Essay Plans

"The opportunity cost of unemployed labour is zero." Discuss.

SYNOPSIS:




POINTS:
  1. Define terms
    • Opportunity cost
    • Unemployment (ie. recorded figures)

  2. Relate opportunity cost to both micro and macro. As this question is concerned with 'unemployed labour' the macro explanation needs careful attention. Draw a production possibility curve with axes of capital/investment and consumption. Show how an increase in investment needs a reduction in consumption ie. investment goods replace consumer goods. (Incidentally, this diagram may be used to show economic growth.)

  3. If unemployed labour is used to produce there is no reduction in production elsewhere as - by definition - unemployed labour is not employed to do anything and is therefore non-productive - or so it would seem.

  4. BUT if the benefits etc. received by unemployed labour exceed the wages offered (poverty trap) then demand falls and investment (accelerator) declines. So there may well be a long term opportunity cost of using unemployed labour because of that labour's spending power.

  5. A second, and more important point to consider, is the status of the unemployed labour ie. whether it is of a voluntary or involuntary nature.

  6. Voluntary - defined as workers pricing themselves out of jobs - possibly coerced to do so by trade unions who may or may not be representative (political point - avoid).

  7. If workers ARE voluntarily unemployed they must prefer the combination of leisure and lower income (ignoring the black economy estimated at £7bn and also dole fiddlers) to a higher material standard of living and less leisure. Thus the opportunity cost of this labour working is the loss of leisure thus a net loss of social welfare. Employing them would increase their income and thus (presumably) their consumption of material goods which may result in a net gain in economic/material welfare.

  8. Opportunity cost could be inflation (see Philips curve) is by employing people inflation is caused; equally if the employment of people worsened the current account deficit (ceteris paribus) this may also be an opportunity cost. If workers are priced out of the jobs and may only priced in again by taking a wage cut below the original level then the opportunity cost is this fall in wages. Thus if the industry wage is £9/hour, workers now industry wide have to accept £9 to create funds to re-employ others, the opportunity cost is thus £1/hour lost by other workers.

  9. As with the example in (2) is unemployment reduced by training schemes etc. the opportunity cost is what else could that money have been spent on eg. hospitals. This should be supported with the figures in the most recent budget.

  10. A similar point would apply to government spending on job centres to make knowledge of job vacancies more available - eg. by having job centres open on Saturdays.

  11. Thus there are several opportunity costs - loss of leisure, macro effects on Balance of Payments etc; possible loss of demand. Remembering also that leisure often COST, thus a fall in unemployment could lead to fall in daytime use of cinemas, libraries and sports facilities - a further opportunity costs as their fixed costs will now be borne by fewer people.
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