The document discusses policies to reduce unemployment in three main areas: boosting labor demand, improving labor supply, and addressing structural barriers. It analyzes policies like fiscal stimulus, tax cuts, regional development, and workforce training. It also evaluates the challenges, like long-term unemployment, regional disparities, and weak productivity growth. Reducing unemployment significantly requires stronger economic growth and new industries to generate sufficient jobs.

1. Policies to Reduce Unemployment
AS and A2 Macro Revision – May 2013

2. Defining unemployment
The number of people
able, available and willing
to find work and actively
seeking work – but not
employed

3. Some Key Terms
De-industrialization A decline in the share of national income from manufacturing industries
Discouraged
workers
People often out of work for a long time who give up on job search
Full employment When there enough job vacancies for all the unemployed to take work
Hysteresis A problem caused by high levels of unemployment. An unemployed
worker loses skills and motivation and so finds it hard to re-enter the
labour force
Keynesian
unemployment
Unemployment caused by a lack of aggregate demand – a deficiency of
private sector spending causes output and employment to contract
Labour shedding Cut backs in employment often seen in a slowdown or a recession
Labour shortages When businesses find it difficult to recruit the workers they need
Under-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 use
Unemployment
trap
When the prospect of the loss of unemployment benefits dissuades
those without work from taking a new job

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 four
weeks and be available to start work immediately
– Higher figure than the claimant count partly because
there are limits on who can claim unemployment
benefit

5. Unemployment RatesSpring 2013:
LFS unemployment: 8.1%
Claimant count: 4.7%

6. Flows in the Labour Market
Employed
Labour force Unemployed
Out of the
labour forceTaking
a job
Retiring
Temporarily
leaving
New hires
Recalls
Job-losers
Lay-offs
Quits
Re-entrants
New entrants
Discouraged
workers

7. Main Types of Unemployment
Seasonal
Regular seasonal
changes in
employment / labour
demand e.g. Tourism,
retail, agriculture
Structural
Arises from the
mismatch of skills and
job opportunities as
the pattern of labour
demand changes –
linked to labour
immobility
Frictional
Transitional
unemployment due
to people moving
between jobs
Cyclical
Caused by a fall in
or persistent
weakness of
aggregate demand
leading to a decline
in GDP and jobs

8. Reducing Unemployment - Themes
Boosting human
capital
Improving
flexibility
Lower taxes to
increase labour
demand
Stimulus to
demand from
public and
private sector
Improved
export
competitiveness
Improving work
incentives

9. Cutting Unemployment – Labour
Demand Policies
Macro 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 grants
Competitiveness 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. AD-AS Diagram – Rising GDP
Price
Level
Real National
Output (Y)
LRAS
Y1
SRAS
AD = C+I+G+X-M
Ye
AD2 (higher demand)
Y2
Rising AD causes
expansion of SRAS,
helping to close a
negative output gap
Stimulus policies
helped if there is a
sufficiently large
multiplier effect
causing further
boost to output and
jobs

11. Cutting Unemployment – Labour
Supply Policies
Reducing occupational mobility
• Better funding for and more effective training
• Teaching new skills e.g. Coding for gaming
Improving geographical mobility
• Rise in house-building, more affordable rents
• Active regional policy to create new jobs
Stimulate work incentives
• Higher minimum wage or a living wage
• Reductions in income tax, welfare reforms

12. Long term unemploymentSpring 2013:
Over 1.3 million people in UK have
been out of work for at last one year

13. Regional UnemploymentSpring 2013:
Large spread in regional
unemployment rates –
persistently high in
some areas

14. Unfilled Vacancies in Jobs MarketSpring 2013:
LFS unemployment =
2.5million
There are 500,000
unfilled vacancies
Why are so many jobs
left unfilled?

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 social
and economic problems
• Poverty trap for families on low incomes
• Unemployment trap for those looking for new work

16. Further evaluation points
• Unemployment rate of 8% is lower than many
forecast at the start of the recession
• Employment levels are at record highs although the
employment rate is lower than at the end of the last
upswing
• UK labour market has become more flexible in recent
years
• But there are some deep structural barriers to
getting unemployment down to 5% or less

17. Structural Barriers to Getting
Unemployment Down in the UK
• High levels of long term unemployment
• Pockets of exceptionally high unemployment and low
economic 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 in
educational performance and opportunity
• Weak demand in domestic & overseas markets

18. OECD Data on UK Jobs Market

19. Key Data on the Economy
Indicator (* is a forecast) 2011 2012 2013*
Real GDP (% change) 0.9 -0.1 0.9
Consumer spending (% change) -0.9 1.1 1.6
Capital investment (% change) -2.4 1.8 2.5
Exports of goods and services (% change) 4.5 -0.2 2.4
Unemployment rate - % of labour force 8.1 8.0 8.3
Consumer price inflation - per cent 4.5 2.6 1.9
For unemployment to fall by a considerable amount, the economy needs
to achieve stronger growth and for new businesses and industries to
scale up and generate sufficient new jobs

20. Causes of Weak Growth / Recovery
Domestic demand-side factors:
Weak consumer demand, low business capital
investment, cuts in real level of government spending
Domestic supply-side factors:
Low supply of bank credit, falling productivity, high
energy prices
External demand-side factors:
Weak growth in key overseas markets, hitting UK export
sales e.g. Euro Area, too few exports to Asia Rising region
External supply-side factors:
Rising world food and energy prices, keeping UK inflation
high and squeezing real disposable incomes
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21. Implications of unemployment for business
High unemployment
• Lower consumer spending =
lower demand for income-
elastic products
• Demand for inferior goods
(lower price, quality) may
increase
• Greater supply of labour –
potentially lower wage/salary
levels
• Danger of lost skills for
industries as a whole
Low unemployment
• Consumers have more
income = higher demand for
income elastic goods
• Labour market “tightens” –
increased upward pressure
on wages / salaries
• Harder to recruit or expand
without offering better
worker packages

22. Possible business responses to unemployment
Low Unemployment High Unemployment
A chance to expand capacity to take
advantage of higher demand
Reduced production capacity if
demand falls
Adjust remuneration packages to
remain competitive to attract staff
Headcount reductions (redundancy,
recruitment freeze)
Invest in training to meet skills gap and
help retain key staff
Reduce working capital (particularly
inventories)
Offer more flexible working options to
attract larger labour pool
Postpone or cancel investment
projects
Consider outsourcing to access
specialist skills where recruitment is
tough
Potentially diversify into new markets

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