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Going further into the details of macroeconomic issues, we now turn to the second major problem that a society 'should' avoid: unemployment.  Unemployment has adverse economic, social and psychological consequences.  In this chapter, the significance of unemployment and its spatial and temporal aspects are highlighted.  Causes, remedies and policies aimed to tackle it are then analysed.  Opinions differ on the best way of tackling unemployment problem but 'new consensus' conclusions emphasise the importance of wage flexibility and appropriate training and education.  Unemployment is certainly a multi-faceted problem and the theory has always to be continually adapted and confronted with real situations that can vary across countries.


Q1 Why should business be concerned with the problem of unemployment?

Unemployment has economic and social costs to society and, therefore, also to business:

i) unemployment means that the productive capacity of a society is not fully utilised.  This implies foregone income, an actual growth rate below the potential growth and, from a business perspective, a lower level of demand, sales and profits.

ii) In most developed countries the state provides a social welfare 'safety net' consisting of unemployment assistance and benefits.  High unemployment means high public spending which has to be matched by an increase in taxes.  Taxes negatively affect business directly through a decrease in after-tax profits and indirectly through a cut in consumers' disposable income.

iii) Unemployment can also create a hostile social and political environment.

iv) In the long term it alters the skills, motivation and self-esteem of unemployed, rendering them unfit to take up new jobs in case of availability.

While unemployment has costs for business, some benefits can also arise:

v) It improves work efficiency, by making people less inclined to take their jobs for granted.  In periods of high unemployment, workers are more grateful for the job they have and they are easier to manage.

vi) It diminishes trade-unions' power, allowing more favourable conditions for firms, including pay-moderation, when contacts are renewed.

Q2 (a) Explain how the demand and supply curves of labour are derived in the classical model. Comment on the realism of the classic assumptions relating to the labour market.


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