Unemployment

From WikiTextbook

There are many measures of unemployment.The common error is to suppose that this is merely the number of people who are not in work. There are, however, many more factors to account for; e.g. "Should a person who is not able to work be included in the unemployment figures?" The unemployment figures can, therefore, easily be shown as biased, depending on the method used in calculating them. There are also many different kinds of unemployment and these all occur because of diferent factors, and they all have different "cures".

Contents 1 Measures of unemployment 1.1 Claimant Count 1.2 The Labour Force Survey 2 Causes and Cures of Unemployment 2.1 Real Wage (Classical) 2.2 Frictional Unemployment 2.3 Demand Deficient Unemployment 2.4 Structural Unemployment 3 Costs of Unemployment 3.1 Economic 3.2 Social 4 Full Employment 5 Voluntary and Involuntary Unemployment 6 Natural Rate of Unemployment 7 Trends in the UK Labour Market 7.1 Unemployment Rates 7.2 Employment Rates 7.3 Immigration and Emmigration 7.4 Female workers 7.5 Part-time workers 7.6 Short-term contracts 7.7 A job for life? 7.8 Economically Inactive 8 Statistics 9 Videos 10 Selected further reading 11 Other revision material 12 Latest news

Measures of unemployment

There are two main methods of calculating the level of unemployment in the UK.

Claimant Count

The Claimant Count is a count of those people who are claiming unemployment-related benefits such as Jobseeker's Allowance (JSA) and National Insurance credits. The claimant count can therefore be used as a measure of unemployment by comparing it to the total labour force, which the government also has a good idea of since it is recieving income tax from them. When the claimant count is looked at as a proportion of the labour force we get the unemployment rate. You are able to claim Jobseeker's Allowance if you live in Great Britain and:

• Are available for work.
• Actively seeking work.
• Have a jobseekers agreement.
• Are not working 16 hours or more a week.
• Are capable of work.
• Are under pension age.
• Are not in full time, non-advanced education if you are under age 19.

The Claimant Count is useful because:

• it is regularly updated (monthly) it is available down to a small geographical level (Lower Layer Super Output Areas (LSOAs). However, because the Claimant Count is benefits based, it does miss out a large proportion of people who are unemployed and seeking work, but do not qualify for JSA.

The Labour Force Survey

The labour force survey is the second and probably more reliable method of measuring unemployment, it is done through the use of surveys. It was introduced by the government in 1998 and tries to better define people who are out of work and are willing to work at the current wage rates.

The previous count only counted those who were unemployed and claiming benefit which excluded a large number of people. The most significant group now included in the monthly unemployment statistics are women seeking work whose partners are on means tested benefit.

How is this survey carried out?

• The survey sample of addresses is taken from the Postcode Address File.
• In addition, a small sample of addresses of NHS and Health trust accommodation is included in the survey and anyone aged 16 or over and at boarding school or living in a hall of residence is included in their parent's household.
• The survey is a stratified random sample.

Causes and Cures of Unemployment

There are many causes of unemployment, but the most important ones are outlined below:

Real Wage (Classical)

Real Wage or Classical unemployment is the result of real wages being above the market clearing level, and this leads to an excess supply of labour.

Causes of this type of unemployment include

• A national minimum wage which has been set above the market clearing level.
• Large amounts of Trade Union activity.

Cures for real wage unemployment include:

• A reduction of power and influence to trade unions. This will give them less control over the minimum wage.
• Another way is to try and limit the effects of the minimum wage.
• Creating a flexible market so that pay conditions become more adaptable to change in demand and supply.

For real wage unemployment to be cured completley the minimum wage must be lowered to the market-clearing wage.

Frictional Unemployment

Frictional unemployment covers people who are out of work but are "between jobs"- that is, they are in the process of finding a new one. As a consequence, this form of unemployment is seen to be largely voluntary. This form of unemployment, however, could be seen as beneficial, as it allows jobseekers to find jobs which better suit their job "wants" and their skillset.

Causes of frictional unemployment are simply that for one reason or another, a worker is "between jobs". This may be if they are a university graduate looking for first-time employment, or have recently been made redundant and are currently searching for a job. Another reason may be ineffective information about new jobs, or similar, for this would hinder the search for new jobs and thus create prolonged unemployment.

This is a very small sector of unemployment, as workers can always search for new jobs when employed, and employers can find new employees before firing old ones.

Usual cures for frictional employment are:

• Lowering the real value of unemployment benefits, such as the jobseeker's allowance.
• Reducing the amount of time unemployment benefits can be claimed
• Improving job centres and information on job vacancies
• Cutting direct taxes for the low paid.

Demand Deficient Unemployment

Demand deficient unemployment occurs when there is an economic recession or a sharp economic slowdown. This is due to a fall in the level of aggregate demand and national output in the economy which results in firms laying-off workers to reduce their monthly costs and protect the profits they make. Also demand deficient unemployment can result in the long run when the economy is constantly run below capacity.

Cures for this type of unemployment include:

• Interest rates can be lowered to encourage consumers to spend, pushing up aggregate demand and encouraging businesses to employ more workers. Also,
• Government spending increases and employing more people in the public sector will provide the economy with more consumers to push up aggregate demand and hopefully encourage even more employment, in the private sector.
• Tax cuts would release more capital for consumers to spend, having the same effect.

• Another strategy would be to depreciate the pound to encourage exports, aggregate demand being shifted to the right by foreign demand, through releasing pounds on the currency market by buying up foreign currency. Buying up foreign currency is a tactic used in China, where currency reserves recently reached a trillion US dollars. This helps keep the value of the Yuan low, encouraging export.

Structural Unemployment

Structural unemployment occurs when there are unfilled job vacancies due to a mismatch of skills between the unemployed and the job vacancies, e.g there might be a shortage of maths teachers but the bulk of the unemployed could be searching for a job with more physical labour. This mismatch often occurs as a result of people leaving their current industry in favour of an industry that requires a higher level of skills.

Cures of structural unemployment include:

• Incentives can be given to attract the unemployed to train for a certain job and to gain the skills in order to work in the job efficiently.
• These incentives may be in the form of giving new workers free training, give them pay in order to train and offer regional benefits.

Costs of Unemployment

Economic

Lost Output Of Goods And Services

Unemployment causes a waste of scarce economic resources due to a large number of labourers not producing anything, therefore leading to the reduction of long run growth potential of the economy. An economy with high unemployment is producing within its production possibility frontier, and therefore is inefficient, and the hours that the unemployed do not work can never be got back; this can be shown in the diagram when the economy is at point V.

Fiscal Costs To The Government

High unemployment will have a fiscal cost to the government; its impact on government expenditure, taxation and the level for government borrowing each year

• An increase in unemployment results in higher benefit payments and lower tax revenues, as less people are paying taxes. Therefore for the government to receive a steady amount of tax, they need to raise taxes for others.
• As they are spending less they contribute less to the government indirect taxes
• The rise in government spending along with the fall in tax revenues may result in a higher government borrowing requirement (public sector net cash requirements)

Deadweight Loss Of Investment In Human Capital

Unemployment wastes some of the scarce resources used in training workers. Furthermore, workers who are unemployed for long periods become de-skilled as their skills become increasingly dated in a rapidly changing job market. This reduces their chances of gaining employment in the future, which in turn increases the economic burden on government and society.

Social

Rising unemployment has been linked in to social deprivation. It has been proven there is a relationship between rising unemployment and rising crime. Also in areas of high unemployment other factors such as divorce has increased. These areas have also been proven to have less real income and spending power than areas of high employment.

Younger workers also tend to leave areas of high unemployment into areas where there is high employment as there is more potential for them to get a job in these other areas. This then leaves the area they left with either a very young, or more likely, an ageing population in that area. This makes it even less likely that businesses will locate there as there is less of a young, able workforce.

All these costs are at their greatest when long-term structural unemployment is high.

Below is a graph showing the long-term unemployment in the UK economy:

Full Employment

To many people it would seem that full employment should be when unemployment reaches 0%. However, the majority of economists would suggest that this is not the case and that unemployment would be greater than zero when full employment is achieved. Full Employment is usually defined as when everyone who is able and willing to work is employed. This figure obviously depends on the demographic and characteristics of a country as well as governments managing their education systems properly. There have been many attempts to give a generalised figure for full employment and these have generally ranged from in between 3% and 7%.

Voluntary and Involuntary Unemployment

Natural Rate of Unemployment

The natural rate of unemployment is the rate of unemployment where the labour market is in a position of equilibrium. This is the point where the labour demand curve meets the labour force curve.

The natural rate of unemployment is not zero - at the equilibrium wage W1 in the diagram above, there is unemployment measured by AB. This is made up of frictional plus structural unemployment.

Trends in the UK Labour Market

Labour Market Trends is a trade publication providing coverage and analysis of jobs and career development. It shows a number of aspects to do with the UK Labour market, and how they have changed over time.

Unemployment Rates

The unemployment rate, which includes all those willing and able to work for pay - both unemployed and employed is:

Number of unemployed workers Total labour force

Employment Rates

Immigration and Emmigration

Immigration allows our unemployment levels to carry on decreasing without affecting levels of GDP, this is because the immigrants are entering the labour market and are expanding it, they are also willing to work for a lesser wage which allows us to keep the wage level down, and let unemployment levels fall.

Emigration has the opposite effect on unemployment levels, the emigration leads to a shrinking of the labour market, which forces wage rates to rise.

Female workers

More females are becoming employed in the Britain and 20 years ago there where a much higher percentage of male workers than female workers.

• In manufacturing, the proportion of female workers in this sector dropped from nearly one in five to under one in ten.
• A quarter of female employees do administrative or secretarial work.
• Similar proportions of men and women work in 'associate professional and technical' occupations, for example computer programmers, technicians and nurses.

The number of females getting into skilled work is increasing and generally female employment is increasing as a whole but labour intensive female employment is decreasing.

Part-time workers

Part-time workers generally work less than 35 hours a week and have the same employment rights as full time workers.

Short-term contracts

Short term contract employment is when a business agrees a place of employment for someone which will expire over a given period of time. Short term contracts can cause more frictional unemployment in the labour market because people who do these jobs must spend time finding another or go on to benifits once their time has ran out. Examples of short term conracts include construction, cleaning and maintenance. Many young people such as students like to have flexibility and variety in their work to fit around a busy life style. This is why they are most likley to have short term contracts. Zero Hours Contracts A legally binding contract that states that you are obliged to work when asked to but that you will not be paid when you are not needed.

A job for life?

It used to be the case the you would join a firm and then spend the rest of your life working for them. This is no longer the case as people on average will work for *** businesses during their working life.

Economically Inactive

The term ‘economically inactive refers to everyone of working age who is left over after counting the employed and the unemployed. There is nothing in this definition which implies any sort of positive choice.

There is no direct linkage between economic inactivity and benefit claims. While Incapacity Benefit and Income Support are frequently called 'inactive benefits', people can claim these benefits while working – under 16 hours for example.

Statistics

National Statistics labour market data

National Statistics employment data

Wednesday, 14 February 2007 - Unemployment down to 1.69 million, 5.5%

Videos

BBC News videos on inflation

Selected further reading

ONS - how unemployment is calculated

Other revision material

Revision Guru's note on unemployment.

Latest news