Unemployment

Key Terms
Unemployment: The number of people of working age who do not have a job but are actively seeking work.

Cyclical unemployment: Unemployment due to a lack of aggregate demand.

Frictional unemployment: Workers moving between jobs.

Structural unemployment: Unemployment due to a change in the pattern of demand and production.
Theory

Measurement of Unemployment


Unemployment is measured in two main ways:


Claimant count:


Includes people who are eligible to claim Job Seekers Allowance (JSA). However it excludes people who don’t meet all criteria even though they may actively seek work e.g. people on government schemes.


Labour Force Survey:


Includes those who have looked for work in the past month and are able to start work in the next two weeks.


Types of Unemployment

Demand deficient / Cyclical / Keynesian unemployment / involuntary

Arises in a recession in the economic cycle due to a lack of aggregate demand.

In recession people spend less on consumer goods so firms reduce production of goods. Firms therefore employ fewer workers.


Structural unemployment

This occurs when there is a mismatch between the characteristics of unemployed workers and the requirements of jobs. Structural unemployment is caused by immobility of labour:

Occupational immobility:

Lack of transferable skills, preventing workers from moving from one job to another.


Geographical immobility:

Prevents workers moving from one area to another to fill vacancies.


Classical Unemployment / Real-wage unemployment

Occurs when wages are above the market clearing level (equilibrium) e.g. minimum wages. This leads to excess supply as higher wages reduces demand for labour = unemployment.


Frictional unemployment

This is a form of voluntary unemployment caused by people moving in between jobs or searching for jobs e.g. University graduates are a good example. It takes time for people to find jobs at wage rates they a prepared to accept.


Casual and seasonal unemployment

  • Casual = when workers are made redundant on a short term basis.

  • Seasonal = a form of casual unemployment where workers are made redundant when demand falls after a specific season.

  • E.g. Café waiters in seaside towns are dismissed at the end of summer.


    • Hidden Unemployment

    Unemployed individuals that are not counted in the unemployment figures. This may exist because the official unemployment figures only include people that are unemployed, but actively seek employment.
    Advantages of Unemployment
    1) Reduced inflationary pressure

    The longer people remain out of work the more willing they become to work for a lower wage. This is known as the search theory of unemployment. The downward pressure on wages results in a lower rate of inflation.

    Unemployment can also result in a lower inflation rate if the economy is at full capacity.Unemployment results in a shift left of AD (due to lower consumer spending) and increases spare capacity thus reducing inflationary pressure.


    2) Labour market efficiency

    A small amount of unemployment in the economy may mean that people are waiting and searching for jobs in which they will be happiest. High job satisfaction is unsurprisingly linked to higher labour productivity.


    3) Improvements on the balance of payments

    Low inflationary pressure resulting from unemployment makes exports cheaper and imports more expensive. The unemployed often have less disposable income than employed workers.

    If more people are unemployed then less will leak out into imports. This is assuming that unemployment benefits are less than the national minimum wage after tax.


    4) Restructuring in the economy

    Unemployment is neccesary to achieve a restructuring the economy.

    For instance if the economy is uncompetitive in an industry and policy makers wish to transition into a new industry then unemployment is neccessary and benefitial in achieving this trasition.
    Disadvantages of Unemployment
    1) Lower Productivity

    Unemployed workers represent wasted resources (inside the PPF) also over time the unemployed may become deskilled as the labour market rapidly changes.

    Lower productivity will also = lower output

    This will have hysteresis effect as employment will fail to return back to its original level as the long term unemployed no longer have skills to work even when the economy recovers.

    However firms may not necessarily suffer from lower productivity if unemployment has occurred from investment in capital equipment (Technical Unemployment).


    2) Public Finances

    Less people working = ↓ Tax revenue and ↑welfare payments.

    This will cause a rising budget deficit. The government may be forced to increase their borrowing, thus increasing the national debt.


    3) Lower Consumer Spending / Fall in AD

    Unemployed households may face lower disposable income. They will cut spending and increase precautionary saving.


    4) Social costs

  • Increased crime

  • Increased divorce

  • Increased suicide (lower life expectancy)


    • 5) Greater income inequality

    Those out of work usually have less income therefore less to save.

    Those in employment are likely to earn more, therefore an increase in unemployment will result in greater income inequality.
    Evaluation
    The costs of unemployment depends on what type of unemployment exists.

  • Economic growth may still occur if technical unemployment exists

  • Frictional unemployment is unlikely to have such significant social costs

    • Unemployment (even structural) may be acceptable if it is backed by the right policy e.g. education and training.


    Unemployment may also be considered acceptable if the economy is changing industries.

  • E.g. under Thatcher’s government coal mines were closed, causing structural unemployment

    • But the coal industry was rapidly declining in comparison to other energy sectors, therefore by moving to other industries the U.K could remain competitive.
    Policies to Reduce Unemployment

    Cyclical Unemployment

  • Fiscal expansionary

  • Loose Monetary policy


    • Frictional Unemployment

    1) Stricter Job Seeker’s Allowance assessment

    Job seeker has to prove they are actively seeking work, if they are unable to prove this at fortnightly interviews, they lose benefit.


    2) Reducing Job Seeker’s Allowance

    If government reduce JSA search time between jobs will be reduced. Workers have to take a job more quickly before their financial situation deteriorates.

    However some economists argue that if unemployed are financially worse off they will not be able to search for work effectively, due to travel costs etc.


    3) Direct Tax Cuts

    The government could reduce direct taxes for the low paid. This will increase post-tax wage and encourage unemployed to find work more quickly.

    However most economists believe that tax cuts on their own are insufficient to reduce frictional unemployment.

    Benefits system also needs to be reformed to eliminate the unemployment trap.


    Structural Unemployment

    1) Investment in training / education

    The New Deal programme is a good example of investment in training / education. The scheme starts with an interview to identify gaps in workers knowledge.

    The aim of the scheme is to give worker the training and skills needed to take up jobs in their local areas.


    2) Improving geographical mobility

    Government could provide grants or low cost housing. This will encourage workers to move from areas of high unemployment to regions where there are jobs.


    3) Regional policy

    Involves giving grants and tax breaks to encourage firms to locate in areas of high structural unemployment.









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