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Employment 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
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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 10
per 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
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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
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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 down
Graduate unemployment in the UK
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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
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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 force
Percentage 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 1.5
Person (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
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UK - Total actual weekly hours worked
Hours worked
Million hours per week
950 950
940 940
930 930
per 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
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Consequences of unemployment
Economic and social impact of high unemployment
A selection of news reports
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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’
UK's 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 months
Persons (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
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TheYouth Unemployment Crisis
Youth unemployment
Thousands, people out of work for at least a year aged 18-24
275000 275000
250000 250000
225000 225000
200000 200000
175000 175000
150000 150000
125000 125000
100000 100000
75000 75000
50000 50000
25000 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
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11. 26/10/2010
Unemployment 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
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Macroeconomic 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.”
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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 individuals
Demand-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
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Supply-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
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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 8
GBP
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
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Unemploymentunemployment
Expectations
Expectations ofhigher unemployment in the next year
Net % balance of people expecting
80 80
70 70
60 60
Net 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 9
Per 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
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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 12.5
PERCENT
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
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Spanish Youth Jobs Crisis
Recent audio-videos on unemployment
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20. 26/10/2010
Revision Workshops
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