The Labour Market

The labour market is the real or virtual meeting point, within an economy or market place, where people selling their labour (employees) negotiate and may reach an agreement with those who buy it (employers). Labour markets provide the structure through which workers and employers interact about jobs, working conditions and pay. Other actors are the institutions and processes of collective bargaining, including the roles played by employers organisations and trade unions. The labour market concept also covers issues such as employment, unemployment, participation rates and wages.

Unemployment
Unemployment (or joblessness) occurs when people are without work and actively seeking work. The unemployment rate is a measure of the prevalence of unemployment and it is calculated as a percentage by dividing the number of unemployed individuals by all individuals currently in the labour force. During periods of recession, an economy usually experiences a relatively high unemployment rate. According to the International Labour Organization report, more than 197 million people globally are out of work or 6% of the world's workforce were without a job in 2012.

An unemployed person is defined by Eurostat (the statistical office of the European Union, based in Luxembourg; it publishes official, harmonized statistics on the European Union and the euro area, offering a comparable, reliable and objective portrayal of Europe's society and economy), according to the guidelines of the International Labour Organization, as:

someone aged 15 to 74 (in Italy, Spain, the United Kingdom, Iceland, Norway: 16 to 74 years); without work during the reference week; available to start work within the next two weeks (or has already found a job to start within the next three months); actively having sought employment at some time during the last four weeks.

The unemployment rate is the number of people unemployed as a percentage of the labour force.

There remains considerable theoretical debate regarding the causes, consequences and solutions for unemployment. Classical economics, New classical economics, and the Austrian School of economics argue that market mechanisms are reliable means of resolving unemployment. These theories argue against interventions imposed on the labor market from the outside, such as unionization, bureaucratic work rules, minimum wage laws, taxes, and other regulations that they claim discourage the hiring of workers. Keynesian economics emphasizes the cyclical nature of unemployment and recommends government interventions in the economy that it claims will reduce unemployment during recessions. This theory focuses on recurrent shocks that suddenly reduce aggregate demand for goods and services and thus reduce demand for workers. Keynesian models recommend government interventions designed to increase demand for workers; these can include financial stimuli, publicly funded job creation, and expansionist monetary policies. Keynes believed that the root cause of unemployment is the desire of investors to receive more money rather than produce more products, which is not possible without public bodies producing new money.

Types of Unemployment
There are several types of unemployment, each one defined in terms of cause and severity. Economists classify unemployment into four types according to what caused the unemployment. If we assume the goal is full employment (never mind how we might define or measure full right now theres mischief there), then what were really saying is that our goal is for the economy to create an appropriate a job for every willing and able worker. Then, if we find that the economy is producing some unemployment, we can and should ask ourselves: why hasnt the economy produced an appropriate job for each worker? There are three main types of unemployment: structural, frictional and cyclical. The first two make up the natural unemployment rate, while the third rises when demand falls, usually during a recession. Some economists include as many as five types of unemployment, such as seasonal and classical.

1. Frictional: Frictional unemployment is when workers leave their old jobs but haven't yet found new ones. Most of the time workers leave voluntarily, either because they need to move, or they've saved up enough money to allow them to look for a better job. Frictional unemployment also occurs when students are looking for that first job, or when mothers are returning to the work force. Frictional unemployment also occurs when workers are fired or, in some cases, laid off due to business-specific reasons, such as a plant closure. Frictional unemployment is short-term and a natural part of the job search process. In fact, frictional unemployment is good for the economy, as it allows workers to move to jobs where they can be more productive.

2. Cyclical: Cyclical unemployment is not part of the natural unemployment rate. It's strictly caused by the contraction phase of the business cycle. Demand for goods and services fall dramatically, forcing businesses to lay off large numbers of workers to cut costs. Cyclical unemployment can usually create more unemployment, because the laid off workers now have less money to buy the things they need, further lowering demand. Government intervention, in the form of expansive monetary policy and even fiscal policy, is usually required to stop the downward spiral. After the stock market crash of 1929, the government did not step in right away. This led to the Great Depression, which lasted 10 years and led to a 25% unemployment rate.

3. Structural: Structural unemployment is when shifts occur in the economy that create a miss-match between the skills workers have and the skills needed by employers. An example is when an industry fires machinery works and replaces them with robots. The workers need to learn how to manage the robots that replaced them. Those that don't must be retrained for other jobs, or face long-term structural unemployment. A long recession can create structural unemployment. If workers are unemployed for too long, their skills can become outdated. Unless they are willing and able to take a lower-level, unskilled job, they may stay unemployed even when the economy recovers. In this way, structural unemployment can lead to a higher rate of natural unemployment..

4. Seasonal: Some sources include seasonal unemployment as a fourth type of unemployment. It is part of natural unemployment. Like its name says, seasonal unemployment results from regular changes in the season. Workers who may be affected by seasonal unemployment include resort workers, ski instructors and ice cream vendors. It could also include people who harvest crops. Construction workers are laid off in the winter, in most parts of the country. School employees can also be considered seasonal workers.

5. Classical unemployment: Classical unemployment, also known as real wage unemployment or induced unemployment, is when wages are higher than the laws of supply and demand would normally dictate. It usually occurs in three situations: 1. Unions negotiate higher salaries and benefits. 2. Long-term contracts set a wage that may wind up being too high if there is a recession and everyone else's salary falls. 3. The government sets a minimum wage. 3

The natural rate of unemployment

This is a term associated with new Classical and monetarist economists. It is defined as the rate of unemployment that still exists when the labour market it in equilibrium, and includes seasonal, frictional and voluntary unemployment. There will always be some natural level of unemployment, even in a healthy economy. The lowest level of unemployment was 2.5%, right after the Korean War. In fact, this was an economic bubble that soon led to a recession. That's why some level of natural unemployment, usually around 4%, is actually a healthy indicator. Natural unemployment is caused by two of the three main types of unemployment: frictional and structural.

Recent developments in unemployment at a European and Member State level

Eurostat estimates that 26.654 million men and women in the EU-28, of whom 19.298 million were in the euro area (EA-17), were unemployed in October 2013. Compared with September 2013, the number of persons unemployed decreased by 75 000 in the EU-28 and by 61 000 in the euro area. Compared with October 2012, unemployment rose by 512 000 in the EU-28 and by 615 000 in the euro area. The euro area seasonally-adjusted unemployment rate was 12.1 % in October 2013, down from 12.2 % in September; it was 11.7 % in October 2012. The EU-28 unemployment rate was 10.9 % in October 2013, stable compared with September; it was 10.7 % in October 2012. Among the Member States, the lowest unemployment rates were recorded in Austria (4.8 %), Germany (5.2 %) and Luxembourg (5.9 %), and the highest rates in Greece (27.3 % in August 2013) and Spain (26.7 %). Compared with a year ago, the unemployment rate increased in half of the Member States and fell in half. The highest increases were registered in Cyprus (13.2 % to 17.0 %), Greece (25.5 % to 27.3 % between August 2012 and August 2013) and the Netherlands (5.5 % to 7.0 %. The largest decreases were observed in Latvia (14.0 % to 11.9 % between the third quarters of 2012 and 2013), Ireland (14.5 % to 12.6 %) and Lithuania (13.0 % to 11.1 %). In October 2013, the unemployment rate in the United States was 7.3 %, up from 7.2 % in September 2013 and down from 7.9 % in October 2012.

In October 2013, 5.657 million young persons (under 25) were unemployed in the EU28, of whom 3.577 million were in the euro area. Compared with October 2012, youth unemployment decreased by 29 000 in the EU-28, but increased by 15 000 in the euro area. In October 2013, the youth unemployment rate was 23.7 % in the EU-28 and 24.4 % in the euro area, compared with 23.3 % and 23.7 % respectively in October 2012. In October 2013 the lowest rates were observed in Germany (7.8 %), Austria (9.4 %) and the Netherlands (11.6 %), and the highest in Greece (58.0 % in August 2013), Spain (57.4 %) and Croatia (52.4 % in the third quarter 2013).

Unemployment trends
At the beginning of 2000, about 20 million persons were unemployed in the EU-27, corresponding to 9 % of the total labour force. The unemployment trend at that moment was downwards. In the first quarter of 2001 the number of unemployment persons had dropped to just above 19 million and the unemployment rate to 8.5 %. A long period of increasing unemployment followed. At the end of 2004 the number of jobseekers available for work reached 21.3 million, while the unemployment rate was at 9.2 %. At the beginning of 2005 a period of steadily declining unemployment started, lasting until the first quarter 2008. At that time, EU-27 unemployment hit a low of 16 million persons (equivalent to a rate of 6.8 %) before rising sharply in the wake of the economic crisis. Between the second quarter 2008 and mid-2010 the unemployment level went up by more than 7 million, taking the rate up to 9.7 %, at that time the highest value recorded since the start of the series in 2000. The decline of both the unemployment level and rate in the following three quarters was a deceptive sign of the end of the crisis and of a stable improvement of the labour market conditions in the EU-27. As a matter of facts, since the second quarter 2011 and until the end of 2012 unemployment has steadily and markedly increased taking unemployment to the record level of nearly 26 million, corresponding to a record rate of 10.7 %. The unemployment rate in the euro area (EA-17) followed roughly the same trend as in the EU-27. However, between 2000 and the middle of 2004 the unemployment rate in the euro area was below that recorded in the EU-27. This pattern was subsequently reversed as unemployment declined more rapidly in the Member States which do not yet have the euro between 2005 and the beginning of 2008. Like in the EU-27, during the economic crisis unemployment increased at a considerable pace, with the exception of the period between mid-2010 and mid-2011 where it temporarily declined. At the end of 2012 the unemployment rate for the EA-17 hit 11.8 %, the highest rate since 1995.

In 2000, the unemployment rate in the United States was around 4 %, considerably lower than in the EU. It remained much lower until early 2008, when unemployment started to increase rapidly. By the beginning of 2009 the unemployment rate in the United States had reached the same level as in the EU-27, and stayed above the EU-27 rate until the beginning of 2010. Since then the US unemployment rate, while remaining relatively high, has taken a downwards path which has taken it to 7.8 % at the end of 2012. In Japan, between 2000 and 2012, unemployment rates were much lower than in the EU, ranging between 3.7 % in the third quarter 2007 and 5.4 % in the third quarter 2009, when the rate started declining until reaching 4.2 % at the end of 2012.

Youth unemployment trends

Youth unemployment rates are generally much higher than unemployment rates for all ages. Until the end of 2008, the youth unemployment rate in the EU-27 has been around twice as high as the rate for the total population, reaching its minimum value (18.1 %) in the first quarter 2008. The economic crisis, however, seems to have hit the young more than other age groups. From the beginning of 2009, the gap between the youth and the total unemployment rates has increased, so that at the end of 2012 the youth unemployment rate was 2.6 times the total rate. The EU-27 youth unemployment rate was systematically higher than in the euro area between 2000 and mid-2007. Since then and until the third quarter 2010 these two rates have been very close. Afterwards the indicator has moved more sharply in the EA-17 than in the EU27, first downwards, until mid-2011, then upwards until the end of 2012. In the middle of 2012 the euro area youth unemployment rate has overtaken the EU-27 rate, and the gap has increased until the end of the year. High youth unemployment rates do reflect the difficulties faced by young people in finding jobs. However, this does not necessarily mean that the group of unemployed persons aged between 15 and 24 is large, as many young people are studying full-time and are therefore neither working nor looking for a job (so they are not part of the labour force which is used as the denominator for calculating the unemployment rate). For this reason, youth unemployment ratios are calculated as well, according to a somewhat different concept: the unemployment ratio calculates the share of unemployed for the whole population. Youth unemployment ratios in the EU are much lower than youth unemployment rates; they have however also risen since 2008 due to the effects of the crisis on the labour market.

Male and female unemployment trends

Historically, women have been more affected by unemployment than men. In 2000, the unemployment rate for women in the EU-27 was around 10 %, while the rate for men was below 8 %. By the end of 2002, this gender gap had narrowed to around 1.5 percentage points and between 2002 and mid-2007 this gap remained more or less constant. Since the first quarter of 2008, when they were at their lowest levels respectively at 6.3 % and 7.4 %, the male and female unemployment rates in the EU-27 have converged, and by the second quarter of 2009 the male unemployment rate was higher. The decline of the mens rate during 2010 and the first half of 2011 and the corresponding stability of the womens rate over the same period have brought the male rate below the female one once again. Since then the two rates have risen at the same pace, remaining very close and reaching at the end of 2012 10.7 % for men and 10.8 % for women.

Unemployment rates EU-28, EA-17, US and Japan, seasonally adjusted, January 2000 - October 2013

Unemployed persons, in millions, seasonally adjusted, EU-28 and EA-17, January 2000 - October 2013

Youth unemployment rates, EU-28 and EA-17, seasonally adjusted, January 2000 October 2013

Unemployment rates by gender, EU, seasonally adjusted, January 2000 - October 2013

Preventing and fighting unemployment

Societies try a number of different measures to get as many people as possible into work, and various societies have experienced close to full employment for extended periods, particularly during the Post-World War II economic expansion. The United Kingdom in the 1950s and 60s averaged 1.6% unemployment, while in Australia the 1945 White Paper on Full Employment in Australia established a government policy of full employment, which lasted until the 1970s when the government ran out of money. However, mainstream economic discussions of full employment since the 1970s suggest that attempts to reduce the level of unemployment below the natural rate of unemployment will fail, resulting only in less output and more inflation.

Demand side solutions

Many countries aid the unemployed through social welfare programs. These unemployment benefits include unemployment insurance, unemployment compensation, welfare and subsidies to aid in retraining. The main goal of these programs is to alleviate shortterm hardships and, more importantly, to allow workers more time to search for a job. A direct demand-side solution to unemployment is government-funded employment of the able-bodied poor. This was notably implemented in Britain from the 17th century until 1948 in the institution of the workhouse, which provided jobs for the unemployed with harsh conditions and poor wages to dissuade their use. A modern alternative is a job guarantee, where the government guarantees work at a living wage. Temporary measures can include public works programs such as the Works Progress Administration. Government-funded employment is not widely advocated as a solution to unemployment, except in times of crisis; this is attributed to the public sector jobs' existence depending directly on the tax receipts from private sector employment. In the U.S., the unemployment insurance allowance one receives is based solely on previous income (not time worked, family size, etc.) and usually compensates for one-third of one's previous income. To qualify, one must reside in their respective state for at least a year and, of course, work. The system was established by the Social Security Act of 1935. Although 90% of citizens are covered by unemployment insurance, less than 40% apply for and receive benefits. However, the number applying for and receiving benefits increases during recessions. In cases of highly seasonal industries the system provides income to workers during the off seasons, thus encouraging them to stay attached to the industry. According to classical economic theory, markets reach equilibrium where supply equals demand; everyone who wants to sell at the market price can. Those who do not want to sell at this price do not; in the labour market this is classical unemployment. Increases in the demand for labour will move the economy along the demand curve, increasing wages and employment. The demand for labour in an economy is derived from the demand for goods and services. As such, if the demand for goods and services in the economy increases, the demand for labour will increase, increasing employment and wages. Monetary policy and fiscal policy can both be used to increase short-term growth in the economy, increasing the demand for labour and decreasing unemployment. However, the labour market is not 100% efficient: It does not clear, though it may be more efficient than bureaucracy. Some argue that minimum wages and union activity keep wages from falling, which means too many people want to sell their labour at the going price but cannot. This assumes perfect competition exists in the labour market, specifically that no single entity is large enough to affect wage levels.

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Advocates of supply-side policies believe those policies can solve this by making the labour market more flexible. These include removing the minimum wage and reducing the power of unions. Supply-siders argue the reforms increase long-term growth. This increased supply of goods and services requires more workers, increasing employment. It is argued that supply-side policies, which include cutting taxes on businesses and reducing regulation, create jobs and reduce unemployment. Other supply-side policies include education to make workers more attractive to employers. The solution for unemployment is to create new jobs. Usually, a healthy economic growth rate of 2-3% is enough to create the 150,000 new jobs needed to keep unemployment from rising. When unemployment creeps above 6-7% and stays there, it means the economy isn't strong enough to create sufficient new jobs without help. That's when the government is expected to step in and provide solutions. The solution used first to address sustained high unemployment is monetary stimulus from the Federal Reserve. Expansive monetary policy is powerful, quick and usually effective. Lower interest rates allow families to borrow more cheaply to buy what they need, like cars, homes and consumer electronics. This stimulates enough demand to put the economy back on track. Low interest rates also allow businesses to borrow for less, giving them the capital to hire new workers to meet rising demand.

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