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Module 1: Economics and employment

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Causes of unemployment

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Economics - Causes of unemployment

Causes of unemployment

The main causes of recent unemployment are:

* Falling levels of economic activity. If economic activity begins to
slow due to such factors as higher interest rates or pessimistic
expectations, private consumption and investment, expenditure will fall, as
will aggregate demand. With people buying less goods and services,
businesses will reduce production levels and, consequently, will require
less labour.

* Rising wages. Wages are the largest cost of production for most firms.
Increased wages mean it is more expensive for business to hire employees.
If real wages are increasing faster than productivity, firms may reduce
their workforce. They may even replace labour with capital.

* The introduction of new technology. The introduction of new technology,
such as robotics and computers, has replaced labour in the affected
industries.

* Lower Tariffs. Tariffs are a form of protection for local firms. If
they are reduced, local producers are faced with more competition from
imports. This may force the producer to restructure the industry leading to
job losses.

* Privatisation. The selling of government owned businesses to the
private sector.

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