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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 governments preferred measure The basis for cross-country comparisons

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Unemployment in thein UK Economy Unemployment the UK

Unemployed people aged 16-59 (women) / 64 (men), seasonally adjusted

13 12 11 10 9 8 7 6 5 4 3 2 1 0 90

Labour Force Survey

Claimant Count

13 12 11 10 9 8 7 6 5 4 3 2 1 0 06 08 10
Source: Labour Force Statistics

per cent of the labour force

92

94

96

98

00

02

04

Changes in the world of work

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Flows in the Labour Market

Employed Labour force

New hires R Recalls ll Job-losers Lay-offs Quits Unemployed

Retiring Temporarily l leaving i Taking a job Out of the labour force

Discouraged workers Re-entrants New entrants

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 long term unemployment 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 affects unemployment Growth and unemployment in the UK

Annual % change in UK GDP at constant prices,% of labour force unemployed

10.0 7.5
Percentage growth of GDP Unemployment (% of the labour force, LFS)

10.0 7.5
Per cent of the labour force millions

5.0 2.5 0.0

Real GDP (Annual % Change)

5.0 2.5 0.0 -2.5 -5.0 -7.5 02 03 04 05 06 07 08 09 10

-2.5 -5.0 -7.5

Source: UK Statistics Commission

The Short recession leaves many out of work term unemployment

Annual % change in GDP and short term unemployment 1.5
Person n (millions)

1.5 1.3
O t of Out f work kf for l less than th 6 months th

1.3 1.1 0.9 4 2

1.1 0.9 4 2 0

Pe ercent

0
Annual growth of real GDP

-2 2 -4 -6 Q1 Q3 05 Q1 Q3 06 Q1 Q3 07 Q1 Q3 08 Q1 Q3 09 Q1 Q3 10

-2 2 -4 -6

Source: Reuters EcoWin

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UK - Total actual weekly hours worked Hours worked

Million hours per week 950 940 930
per week (millions)

950 940 930

millions

920 910 900 890 880 00 01 02 03 04 05 06 07 08 09 10

920 910 900 890 880

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 1.4 12 1.2
Unemployed for up to six months
Persons (millions)

1.6 1.4 12 1.2 1.0 0.8

Unemployed for over 12 months
millions

1.0 0.8 0.6 0.4 0.2 0.0 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10

Unemployed for over 24 months

0.6 0.4 0.2 0.0

Source: Reuters EcoWin

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Thousands, people out of work for at least a year aged 18-24 275000 250000 225000 200000 175000 150000 125000 100000 75000 50000 25000 0 92 94 96 98 00 02 04 06 08 10
Source: Reuters EcoWin

TheYouth Youth Unemployment Crisis unemployment

275000 250000 225000 200000 175000 150000 125000 100000 75000 50000 25000 0

Unemployment and businesses

Economic Consequences for Businesses
Negative g consequences 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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Unemployment and businesses (2)

Some positive consequences
Bigger gg p pool of surplus p labour is available but 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 p in employment p y hits trend g 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 people p being g out of 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 pp y p 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

Unemployment by Gender
Per cent of the labour force, source: Office of National Statistics

Claimant Unemployment for the UK by Gender

14 13 12 11 10 9
GBP

14 13 12 11 10 9 8 7 6 5 4 3 2 1

8 7 6 5 4 3 2 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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Unemployment Expectations Expectations of unemployment Net % balance of people expecting higher unemployment in the next year
80 70 60
Net balance

80 70 60 50 40 30 20 10 05 06 07 08 09 10
Source: Reuters EcoWin

50 40 30 20 10

Unemployment in the comparisons Euro Area and the UK International

Percentage, seasonally adjusted, 2011 is a forecast 11 10
Euro Area Unemployment Per cent of the labour force

11 10 9 8 7
UK unemployment rate

9 8 7 6 5 4 99 00 01 02 03 04 05 06 07 08 09 10 11

6 5 4

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 Spain 17.5 17.5 20.0

15 0 15.0

15 0 15.0

PERCENT

12.5 UK

12.5

10.0

10.0

7.5

7.5

5.0

5.0

2.5 80 82 Spain 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

2.5

United Kingdom
Source: Reuters EcoWin

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Spanish Youth Jobs Crisis

Recent audio-videos on unemployment

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