Topic 6: Unemployment

Topic 6: Unemployment

1Measuring unemployment

1.1Who is unemployed? An economist would define an unemployed person as anyone who is able, available and willing to work but cannot obtain a job.

1.2The claimant count. Traditionally the government has used the claimant count. Each month it publishes the number of people eligible to claim the Job Seekers Allowance (JSA). Unemployment is also expressed as a percentage of the working population (workforce). The workforce consists of employees in work, the self-employed and the unemployed. This method has been criticised as being inaccurate, because:

•frequent changes in the method of calculation have made it difficult to make long-term comparisons.

•some unemployed people are not included because they choose not to register for unemployment benefit.

•some people who are included are working in the ‘black economy’ but fraudulently claim benefit.

•the strict eligibility criteria for JSA prevents some unemployed people from being claimants.

•the change from unemployment benefit payable for 12 months to JSA payable for only 6 months has reduced the number of claimants.

Claimant count unemployment

%of the labour force (seasonally adjusted)

1.3Seasonal adjustment. The claimant count is usually seasonally adjusted. This removes the effects of regular and predictable seasonal fluctuations in unemployment, e.g. building workers in the winter, ski instructors in the summer, etc. When seasonal variations are taken into account then underlying trends can be identified.

1.4The Labour Force Survey.Since April 1998, the Government has also published unemployment data, each quarter, based on the Labour Force Survey. This is a method similar to that used by other countries so it is more suitable for international comparison. The Labour Force Survey surveys a sample of 150,000 people each quarter and counts as unemployed those who were unemployed and who:

•were available to start work in the next two weeks, and

•had actively looked for work in the last four weeks, or

•had found a job and were waiting to start.

The numbers unemployed as counted by the Labour Force Survey are higher than those given by the claimant count and are considered to be more accurate.

Claimant count and LFS measure of unemployment

% of the labour force (seasonally adjusted)

1.5Why is unemployment measured? Unemployment is a key indicator of the performance of the economy and is a major social problem. Government needs to know the scale of the problem before deciding what policy to use to improve it. The problem is not just one of the number of people unemployed. It is also

important for policy makers to know for how long people have been unemployed and to know which age groups, regions and industries are worst affected. Statistics are available for all of these.

2Types and causes of unemployment

2.1Cyclical or general. This type of unemployment is associated with recession in the economy when the level of aggregate demand in the economy has fallen. The rate of unemployment is likely to be high.

2.2Structural. This is associated with the changing structure of an industry.

•New technology. An industry becoming more mechanised may need fewer workers. Note that in the long term new technology is a creator of jobs. Firms become more competitive and win new markets. New products can be made, again resulting in new markets. However, in the short run, jobs may be lost in particular firms or industries. The faster that workers and industry can adapt the less will be the problem of this technological unemployment.

•Falling demand. An industry facing long-term decline in demand for its products because they are obsolete or cannot compete with foreign products will reduce labour.

•Structural unemployment may exist even when the aggregate demand within the economy is high.

3.3 Frictional. This occurs when there are barriers to the free movement (i.e.friction) of the unemployed into vacancies. This may be caused by

•a lack of knowledge about job opportunities

•occupational immobility, e.g. an unemployed worker not having the required education, experience or skills

•geographical immobility, e.g. an unemployed worker not being able to move to the location of job vacancies – cost of moving, social ties such as children’s schooling, elderly parents to care for

•disincentives to work, e.g. a worker may calculate that because of lost welfare benefits, transport costs and extra direct taxes s/he is no better off working.

2.4Seasonal. This occurs in industries such as agriculture, tourism and building where employment fluctuates with the seasons.

3Full employment, the natural rate of unemployment and NAIRU

Full employment does not mean that everyone who is looking for work has a job. There will always be some people unemployed for structural, frictional or seasonal reasons. Full employment is difficult to define precisely and there have been a number of definitions since the Second World War. An early definition stated that it would exist if the number of unfilled vacancies equalled the number of unemployed people and it was suggested that full employment would be achieved when there was an unemployment rate of 3%. Today economists and politicians are more cautious about stating a figure and talk more in terms of a concept. They would say that full employment is where unemployment equals the natural rate of unemployment. The natural rate of unemployment is seen as the level of unemployment below which there will be a rise in inflation. Below this level, labour shortages in certain sectors and high demand increase the pressure on wages and prices. The remaining unemployment is frictional and structural. The natural rate is sometimes called the NAIRU (the non-accelerating inflation rate of unemployment).

4Effects of unemployment

4.1For the individual

Economic effects

•reduced income while major spending commitments continue, e.g. mortgage, credit agreements, etc.

•reduced standard of living

•reduced efficiency as an unemployed worker loses his skill, fitness and motivation.

Social effects

•reduced status – social exclusion from friends because of loss of work and income

•increased health problems both physical and mental, e.g. stress, reduced quality of diet, increased risk of marital break-up.

4.2For businesses

Negative consequences

•fall in demand for goods and services – fall in revenue and profits

•knock-on effect on suppliers (multiplier effect).

Positive consequences

•bigger pool of labour available

•less pressure to pay higher wages

•less risk of industrial action from employees because of fear of job loss.

4.3For the economy

Economic costs

•lost output – real GDP will fall – economy will be operating well within its production possibility curve

•multiplier effect of reduced demand – reduced spending of the unemployed or those fearing unemployment – affects jobs of others

•reduced taxation revenue for the Government – fall in revenue from income tax and taxes on consumer spending; fall in corporation tax on company profits

•increased burden on taxpayers to fund benefits and training measures.

Social effects

•increased crime

•civil unrest

•increased burden on healthcare system.

5All types of unemployment have been in evidence in recent years

5.1Cyclical. During the recession of 1990 to 1992 there was a fall in aggregate demand.

5.2Structural. There has been a continued decline in employment in manufacturing industries for the following reasons:

•inability of some industries to compete with foreign firms particularly those in the ‘tiger economies’, e.g. China, Hong Kong, Singapore, Taiwan and Korea

•rapid mechanisation

•privatisation of nationalised industries led to large-scale job reductions

•after privatisation, industries continued to shed labour in large numbers, e.g. BT.

5.3Frictional. There is a lack of flexibility in the labour market – for the causes, see para. 2.3.

Section 6 is for Higher only

6Trends in unemployment

6.1Total unemployment has fallen

Since 1993 unemployment in the UK has been on a downward trend. A number of factors can account for this:

•sustained economic growth

•a slowdown in the numbers of school leavers entering the labour market

•more students staying on in further and higher education

•the success of the Government’s ‘Welfare to Work’ programme.

6.2Regional differences in unemployment remain

Regional unemployment in the UK

% of the labour force

North-EastLondonWalesNorth WestUK TotalEastern SE

ScotlandN. IreYorksW. MidE. MidSW

Labour Force Survey, unemployment rate (%) – June to August 2001

For the UK those regions closest to London and the south-east continue to have the lowest rates of unemployment whereas those such as Scotland, Northern Ireland and the north-east of England have the highest. The growth in service jobs in the prosperous south and the decline in primary and manufacturing jobs in other regions account for these differences.

Within Scotland there are also wide differences. The Edinburgh area with its growing number of service jobs and its success in attracting electronics businesses is prosperous. The oil industry explains the lower level of unemployment in the north-east. Higher rates of unemployment exist in west-central Scotland because of the decline in manufacturing jobs and in the Highlands and islands because of their remoteness. However rates of unemployment have also been falling in these areas.

6.3The pattern of employment has changed. The numbers employed in the primary and secondary sectors have continued to fall whilst the number employed in the tertiary sector have risen. Most of these jobs were full time and taken by men. An increasing number of new jobs in services are part time, temporary and are taken up by women. These changes help to explain why men account for a growing proportion of the unemployed.

Bannerman High School

Higher Grade Economics

Unit 6 Summary (Unemployment) 1