Policies to Reduce Unemployment

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Policies to Reduce Unemployment

  1. 1. Policies to Reduce UnemploymentAS and A2 Macro Revision – May 2013
  2. 2. Defining unemploymentThe number of peopleable, available and willingto find work and activelyseeking work – but notemployed
  3. 3. Some Key TermsDe-industrialization A decline in the share of national income from manufacturing industriesDiscouragedworkersPeople often out of work for a long time who give up on job searchFull employment When there enough job vacancies for all the unemployed to take workHysteresis A problem caused by high levels of unemployment. An unemployedworker loses skills and motivation and so finds it hard to re-enter thelabour forceKeynesianunemploymentUnemployment caused by a lack of aggregate demand – a deficiency ofprivate sector spending causes output and employment to contractLabour shedding Cut backs in employment often seen in a slowdown or a recessionLabour shortages When businesses find it difficult to recruit the workers they needUnder-employment When people want to work full time but find that they can only get part-time work – the result is a loss of hours that the economy can useUnemploymenttrapWhen the prospect of the loss of unemployment benefits dissuadesthose without work from taking a new job
  4. 4. Two measures of unemployment• Claimant Count Measure– The number of people claiming the Jobseekers’Allowance– Monthly head count of unemployed• Labour Force Survey– An internationally agreed measure of unemployment– Must have actively sought work in the previous fourweeks and be available to start work immediately– Higher figure than the claimant count partly becausethere are limits on who can claim unemploymentbenefit
  5. 5. Unemployment RatesSpring 2013:LFS unemployment: 8.1%Claimant count: 4.7%
  6. 6. Flows in the Labour MarketEmployedLabour force UnemployedOut of thelabour forceTakinga jobRetiringTemporarilyleavingNew hiresRecallsJob-losersLay-offsQuitsRe-entrantsNew entrantsDiscouragedworkers
  7. 7. Main Types of UnemploymentSeasonalRegular seasonalchanges inemployment / labourdemand e.g. Tourism,retail, agricultureStructuralArises from themismatch of skills andjob opportunities asthe pattern of labourdemand changes –linked to labourimmobilityFrictionalTransitionalunemployment dueto people movingbetween jobsCyclicalCaused by a fall inor persistentweakness ofaggregate demandleading to a declinein GDP and jobs
  8. 8. Reducing Unemployment - ThemesBoosting humancapitalImprovingflexibilityLower taxes toincrease labourdemandStimulus todemand frompublic andprivate sectorImprovedexportcompetitivenessImproving workincentives
  9. 9. Cutting Unemployment – LabourDemand PoliciesMacro Stimulus Policies (+ Multiplier Effects)• Low interest rates and policies to increase business lending• Depreciation in the exchange rate (to help exports)• Infrastructure investment projects (fiscal policy)Cutting the cost of employing workers• Reductions in national insurance contributions (tax)• Financial support for apprenticeship programmes• Extra funding for regional policy – business grantsCompetitiveness Policies• Reductions in corporation tax (to increase investment)• Tax incentives for research / innovation spending• Enterprise policies to lift the rate of new business start-ups
  10. 10. AD-AS Diagram – Rising GDPPriceLevelReal NationalOutput (Y)LRASY1SRASAD = C+I+G+X-MYeAD2 (higher demand)Y2Rising AD causesexpansion of SRAS,helping to close anegative output gapStimulus policieshelped if there is asufficiently largemultiplier effectcausing furtherboost to output andjobs
  11. 11. Cutting Unemployment – LabourSupply PoliciesReducing occupational mobility• Better funding for and more effective training• Teaching new skills e.g. Coding for gamingImproving geographical mobility• Rise in house-building, more affordable rents• Active regional policy to create new jobsStimulate work incentives• Higher minimum wage or a living wage• Reductions in income tax, welfare reforms
  12. 12. Long term unemploymentSpring 2013:Over 1.3 million people in UK havebeen out of work for at last one year
  13. 13. Regional UnemploymentSpring 2013:Large spread in regionalunemployment rates –persistently high insome areas
  14. 14. Unfilled Vacancies in Jobs MarketSpring 2013:LFS unemployment =2.5millionThere are 500,000unfilled vacanciesWhy are so many jobsleft unfilled?
  15. 15. Evaluation Points:• Fiscal and Monetary Policy policies:– Limits to effectiveness of policies in current times• E.g. Slow growth despite low interest rates• Competitive exchange rate but exports remain flat– Impact of Coalition fiscal austerity• Deep cuts in public sector jobs• Cancellation / cutting of infrastructure spending• Supply-side policies:– Take a long time to have a major impact– Jobs market is always changing – some deep-rooted socialand economic problems• Poverty trap for families on low incomes• Unemployment trap for those looking for new work
  16. 16. Further evaluation points• Unemployment rate of 8% is lower than manyforecast at the start of the recession• Employment levels are at record highs although theemployment rate is lower than at the end of the lastupswing• UK labour market has become more flexible in recentyears• But there are some deep structural barriers togetting unemployment down to 5% or less
  17. 17. Structural Barriers to GettingUnemployment Down in the UK• High levels of long term unemployment• Pockets of exceptionally high unemployment and loweconomic activity rates, high youth unemployment• Persistent productivity gap with leading OECD countries• Disincentive effects of– Complex welfare and tax system– Unaffordable housing sector– Many low-paid jobs that keep families in relative poverty• High rates of public sector dependency in some areas• Many people are under-employed, stuck in part-time jobs• Skills shortages, creaking infrastructure, huge variations ineducational performance and opportunity• Weak demand in domestic & overseas markets
  18. 18. OECD Data on UK Jobs Market
  19. 19. Key Data on the EconomyIndicator (* is a forecast) 2011 2012 2013*Real GDP (% change) 0.9 -0.1 0.9Consumer spending (% change) -0.9 1.1 1.6Capital investment (% change) -2.4 1.8 2.5Exports of goods and services (% change) 4.5 -0.2 2.4Unemployment rate - % of labour force 8.1 8.0 8.3Consumer price inflation - per cent 4.5 2.6 1.9For unemployment to fall by a considerable amount, the economy needsto achieve stronger growth and for new businesses and industries toscale up and generate sufficient new jobs
  20. 20. Causes of Weak Growth / RecoveryDomestic demand-side factors:Weak consumer demand, low business capitalinvestment, cuts in real level of government spendingDomestic supply-side factors:Low supply of bank credit, falling productivity, highenergy pricesExternal demand-side factors:Weak growth in key overseas markets, hitting UK exportsales e.g. Euro Area, too few exports to Asia Rising regionExternal supply-side factors:Rising world food and energy prices, keeping UK inflationhigh and squeezing real disposable incomes2:32:17 PM
  21. 21. Implications of unemployment for businessHigh unemployment• Lower consumer spending =lower demand for income-elastic products• Demand for inferior goods(lower price, quality) mayincrease• Greater supply of labour –potentially lower wage/salarylevels• Danger of lost skills forindustries as a wholeLow unemployment• Consumers have moreincome = higher demand forincome elastic goods• Labour market “tightens” –increased upward pressureon wages / salaries• Harder to recruit or expandwithout offering betterworker packages
  22. 22. Possible business responses to unemploymentLow Unemployment High UnemploymentA chance to expand capacity to takeadvantage of higher demandReduced production capacity ifdemand fallsAdjust remuneration packages toremain competitive to attract staffHeadcount reductions (redundancy,recruitment freeze)Invest in training to meet skills gap andhelp retain key staffReduce working capital (particularlyinventories)Offer more flexible working options toattract larger labour poolPostpone or cancel investmentprojectsConsider outsourcing to accessspecialist skills where recruitment istoughPotentially diversify into new markets
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