Employment and Unemployment

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1 Employment and Unemployment A2 Economics, Autumn 2010 Measuring Unemployment A Working Definition of Unemployment People able, available and willing to find work and actively seeking work but not employed The Claimant Count Measure The number of people claiming the Jobseekers Allowance a monthly headcount of the unemployed The Labour Force Survey Must have actively sought work in the previous four weeks and be available to start work immediately and be available to start work immediately A large sample but subject to sampling error This is the government s preferred measure The basis for cross-country comparisons 1

2 per cent of the labour force Unemployment in the in UK the Economy UK Unemployed people aged (women) / 64 (men), seasonally adjusted Labour Force Survey 5 4 Claimant Count Source: Labour Force Statistics Changes in the world of work 2

3 Flows in the Labour Market Taking a job Employed Labour force Retiring Temporarily leaving New hires Recalls Job-losers Lay-offs Quits Out of the labour force Unemployed Discouraged workers Re-entrants New entrants Types of Unemployment Seasonal Unemployment Regular seasonal changes in employment / labour demand Unemployment data is usually given a seasonal adjustment to reflect this Not a major concern for labour market economists Affects certain industries more than others Catering and leisure Construction Retailing Tourism Agriculture 3

4 Types of Unemployment Frictional Unemployment Irreducible minimum unemployment in a dynamic economy Often involves short spells of unemployment Includes new and returning entrants into the labour market Imperfect information about available jobs can lengthen the period of job search Some frictional unemployment is useful a pool of available workers, can help to keep wage inflation down Graduate unemployment in the UK 4

5 Structural Unemployment Labour market failure Mismatch of skills as pattern of labour demand in the economy changes over time Involuntary unemployment Factor immobility of labour is a major cause of structural unemployment labour market failure Often involves long-term unemployment Prevalent in regions where industries go into long-term decline and have been major sources of employment Labour market disincentives poverty trap Cyclical unemployment Cyclical (Keynesian) Unemployment There is a clear cyclical relationship between demand, output, employment and unemployment Caused by a fall in aggregate demand relative to potential GDP leading to a loss of real national output and employment If national output grows less than potential output then a slowdown in demand is nearly always enough to create some more cyclical unemployment 5

6 10.0 Growth Growth and affects unemployment in the UK Annual % change in UK GDP at constant prices,% of labour force unemployed Unemployment (% of the labour force, LFS) 7.5 Percentage growth of GDP Real GDP (Annual % Change) Per cent of the labour force Source: UK Statistics Commission The Short recession term leaves unemployment many out of work Annual % change in GDP and short term unemployment n (millions) Person Out of work for less than 6 months llions mi Pe ercent Annual growth of real GDP Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q Source: Reuters EcoWin 6

7 UK - Total actual Hours weekly worked hours worked Million hours per week per week (millions) millions Source: Reuters EcoWin Real wage unemployment Real Wage Unemployment Created when real wages are maintained above their market clearing level leading to an excess supply of labour at the prevailing wage rate Possible causes of real wage unemployment Trade unions using their collective bargaining power to drive wages above their free market level Successive rises in the national minimum wage Globalisation is driving down real wages in some industries e.g. textiles 7

8 Consequences of unemployment Economic and social impact of high unemployment A selection of news reports 8

9 Economic Costs of Unemployment Private Costs for the Involuntary Unemployed Loss of income but many people have major commitments (mortgage, credit agreements) Fall in real living standards Unemployment in your 20s has a huge effect on living standards for people in their 50s Increased health risks (particularly for long term unemployed) Stress / reduction in quality of diet Increased risk of marital break-up Social exclusion Loss of marketable skills (human capital) The longer the duration of unemployment, the lower the chances of finding fresh employment Particular problem facing the youth unemployed the lost generation Persons (millions) Long UK's term Long unemployment Term Jobless Problem in the UK Millions, seasonally adjusted, using Labour Force Survey data Unemployed for up to six months Unemployed for over 12 months millions 0.2 Unemployed for over 24 months Source: Reuters EcoWin 9

10 The Youth Unemployment unemployment Crisis Thousands, people out of work for at least a year aged Source: Reuters EcoWin Unemployment and businesses Economic Consequences for Businesses Negative consequences Fall in demand for goods and services Fall in demand for businesses further down the supply chain Consider the negative multiplier effects from the closure of a major employer in a town or city 10

11 Unemployment and businesses (2) Some positive consequences Bigger pool of surplus labour is available but still a problem if there is plenty of structural unemployment Less pressure to pay higher wages Less risk of industrial / strike action fear of job losses leading to reduced trade union power Consequences for Government Consequences for the Government Drop in employment hits trend growth - hysteresis Increased spending on unemployment benefits and other income related state welfare payments Fall in revenue from income tax and taxes on consumer spending Fall in profits reduction in revenue from corporation tax Rise in government borrowing 11

12 Macroeconomic costs of unemployment Consequences for the Economy as a whole Lost output (real GDP) from people p being out of work the economy will be operating well within its production frontier Unemployment seen as an inefficient way of allocating resources labour market failure? Some of the long-term unemployed may leave the labour force permanently fall in potential GDP (hysteresis effects) Increase in income inequality rise in relative poverty David Blanchflower on the costs of U In past recessions rising long-term unemployment had a persistent adverse effect on the supply potential of the economy. Rising unemployment may lead to a reduction in the supply capacity of the economy. If workers remain unemployed for sustained periods they may lose their skills, thus reducing their human capital. High rates of long-term unemployment in the economy may mean there is a mismatch between those skills that workers possess, and those for which there is demand. People may also be less likely to participate in the labour market the longer their spell of unemployment persists. 12

13 External costs of unemployment High unemployment creates external costs Rising relative poverty Increased risk of Crime Family breakdown Premature death Chronic illnesses Increased burden on the welfare state which may require higher taxes crowding-out effect on private sector businesses and individuals Demand-side policies to raise employment Measures to boost labour demand Lower interest rates (monetary stimulus) + unconventional monetary policy such as quantitative easing Lower direct and indirect taxes (fiscal stimulus) including cuts in employment taxes Attempts to achieve a more competitive exchange rate to boost the export sector Government spending on major projects (e.g. improving the transport infrastructure) labour intensive / shovel-ready Employment subsidies including youth jobs subsidies Incentives to encourage foreign investment into the UK Targeted policies to reduce youth unemployment Welfare reforms to incentivise people off benefits 13

14 Supply-side policies to reduce unemployment Measures to improve labour supply (i.e. reduce frictional and structural unemployment) Increased spending on education & training including an emphasis on lifetime-learning ) Investment in human capital Measures to improve geographical mobility Improved flows of information on job vacancies Changes to income tax and benefits to improve incentives to find work (raise the active labour supply) Changes to further and higher education Changes to policies on net labour migration Trends in UK unemployment Developments in the UK labour market 14

15 Regional / local unemployment rates Source: BBC News website Claimant Unemployment for the UK by Gender Per cent of the labour force, source: Office by of National Statistics GBP Claimant count rate - all - % Claimant count rate % : Males Claimant count rate % : Females Source: Reuters EcoWin 15

16 Expectations Unemployment of unemployment Expectations Net % balance of people expecting higher unemployment in the next year Net balance Source: Reuters EcoWin Unemployment International in the comparisons Euro Area and the UK Percentage, seasonally adjusted, 2011 is a forecast Per cent of the labour force Euro Area Unemployment UK unemployment rate Source: Reuters EcoWin 16

17 Euro Zone Unemployment 20.0 Comparing Unemployment Rates Per cent of the labour force, standardised in Spain measure Spain PERCENT UK Spain United Kingdom Source: Reuters EcoWin 17

18 Spanish Youth Jobs Crisis Recent audio-videos on unemployment 18

19 Tutor2u Keep up to date with economics, resources, quizzes and worksheets for your economics course. Join our Facebook Fan Page 19

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