Employment & Unemployment

Employment & Unemployment
Syllabus Requirement: Employment/unemployment: Define, Trends in (inc international comp) Explore causes Explore consequences Understand objectives of government economic policy Questions for Exploration: What is unemployment? How can we measure unemployment? Why is unemployment an economic issue? What causes people to be unemployed? What can be done to reduce unemployment? What have the trends in unemployment been over the last 20 years? How successful have polices to reduce unemployment been?

Unemployment in Britain: Use this link to build up a picture of unemployment in the UK over previous years Make a few key notes on: What is happening to unemployment overall Which regions have had high or low unemployment throughout Which regions have changed most Try to find out which groups of people are most affected by current unemployment.

Reading Refs: Smith, Pgs & Grant, Pgs & Objectives: Be clear about the extent of your understanding of the basic definitions: Labour Market Labour Supply Working Age Population Labour Force Unemployed Understand the meaning of other key terms in relation to unemployment Understand there are different causes of unemployment leading to different types of unemployment

Work in Pairs. Use your knowledge of key terms you know to suggest what the following terms mean: Labour Market Labour Supply Working Age Population Labour Force Participation Rate Unemployment Unemployment Rate Economically Active Economically inactive Seasonal adjustment Voluntary Unemployment Involuntary Unemployment

Work in Pairs. Use your knowledge of key terms you know to suggest what the following terms mean: Labour Market: Is made up of firms willing to employ workers and labour seeking employment. The demand for labour by firms is downward sloping with respect to wage (price of labour), while the supply of labour by households is upward sloping with respect to wage. Labour Supply: Availability of suitable human resources, both physical and mental, either in total or for in a particular labour market. The supply of workers with the specific skills or qualifications needed for particular types of work is affected by a country's education and training systems, and any past restrictions on entry to particular occupations

Population of Working Age: Everyone between 16-60/65 who is eligible and willing to work Labour Force: The potential suppliers of labour, who are participating workers or seeking employment People not counted include students, retired people, stay-at-home parents, people in prisons or similar institutions, as well as people not actively seeking work Participation Rate The proportion of the Population of Working Age who form the Labour Force – ie decide to seek work, rather than staying at home or dropping out. This is affected by rates of pay, the availability of jobs, and the rules of the social security system, which determine how much income is available without working

is measured through the Labour Force Survey (an internationally agreed definition recommended by the International Labour Organisation - ILO) Unemployed people are those: without a job, want a job, have actively sought work in the last four weeks and are available to start work in the next two weeks or; out of work, have found a job and are waiting to start it in the next two weeks. Unemployment Rate: The headline unemployment rate is calculated by dividing the unemployment level for those aged 16 and over by the total number of economically active people aged 16 and over. Economically active is defined as those in employment plus those who are unemployed. Rate of Unemployment (%) = Number of Unemployed/labour force x 100

Some further definitions: Economically Active: People aged 16 and over who are either in employment or unemployed. Economically inactive: People who are neither in employment nor unemployed. This includes those who want a job but have not been seeking work in the last four weeks, those who want a job and are seeking work but not available to start work, and those who do not want a job. Seasonal adjustment: A process of estimating regularly occurring seasonal effects and removing them from the raw data.

Voluntary Unemployment Caused when people choose not to accept a job at the going wage rate (this might be because they are better off on benefits and or working illegally Involuntary Unemployment Caused when unemployed people would accept jobs at the going wage rate but are not able to find jobs

Lesson 2 Objectives: Know the different types of unemployment Understand there are different causes of unemployment leading to different types of unemployment Relate types of unemployment to current economic climate Appreciate why unemployment is an issue for the government & economy but some more of a concern than others

What are the different reasons people might become unemployed? These form the different types of Unemployment : Structural Hidden Frictional Demand Deficient/ Cyclical Seasonal Types of Unemployment Real Wage Regional Voluntary

Frictional Unemployment: Occurs when members of the labour force are moving from one job to another or seeking a new job It reflects a natural part of job turnover in the labour market It takes time to search and find new employment and workers, even when there are plenty of vacancies and unemployed workers available How ‘natural or normal’ is this type of unemployment in an economy? How much of a concern is this to the Government/Economy? What could the Government do to reduce the level of this unemployment?

Structural Unemployment: Occurs as a result of a mismatch between the skills of the unemployed and the requirements of the existing vacancies People do not always have the qualifications, skills or training to move to a different job It is linked to occupational immobility of labour Often occurs more heavily in certain regions because of the long-run decline of traditional industries Simply raising the level of aggregate demand in the economy will do little to alleviate the problem of structural unemployment How ‘natural or normal’ is this type of unemployment in an economy? How much of a concern is this to the Government/Economy? What could the Government do to reduce the level of this unemployment?

Demand Deficient Unemployment/Cyclical: Associated with an economic recession or a sharp economic slowdown. Caused by lack of Aggregate Demand Also known as cyclical unemployment Occurs due to a fall in the level of national output in the economy causing firms to lay-off workers to reduce costs and protect profits. Although usually associated with recession it can also exist in the long run when the economy is constantly run below capacity Mainly a Keynesian view How ‘natural or normal’ is this type of unemployment in an economy? How much of a concern is this to the Government/Economy? What could the Government do to reduce the level of this unemployment?

Hidden Unemployment: people who are interested in taking paid work but who are not classified as unemployed can occur when people have been unemployed long term and become so disillusioned they stop looking for work the poverty trap and the tax/welfare system can also increase hidden unemployment – people would work but better off on welfare benefits How ‘natural or normal’ is this type of unemployment in an economy? How much of a concern is this to the Government/Economy? What could the Government do to reduce the level of this unemployment?

Real Wage Unemployment: a form of dis-equilibrium unemployment that occurs when real wages for jobs are forced above the market clearing level traditionally, trade unions and wages councils are seen as the institutions causing this type of unemployment although evidence of this is limited How ‘natural or normal’ is this type of unemployment in an economy? How much of a concern is this to the Government/Economy? What could the Government do to reduce the level of this unemployment?

Seasonal Unemployment: some jobs are only available on a seasonal basis, eg fruit picking it may however be the case that during the remaining months workers are not looking for alternative work and therefore are not unemployed those who are looking for work the rest of the year are therefore likely to be classified under another type of unemployment How much of a concern is this to the Government/Economy? How ‘natural or normal’ is this type of unemployment in an economy? What could the Government do to reduce the level of this unemployment?

Regional Unemployment: Occurs when a significant concentration of unemployed are located in a specific area, leaving the unemployment rate much higher than average in this area It can be caused by the closure of a significant business or industry in that area Geographical immobility can intensify regional unemployment Where the younger people leave the area in search of work it leaves and local ageing population Businesses may not be attracted to these areas where the unemployed are older or the area is run down How ‘natural or normal’ is this type of unemployment in an economy? How much of a concern is this to the Government/Economy? What could the Government do to reduce the level of this unemployment?

Long Term Unemployment occurs when workers fail to find new employment after six months many remain out of work for very long periods economic and social costs are much higher for them most are out of work for structural reasons. it is serious for the economy it damages individuals – loss of self-respect and less interest to employers they have a much lower chance of employment than those short-term employers may perceive them to have lower productivity than other workers vacancies may therefore coexist with high long-term unemployment Policies to reduce long term unemployment normally focus on improving the employability of these "outsiders" in the labour market. If successful, structural unemployment can be reduced and the natural rate of unemployment can decline.

Employment & Unemployment Unemployment – what are the costs?
Why is unemployment such an issue? What are the Costs? Social Costs Economic Costs Unemployment – what are the costs? Investment Costs Fiscal Costs

Employment & Unemployment Unemployment – what are the costs?
Why is unemployment such an issue? What are the Costs? Firms Individuals Unemployment – what are the costs? Government Economy & Society

Consequences of Unemployment BBC News Refs: Your Stories How to cope with unemployment

Consequences of Unemployment Costs – who does it affect? to the individuals and families directly affected, to local and regional economies the economy as a whole Economic Costs: Lost Output Of Goods And Services Causes a waste of scarce economic resources Reduces the long run growth potential of the economy Producing within (to the left of) its production possibility frontier Fiscal Costs To The Government impact on government expenditure, taxation and level of government borrowing higher benefit payments and lower tax revenues. they spend less so contribute less to the government in indirect taxes may result in a higher government borrowing requirement

Consequences of Unemployment (contd/) Deadweight Loss Of Investment In Human Capital Unemployment wastes some of the scarce resources used in training workers. Workers who are unemployed for long periods become de-skilled as their skills become increasingly dated in a rapidly changing job market. This reduces their chances of gaining employment in the future. Social Costs: unemployment is linked to social and economic deprivation, rising crime and worsening social dislocation (divorce, worsening health and lower life expectancy). areas of high unemployment will also see a decline in real income and spending together with a rising scale of income inequality. younger workers are more geographically mobile so some areas left with higher unemployment will have an ageing potential workforce - making them less attractive as locations for new businesses

Costs of Unemployment (contd/) Unemployment carries substantial economic and social costs. The duration of unemployment affects the economic and social costs. These costs are greatest when long-term structural unemployment is high. Many government focus their labour market policies on improving the employment prospects of the long-term unemployed.

Examine the extent to which unemployment reflects Market Failure? Market Failure – when the market mechanism (D&S) does not result in the efficient allocation of scarce resource Unemployment – those willing and able to work are unable to find suitable work Types of Unemployment – structural, demand deficient/cyclical, seasonal, Is there a ‘natural rate of unemployment?

Lesson 3 Objectives: Understand how to measure unemployment Consider the current unemployment situation/trends/who is most affected Evaluate strategies the Gov may use to seek to reduce unemployment?

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Measuring Unemployment The Claimant Count – also known as headline unemployment measures the number of people who are out of work & eligible to claim benefits. is easy & cheap to calculate, it also shows regional variations. but it tends to underestimate unemployment as lots of people who want to work are not eligible for benefits. It changes whenever the rules change. all but one of the last 40 changes to eligibility have reduced the claimant count! \\srv003\staffhome$\WALEli\Economics\EconAS\08-9 F582\Unemployment\NSO Measuring Unemployment.mht

The International Labour Force Survey This is the International Labour Office (ILO) measure of the rate of unemployment. The data comes from a quarterly survey of 60,000 households from across the country. Unemployed people would include those without a job who: Are available for work Have looked for work in the past 4 weeks It is an internationally standardised measure so is used for international comparisons. However it is costly, goes out of data quickly and is subject to sampling errors.

Syllabus Requirement: Trends in (inc international comp) BUT – who are the unemployed? Which groups of people are most likely to be affected? What are the patterns of unemployment across time, different groups and between regions in the UK? How does this compare with: Other EU countries? Countries outside the EU?

YOUTH UNEMPLOYMENT – why is this of great concern to the UK economy?

Who is unemployment hitting most? Men? Women? Young? Old? Certain Regions? Certain Socio-economic Groups? Certain types of Household? Immigrants? Graduates? Those with no/very few formal qualifications? Which are the Gov most concerned about and why? What are they doing to reduce unemployment generally or to target those they are most concerned about?

How can the Government intervene to tackle unemployment? Fiscal Policy Monetary Policy Supply Side Policy It needs to increase the D for labour or improve the quality of supply and information between the buyers (firms) and the sellers (workers) of labour. Demand for Labour is DERIVED demand TASK – 3 groups – each take one Policy and explore the extent to which it can be used to reduce unemployment

How can the Government tackle unemployment? Fiscal Policy Government Income and Taxation Outline how the Government could use Fiscal Policy to reduce unemployment. Increase Gov spending either directly through public sector D (eg build more schools) or through loans/grants/subsidies to business to stimulate or encourage them, includes inward investment opportunities to attract foreign firms Government is one of the biggest employers in the country. If it expands the public sector then it will employ more people (eg nurses, teachers)

How can the Government tackle unemployment? Monetary Policy Varying Interest Rates and the Money Supply. Lower interest rates – makes it easier for firms to borrow to invest and expand. Also consumers have more to spend so AD increases Increase credit availability Increase money supply – quantitative easing

How can the Government tackle unemployment? Supply Side Policy Education, Training, Apprenticeships, Enterprise Schemes, Promote and facilitate business opportunities, etc Ensure education is ‘fit for purpose’ – ie young people leave education with the skills, qualifications and personal attributes which makes them very employable in a modern economy. Also support is available for re-training Reduce barriers to setting up and succeeding in business eg planning laws, simplify tax system, relax business laws

Policies to Reduce Specific Types of Unemployment: Governments will use a range of different policies to reduce levels of unemployment in the economy These policies focus on the underlying causes of unemployment – the different types of unemployment Consider what the Government could do to reduce the following:

Real Wage Unemployment: a form of dis-equilibrium unemployment that occurs when real wages for jobs are forced above the market clearing level traditionally, trade unions are seen as causing this type of unemployment although there is no strong evidence (why might this be?) Employment Level Wage Rate S of Labour D for Labour If wage rates are forced above the market equilibrium (by TUs, or NMW) then unemployment results Unemployment Eq Wr Eq El What Action could the Gov take to reduce this type of unemployment? Reduce or get rid of the Minimum Wage Control the power of Trade Unions Where might the barriers to Gov action be? Trade union power/political party allegiance Poverty may result if wages are allowed to fall to market equilibrium

Demand Deficient (cyclical) unemployment Associated with an economic recession or sharp economic slowdown, caused by lack of Aggregate Demand Occurs due to a fall in the level of national output in the economy causing firms to lay-off workers to reduce costs and protect profits. Although usually associated with recession it can also exist in the long run when the economy is constantly run below capacity Mainly a Keynesian view What Action could the Gov take to reduce this type of unemployment? Boost Aggregate D through: Fiscal Policy Monetary Policy Supply Side Policies Agg D2 Agg S Agg D Real Output Goods/Services Price Level Full Emp of Resources Ep Eq What might the barriers to Gov action be? Might begin to cause inflation Government debt increase Impact of globalisation Unemployed Resources

What other types of employment could the Government help to reduce and what might the barriers be? Voluntary unemployment Possible Gov Action? Reduce Unemployment and other welfare Benefits What might the barriers to Gov action be? May create absolute poverty & widen the rich/poor divide Structural unemployment Possible Gov Action ? Provide retraining schemes – increase occupational mobility Help people find jobs by moving areas - improve geographical mobility Possibly subsidise businesses in declining industries Barriers to mobility – both occupational and geographical

What other types of employment could the Government help to reduce and what might the barriers be? Regional unemployment Possible Gov Action? Encourage people to move areas to find work What might the barriers to Gov action be? May create absolute poverty & widen the rich/poor divide

Why might unemployment be a Regional problem? Causes: Declining industry and unemployed geographically immobile Not a pleasant or accessible area for business to move to Consequences: We end with richer and poorer areas of the country – regional disparities Possible Remedies: Encourage either business to move to those areas or the people to move to where the jobs are Improve the infrastructure in areas of high unemployment Set up Enterprise Zones to focus on these areas Public Sector investment in those areas (eg Royal Mint in Wales)

LABOUR MOBILITY Definition - GEOGRAPHICAL: Definition - OCCUPATIONAL: Why is mobility important to the economy? Ability and willingness for workers to move area/location in search of work or promotion Ability and willingness for workers to change types of job, often also re-training, to secure work or promotion Dynamic/Growing Economy needs labour to: be flexible by moving from areas and job types where business is decline or there is excess supply to where excess demand for labour exists, re-train and move from jobs where demand is falling to newer industries where demand is growing otherwise economic development and maturity is adversely affected

What Barriers exist to reduce/impede geographical and occupational mobility?
What measures might firms or the Gov take to reduce the barriers? Family, personal, social ties. Willingness or confidence to move or re-train. Differences in availability and price of property, cost/stress of moving Financial/opportunity costs. Lack of knowledge of opportunities in other parts of the country or for other jobs. Retraining courses not available. Firms may offer financial incentives/other packages to help people move or re-train Wages may need to increase to attract workers to certain areas/jobs Better communications technology improves knowledge of opportunities Gov may offer incentives, ensure moving is easier, ensure schools and local services are good in all areas. Ensure regional disparities are minimised. Gov may try to change expectations of workers in favour of moving, ie a job is not for life

Is there a perfect level of unemployment? Can it be zero? Full Employment? Most economists agree that unemployment cannot fall to zero since there will always be (and needs to be) some frictional unemployment Could be defined as occurring when an economy is operating on the production possibility frontier Full-employment could be defined as a situation where the labour market has reached a state of equilibrium - i.e. when those in the active labour force who are willing and able to work at going wage rates are able to find work. Any remaining unemployment would be frictional.

The Natural rate of Unemployment: rate where the labour market is in a position of equilibrium labour supply = labour demand at a given real wage rate all those people willing and able to take paid employment at the going wage rate do so. The natural rate of unemployment is not zero The Risk Of Wage Inflation with Full Employment One possible risk of reaching full-employment is that inflation may increase as total spending in the economy increases, causing businesses to raise prices.

Why do Job Vacancies still exist when there are people unemployed? new jobs created in the economy may not be suitable for those unemployed. Barriers to geographical mobility – people not prepared to move Barriers to occupational mobility – people unwilling/unable to retrain Government measures to encourage, enable or persuade the unemployed to take up jobs may be failing Wages are not high enough to attract people to those particular jobs Welfare benefits may mean some unemployed are better off, or feel more secure on benefits than at work (eg the “poverty trap”)

Trends in Unemployment: Extract from Labour Market Overview How should the longer-term trends be described ? The trend for the working age employment rate is falling. The trend for the employment level (16+) is falling. The trend for total actual weekly hours is falling. The trends for both the unemployment rate and unemployment level (16+) are increasing. The trend in the working age economic inactivity rate appears to be falling. Trends in Unemployment

Tutor2U notes: \\srv003home\staffhome$\WALEli\Economics\EconAS\10 start\F582 Nat & Intnat Econ\Support Material\Unemployment\T2U Notes Employment and Unemployment.mht BBC News Refs – Local/Regional Unemployment Unemployment in Abingdon How to cope with unemployment

Answers to Grant Activities: Activity 1: a. The unemployment is STRUCTURAL Mismatch between skills of the unemployed and those required by the vacancy which exists. An increase in public sector employment is likely to be caused by an increase in government spending – eg on health, education, administration Activity 2: a. 2 disadvantages of losing his job – loss of income, lower standard of living and loss of self-esteem b. Evidence of search unemployment – has funding for 6 months, before he starts to panic. Suggestion that he was not looking to take just any other job – looking for something suitable

Answers to Grant Activities: Activity 3: More people entering the labour force, school leavers, immigrants, those not previously part of the labour force (eg previously been carers) 2 benefits of a fall in unemployment – rise in output, increase tax income, less in welfare payments, general feel good factor for those individuals and the economy. Activity 4: Multiple choice questions, page 274 1 Answer C The unemployment arises from the decline in an industry caused by a fall in demand for steel in the country. 2 Answer A Frictional unemployment arises when workers are between jobs. The harder it is for them to obtain information about job vacancies, the longer they will be unemployed.

Answers to Grant Activities: Activity 4: Multiple choice questions, page 274 3 Answer A When there is unemployment, output is below its potential level. As a result, people experience lower living standards than possible. 4 Answer A A recession is a decline in real GDP over a period of six months or more – a downturn in the economic cycle. During a recession demand for some products will decline. The lower aggregate demand causes demand-deficit or cyclical unemployment. 5 Answer A The longer people are out of work, the more desperate they generally become. This often makes them more prepared to accept a lower wage. 6 Answer D A fall in unemployment is likely to be accompanied by a rise in employment. More people in work will lead to an increase in direct and indirect tax revenue. AD will increase and there will be a move towards the production possibility curve. Higher employment may reduce crime levels, but what happens to crime detection rates is determined by how efficiently the police deploy their resources.

Answers to Grant Activities: Data response questions, page 275 a Unemployment was high in 1985 at more than 3 million. It fell in the late 1980s but then rose again in the early 1990s to nearly 3 million when the country experienced a recession. It then fell to just over 1 million by 2000 as measured by the claimant count. b The proportion of the labour force who are in work. c Unemployment can exist when there is full employment as defined by both Keynesians and new classical economists. Keynesians define full employment as existing when there is 3% unemployment. The unemployment will largely frictional, with workers being between jobs. New classical economists also think that some frictional unemployment can occur when the economy is operating at full employment. However, they think that some people will be voluntarily unemployed, being unprepared to work at the going wage rate. d Because of occupational and geographical immobility. The vacancies in one part of the country may require different skills from those possessed by unemployed people. Even if they have the appropriate skills, they may not be able to fill the vacancies if family ties, differences in housing costs or other factors prevent them moving. e The passage does not suggest that the costs of unemployment are evenly spread. It mentions that certain areas of the country, for example, Tower Hamlets, experience high rates of unemployment, and that Asian and black people are more likely to be unemployed than white people.

Answers to Grant Activities: Activity 1: a. The unemployment is STRUCTURAL Mismatch between skills of the unemployed and those required by the vacancy which exists. An increase in public sector employment is likely to be caused by an increase in government spending – eg on health, education, administration Activity 2: a. 2 disadvantages of losing his job – loss of income, lower standard of living and loss of self-esteem b. Evidence of search unemployment – has funding for 6 months, before he starts to panic. Suggestion that he was not looking to take just any other job – looking for something suitable

Answers to Grant Activities: Activity 3: More people entering the labour force, school leavers, immigrants, those not previously part of the labour force (eg previously been carers) 2 benefits of a fall in unemployment – rise in output, increase tax income, less in welfare payments, general feel good factor for those individuals and the economy. Activity 4: Multiple choice questions, page 274 1 Answer C The unemployment arises from the decline in an industry caused by a fall in demand for steel in the country. 2 Answer A Frictional unemployment arises when workers are between jobs. The harder it is for them to obtain information about job vacancies, the longer they will be unemployed.

BBC News Refs: Recession Tracker Article Unemployment hits 3.2 Billion BBC Radio 4 News Article - Wed 29 April 09 – Graduate Jobs BBC News Article - Wed 29 April 09 – Graduate Jobs

Student Activities – work in 2s/3s: Read the case studies and each case decide which categories it fits into. Try the definitions matching activity

Answers to Grant Activities: Activity 11, page 227 a Calculate the country’s labour force 2m + 28m = 30m b Calculate the country’s unemployment rate (2m/30m) x 100 = 6.67% Activity 12, page 227 a The rate of unemployment is the percentage of the labour force who are unemployed. b Because it can be used for international comparisons and it includes both people who are unemployed and claiming job seeker’s allowance and people who are unemployed but not claiming benefits.

Answers to Grant Activities: Activity 13, page 228 a labour force survey b labour force survey c claimant count d claimant count Activity 14, page 229 a In 1999 the unemployment rate was higher in the UK than in Japan. The UK’s unemployment rate fell from 1999 to 2001 and then rose to However, the UK’s unemployment rate in 2003 was lower than in 1999 and lower than Japan’s. Japan’s unemployment rate did not change between 1999 and 2000 but then rose in each year from 2000 to 2003. b It would also be useful to know how the unemployment was measured in the two countries. The comparison is more valid if the same measure is used. In assessing the seriousness of the unemployment experienced, it would also be beneficial to know the average time people are unemployed, as long-term unemployment can be damaging.

Review Questions for discussion! What is unemployment? How can we measure unemployment? Why is unemployment an economic issue? What causes people to be unemployed? What can be done to reduce unemployment?

Past Exam Questions:

Create your own Diamond 9s and pass to another group to discuss and prioritise:

Employment & Unemployment

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