer the coeff. is to 1, the
greater the inequality.
POVERTY
Poverty is the inability to satisfy minimal consumption
needs.
Absolute poverty is measured with a poverty line (minimum income level needed for a family to
sustain sufficiently).
World Bank defined lines: less than $1.25/day (extreme poverty), less than $2/day (moderate
poverty).
Taking % of population whose income falls below the poverty line.
Many developing countries also have national poverty line, and those with a higher income will
have higher national poverty lines, so a higher percentage of people there will be considered
poor.
Relative poverty compares incomes of individuals with the median incomes. Related to equality
of income.
Even though people can buy basic necessities, they cant afford goods/services that are typical
in a society. Usually the percentage is 50% of median income.
macroeconomic objectives page 5
General expenditure (sales) tax - tax on good/service spending and are a fixed % of retail
price. The EU and other countries uses a value added tax and is a tax paid on value added by
each producer.
Excise tax - tax paid on specific goods and services
Customs duties (tariffs) - tax applied on imports
Proportional taxation - constant tax rate; as income increases, fraction income paid is constant
Progressive taxation - increasing tax rate; as income increases, fraction of income paid increases
The more progressive a tax system, the more equal the distribution of income becomes
Regressive taxation - decreasing tax rate; as income increases, fraction paid decreases
Makes income distribution less equal
Corporate income taxes and social insurance contributions are usually proportional.
Indirect taxes are regressive.
EVALUATING EQUITY IN INCOME DISTRIBUTION VS. EFFICIENCY
Taxes affect allocation of resources.
Intended to move economy to more efficient allocation.
Most taxes are not made with the intention of correcting market failure, though.
Can even cause some inefficiency because they change the relative price of goods - and since
prices without market failure make the best resource allocation, taxes can cause inefficiency.
A very progressive tax system can cause a higher degree of income distribution, but this will also
be as a disincentive work or save.
Sales taxes are usually set on all goods and services, so there is no relative price change and thus
no impact. But they are regressive and lead to unequal distribution.
Some necessities excluded from some taxes to make them more affordable, increasing equity,
but then relative price has changed.
Some argue that taxes affecting allocation is mainly theoretical, and that in the real world, they
arent significant enough to reduce growth.
Progressive taxes can make business cycle fluctuations not as serious.
Greater equality can cause more efficient use of resources.
Some argue that transfer payments may have undesirable consequences because they are
disincentives for some to accept work. Others argue that it prevents these vulnerable groups that
may face poverty.
Transfer payments also lower effects of fluctuations.
There are opportunity costs when the govt subsidizes or provides merit goods.
Government intervention conflicts with resource allocation and leads to loss of social surplus and
inefficiency.
macroeconomic objectives page 7