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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

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Unemployment and participation rates

When examining the relationship between the participation rate and the unemployment rate, it is necessary to focus on how a change in the participation rate can impact on the unemployment rate and then how a change in the unemployment rate can impact on the participation rate.  

On the one hand, an increase in the participation rate is likely to cause a short-term increase in unemployment as the new job seekers are immediately classified as ‘unemployed’ until they find work.  Over the longer term, however, a higher participation rate can lead to a reduction in the unemployment rate.  This is because any increase in the labour supply tends to exert downward pressure on wages (as there is greater competition for jobs) and/or an increase in labour productivity (as a bigger labour supply can force workers to increase effort).  As a result, these factors can increase the demand for labour, creating additional employment and lowering the unemployment rate.

On the other hand, a decrease in the unemployment rate is likely to increase the participation rate. This is because some job seekers become encouraged about the prospects of finding work and enter the labour force.  In other words, workers who were previously classified as ‘discouraged job seekers’ (or hidden unemployed) are now more likely to seek employment as the likelihood of success is greater.

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