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Causes & Effects of Unemployment
 

Causes & Effects of Unemployment

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    Causes & Effects of Unemployment Causes & Effects of Unemployment Document Transcript

    • 26/10/2010Employment 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 – A large sample – but subject to sampling error – This is the government’s preferred measure – The basis for cross-country comparisons 1
    • 26/10/2010 Unemployment in thein the UK Unemployment UK Economy Unemployed people aged 16-59 (women) / 64 (men), seasonally adjusted 13 13 12 12 11 11 10 10per cent of the labour force 9 9 8 8 7 7 6 Labour Force Survey 6 5 5 4 Claimant Count 4 3 3 2 2 1 1 0 0 90 92 94 96 98 00 02 04 06 08 10 Source: Labour Force Statistics Changes in the world of work 2
    • 26/10/2010 Flows in the Labour Market New hires Employed Recalls R ll Labour force Unemployed Job-losers Lay-offs Quits Retiring Discouraged Temporarily workers leaving l i Out of the Re-entrants Taking New entrants a job labour force 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
    • 26/10/2010 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 downGraduate unemployment in the UK 4
    • 26/10/2010 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 long term – 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, 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
    • 26/10/2010 Growth and unemployment in the UK Growth affects unemployment Annual % change in UK GDP at constant prices,% of labour force unemployed 10.0 10.0 7.5 Unemployment (% of the labour force, LFS) 7.5 5.0 5.0 Per cent of the labour forcePercentage growth of GDP 2.5 2.5 0.0 0.0 Real GDP (Annual % Change) -2.5 -2.5 -5.0 -5.0 -7.5 -7.5 02 03 04 05 06 07 08 09 10 Source: UK Statistics Commission The Short term unemployment recession leaves many out of work Annual % change in GDP and short term unemployment 1.5 1.5Person (millions) 1.3 1.3 millions n Out f O t of work f l k for less than 6 months th th 1.1 1.1 0.9 0.9 4 4 2 2 0 0 ercent Annual growth of real GDP Pe -2 2 -2 2 -4 -4 -6 -6 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 05 06 07 08 09 10 Source: Reuters EcoWin 6
    • 26/10/2010 UK - Total actual weekly hours worked Hours worked Million hours per week 950 950 940 940 930 930per week (millions) 920 920 millions 910 910 900 900 890 890 880 880 00 01 02 03 04 05 06 07 08 09 10 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
    • 26/10/2010Consequences of unemployment Economic and social impact of high unemploymentA selection of news reports 8
    • 26/10/2010 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’ UKs Long Term Jobless Problem Long term unemployment in the UK Millions, seasonally adjusted, using Labour Force Survey data 1.6 1.6 1.4 1.4 1.2 12 1.2 12 Unemployed for up to six monthsPersons (millions) 1.0 1.0 millions 0.8 0.8 Unemployed for over 12 months 0.6 0.6 0.4 0.4 0.2 Unemployed for over 24 months 0.2 0.0 0.0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 Source: Reuters EcoWin 9
    • 26/10/2010 TheYouth Unemployment Crisis Youth unemployment Thousands, people out of work for at least a year aged 18-24275000 275000250000 250000225000 225000200000 200000175000 175000150000 150000125000 125000100000 10000075000 7500050000 5000025000 25000 0 0 92 94 96 98 00 02 04 06 08 10 Source: Reuters EcoWin Unemployment and businesses • Economic Consequences for Businesses – Negative consequences g q • 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
    • 26/10/2010Unemployment and businesses (2) – Some positive consequences • Bigger p gg pool of surplus labour is available – but p 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 g p p y growth - hysteresis y – 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
    • 26/10/2010Macroeconomic costs of unemployment • Consequences for the Economy as a whole – Lost output ( p (real GDP) from p p being out of ) people g 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 p pp y 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
    • 26/10/2010 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 individualsDemand-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
    • 26/10/2010Supply-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
    • 26/10/2010 Regional / local unemployment rates Source: BBC News website Claimant Unemployment for the UK by Gender Unemployment by Gender Per cent of the labour force, source: Office of National Statistics 14 14 13 13 12 12 11 11 10 10 9 9 8 8GBP 7 7 6 6 5 5 4 4 3 3 2 2 1 1 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Claimant count rate - all - % Claimant count rate % : Males Claimant count rate % : Females Source: Reuters EcoWin 15
    • 26/10/2010 Unemploymentunemployment Expectations Expectations ofhigher unemployment in the next year Net % balance of people expecting 80 80 70 70 60 60Net balance 50 50 40 40 30 30 20 20 10 10 05 06 07 08 09 10 Source: Reuters EcoWin Unemployment in the comparisonsthe UK International Euro Area and Percentage, seasonally adjusted, 2011 is a forecast 11 11 10 10 Euro Area Unemployment 9 9Per cent of the labour force 8 8 7 7 UK unemployment rate 6 6 5 5 4 4 99 00 01 02 03 04 05 06 07 08 09 10 11 Source: Reuters EcoWin 16
    • 26/10/2010 Euro Zone Unemployment Comparing Unemployment Rates Unemployment in Spain Per cent of the labour force, standardised measure 20.0 20.0 Spain 17.5 17.5 15.0 15 0 15.0 15 0 12.5 12.5PERCENT UK 10.0 10.0 7.5 7.5 5.0 5.0 2.5 2.5 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 Spain United Kingdom Source: Reuters EcoWin 17
    • 26/10/2010 Spanish Youth Jobs CrisisRecent audio-videos on unemployment 18
    • 26/10/2010 Tutor2u Keep up‐to‐date with economics,  resources, quizzes and  worksheets for your economics  course.  Join our Facebook Fan Page 19
    • 26/10/2010Revision Workshops 20