7. Flows in the Labour Market Employed Labour force Unemployed Out of the labour force Taking a job Retiring Temporarily leaving New hires Recalls Job-losers Lay-offs Quits Re-entrants New entrants Discouraged workers
18. Cyclical unemployment using AD-AS General Price Level Real National Income AD1 SRAS P1 Y1 LRAS Yfc AD2 Y2 P2 Real Wage Level LD2 W1 E2 YFC2 E1 Demand for Labour W2 Employment of Labour Supply of Labour
32. Falling unemployment The UK heads towards full-employment Growth of service sector has created many new jobs Foreign direct investment New Deal – helping to lower long-term unemployment Flexible labour market – easier to create new jobs Increased spending on education Sustained economic growth since 1992
Editor's Notes
Officially, the unemployed are people who are registered as able , available and willing to work at the going wage rate but who cannot find work despite an active search for work. There is a long-running debate about the accuracy of the unemployment figures in the UK with many economists claiming that the true scale of unemployment is well above the official published statistics.
Officially, the unemployed are people who are registered as able , available and willing to work at the going wage rate but who cannot find work despite an active search for work. There is a long-running debate about the accuracy of the unemployment figures in the UK with many economists claiming that the true scale of unemployment is well above the official published statistics.
Officially, the unemployed are people who are registered as able , available and willing to work at the going wage rate but who cannot find work despite an active search for work. There is a long-running debate about the accuracy of the unemployment figures in the UK with many economists claiming that the true scale of unemployment is well above the official published statistics.
The labour force survey measure of unemployment is higher than the claimant count (usually by about 500,000 people) because the survey includes more people who are actively searching for work (and available to take a job if they find one) but who do not meet the strict criteria for claiming the Job Seeker’s Allowance.
Since the mid-1990s, unemployment in the UK has been below the average for the European Union. High levels of unemployment within the EU are posing serious threats to economic and social cohesion within the economic union. EU countries now have explicit targets for raising employment – but many of the problems appear to be structural in nature and may take several years to resolve.
As one might expect, economists disagree on the main causes of unemployment. Some argue that we need to make a distinction between voluntary and involuntary unemployment . A worker is described as voluntarily unemployed if, at the given level of wages available, he or she does not yet wish to accept a paid job. Involuntary unemployment exists when someone would be prepared to work at the going wage rate, but for one reason or another, they are unable to find work.
When workers calculate that because of lost welfare benefits and extra direct taxes they are no better off working than if they remain outside the employed labour force – thus unemployment can result from the problem of disincentives . Lower income tax rates and benefit reforms might be a solution to this – thereby boosting the supply of labour available to work in the economy
When there is a recession we see a rising level of unemployment because of plant closures , business failures and the inevitable increase in worker lay-offs and permanent redundancies . This is due to a fall in demand leading to a contraction in output across many industries. A downturn in demand is often the stimulus for businesses to rationalise their operations by cutting employment in order to control costs and restore some of their lost profitability.
During the last UK recession (1990-1992) employment fell from nearly 28.8 million to just under 27 million. And the unemployment rate measured by the Claimant Count jumped from 5.6% in 1990 to 9.7% in 1993. The deeper is the downturn, the higher the scale of cyclical unemployment
A growing economy creates jobs for people entering the labour market for the first time. And, it provides employment opportunities for people unemployed and looking for work. In the last two recessions (1980-81 and 1990-92), the number of people in work fell sharply. But a period of sustained economic growth since 1993 has led to a significant increase in employment. Only certain types of unemployment are affected by changes in actual GDP (e.g. cyclical unemployment) Frictional unemployment is unaffected and structural unemployment is unlikely to decline even if there is an expansion of national output.
Persistent unemployment in the economy can be taken as a sign of a failure of the labour market to allocate labour resources efficiently . Long-term unemployment damages individuals because they lose their self-respect and employers lose interest in them. Employers do not consider the long-term unemployed to be probable candidates for vacancies. It is therefore possible to have a large number of vacancies coexisting with high unemployment if many of the jobless have been out of work for a long time.
The costs of unemployment include lost output (output within PPF) lost government revenue and increased expenditure on benefits. Unemployment has important social costs eg unequal income and diminished social cohesion; loss of status, alienation and frustration. The effects of unemployment will depend on its rate and duration – long term unemployment can be very costly and difficult to reduce
Demand side approaches focus on raising the aggregate demand for goods and services. Because labour as a factor input has a derived demand, if production and investment is increasing, so too there should be a rise in the demand for new workers. The multiplier effects of an initial boost to aggregate demand may cause a higher final increase in equilibrium national income.
Because the economy will always be subject to cyclical fluctuations, it is impossible to keep unemployment at very low levels on a permanent basis. In a dynamic economy there will always be industries where output and employment rising, providing new employment opportunities, but also sectors in decline where employment is falling. The labour market needs to be flexible enough to match people out of work with the skills required by newly created jobs. These supply-side policies seek to provide the economy with sufficient labour market flexibility
Unemployment adds to the flow of factor incomes for households and this has a direct effect on the circular flow of income and spending in the economy
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