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Unemployment
AS economics presentation on the measurement and
causes of unemployment
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
•
The Labour Force Survey
– Must have actively sought work in the previous four weeks and be available
to start work immediately
•
Labour Market Slack
– Includes all those who want to work, those on government training schemes,
and part-timers who could not get a full-time job
Recent UK unemployment statistics
Labour Force Survey
Claimant
Count
Unemployment
(seasonally adjusted)
Unemployment
(seasonally adjusted)
Long
Term
Long
Term
Youth
Level
Annual
Change
Rate
Level
Annual
Change
Rate
000s
000s
%
000s
000s
%
000s
000s
1997
2,036
-302
7.2
1,585
-503
5.4
358.6
153.8
1998
1,772
-264
6.2
1,348
-237
4.6
233.1
106.8
1999
1,754
-18
6.1
1,248
-100
4.2
204.3
62.1
2000
1,633
-121
5.7
1,088
-160
3.6
163.9
46.3
2001
1,428
-205
4.9
970
-118
3.2
124.5
37.8
2002
1,524
96
5.2
947
-23
3.1
89.8
39.2
Long term unemployment trends
11
10
9
8
7
6
5
Labour force
4
survey
3
Claimant
2
count
1
70
72
74
76
78
80
82
84
86
88
90
92
94
96
98
00
02 04
Source: DATASTREAM
Claimant Count and Labour Force Survey
DIFFERENT MEASURES OF UNEMPLOYMENT IN THE UK
12
Percentage of the Labourforce
10
8
6
4
2
0
1990
1991
1992
1993
1994
1995
Claimant Count
5.5
7.6
Labour Force Survey
6.9
8.4
1996
1997
1998
1999
2000
2001
2002
9.2
9.7
8.8
9.8
10.5
9.8
7.6
7
5.4
4.6
4.2
3.6
3.2
3.1
8.8
8.3
7.2
6.2
6.1
5.7
4.9
5.2
International Unemployment Statistics
Per cent
Euro Zone
UK
USA
Japan
Germany
France
1996
10.8
8.3
5.4
3.3
8.7
11.9
1997
10.8
7.2
4.9
3.4
9.7
11.8
1998
10.2
6.2
4.5
4.1
9.1
11.4
1999
9.4
6.1
4.2
4.7
8.4
10.7
2000
8.4
5.7
4.0
4.7
7.7
9.2
2001
8.0
4.9
4.8
5.1
7.9
8.5
2002
8.4
5.0
5.8
5.4
8.6
8.8
Types of Unemployment
•
•
Seasonal
– Regular seasonal changes in employment / labour demand
– Affects certain industries more than others
• Catering and leisure
• Construction
• Retailing
• Tourism
• Agriculture
Frictional
– An irreducible minimum unemployment in a dynamic economy
– Includes people experiencing short spells of unemployment
– Includes new and returning entrants into the labour market
– Imperfect information about available job opportunities can lengthen the
period of job search
– Frictional unemployment also affected by incentives / disincentives to
search and accept paid work
Causes of Unemployment (continued)
•
•
•
Structural
– Arises from the mismatch of skills and job opportunities as the pattern of
labour demand in the economy changes over time
– Occupational 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
Cyclical (Keynesian)
– 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
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
Illustrating cyclical unemployment using
AD-AS analysis
LRAS
General
Price Level
Real Wage
Level
Supply of
Labour
W1
W2
P1
P2
SRAS
AD1
LD2 Demand for
Labour
AD2
Y2
Y1
Yfc
Real National Income
E2
E1
YFC2
Employment of Labour
Unemployment and Economic Growth in
the UK
Unemployment and Economic Growth in the UK
12.0
Real GDP
Claimant Count
10.0
8.0
Per Cent
6.0
4.0
2.0
0.0
-2.0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Real GDP
4.5
5.2
2.2
0.8
-1.4
0.2
2.5
4.7
2.9
2.6
3.4
2.9
2.4
3.1
2.1
1.9
Claimant Count
9.4
7.6
5.9
5.5
7.6
9.2
9.7
8.8
7.6
7
5.4
4.6
4.2
3.6
3.2
3.1
Economic and Social Costs of
Unemployment
•
Private Costs for the Involuntary Unemployed
– Loss of income – but many households have major spending commitments
(mortgage, credit agreements etc.)
– Fall in real living standards
– Increased Health risks (particularly for long term unemployed)
• Stress
• Reduction in quality of diet
• Increased risk of marital break-up
• Social exclusion because of loss of work and income
– Loss of marketable skills (human capital) and motivation
• The longer the duration of unemployment, the lower the chances of
finding fresh employment - the unemployed become less attractive to
potential employers (“outsiders in the labour market”)
Consequences of Unemployment (2)
•
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
– 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 of Unemployment (3)
•
Consequences for the Government (Fiscal Policy)
– 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
– May lead to rise in government borrowing (i.e. a budget deficit)
•
Consequences for the Economy as a whole
– Lost output (real GDP) from people 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
– Increase in the inequality – rise in relative poverty
Policies to Reduce Unemployment
•
Measures to boost labour demand (reduce cyclical unemployment)
– Lower interest rates (monetary stimulus)
– Lower direct taxes (fiscal stimulus)
– Government spending on major projects (e.g. improving the transport
infrastructure)
– Employment subsidies (including the New Deal programme)
– Incentives to encourage flows of foreign investment in the UK
•
Measures to improve labour supply (reduce frictional and structural
unemployment)
– Increased spending on education & training including an emphasis on
“lifetime-learning”)
– Improved flows of information on job vacancies
– Changes to income tax and benefits to improve incentives to find work
Consequences of falling unemployment
•
The circular flow and the multiplier:
– Incomes flowing into households will grow
– Falling unemployment adds to demand and creates a positive multiplier
effect on incomes, demand and output.
•
The balance of payments:
– When incomes and spending are growing, there is an increase in the demand
for imports. Unless this is matched by a rise in export sales, the trade
balance in goods and services will worsen
•
Government finances:
– With more people in work paying income tax, national insurance and value
added tax, the government can expect a large rise in tax revenues and a
reduction in social security benefits
•
Inflationary effects
– Falling unemployment can also create a rise in inflationary pressure –
particularly when the economy moves close to operating at full capacity