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Define and determine the types and trends of UK unemployment

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“Define and determine the types and trends of UK unemployment”

Unemployment is when individuals are jobless but are willing and able to work at the going wage rate. The official government figures only count those that are registered as being unemployed and are actively seeking work.

Different Measures of Unemployment

There are several different measures of unemployment:

  • ILO – Any person without a job, available to work, willing to work and sought work in the past four weeks
  • Labour Force Survey (LFS) – Available to work within the next two weeks, currently without work, but have sought work in the past four weeks
  • The Claimant Count – This measures the number of people who are eligible and claim the Job Seekers’ Allowance, as such, this method generally records fewer unemployed (around 400,000)

From these figures is it possible to calculate the Unemployment Rate:

Number of unemployed/number of economically active x 100

Types of Unemployment

There are many different types and causes for unemployment:

  • Real wage unemployment: This is thought to be the result of wages being above the market clearing level, leading to an excess supply of labour. It is thought that national minimum wages can cause wage unemployment because the employees feel that the work is not worth the minimum amount.
  • Demand deficient unemployment: This is usually associated during a period of recession in the business cycle. This is because during recessions aggregate demand is low and so firms are more likely to become bankrupt as well as lay-off of employees.
  • Frictional unemployment: This is transitional unemployment due to people moving between jobs: For example, newly redundant workers or workers entering the labour market may take time to find appropriate jobs at wage rates they are prepared to accept. Many are unemployed for a short time whilst involved in job search. Imperfect information in the labour market may make frictional unemployment worse if the jobless are unaware of the available employment opportunities.
  • Structural unemployment: This occurs when people are made unemployed because of capital-labour substitution (which reduces the demand for labour) or when there is a long run decline in demand in their particular industry. Structural unemployment exists where there is a mismatch between their skills and the requirements of the new job opportunities. Many of the unemployed from heavy manufacturing industry (e.g. in coal, steel and heavy engineering) have found it difficult to gain re-employment without an investment in re-training. This problem is one of occupational immobility.
  • Hidden unemployment: This is when unemployed people are interested in taking part in work, but currently not classified as unemployed. This may be because they have been unemployed for so long that they have lost all motivation for searching for work or they may have lost their skills requires.

In any economy there will always be a certain amount of unemployment, even when there is ‘full employment’. This is because, even in a highly mobile labour force, there will still be frictional unemployment, and possibly structural, these two types of unemployment are considered to be the ‘natural rate of unemployment’. This means that full employment is reached when unemployment is equal to the natural rate of unemployment.

However, the natural rate of unemployment has become to be seen as rather ‘callous’ as it suggests that unemployment is natural. Instead, it is preferable to use the phrase: Non-Accelerating Inflation Rate Unemployment (NAIRU) which infers there is a different level of unemployment that is associated with the rate of inflation. At NAIRU the demand for labour is equal to the number of people prepared to supply their labour for the current wage rate. Thusly, any unemployment is equilibrium unemployment and arises from labour market imperfections (will go into NAIRU at greater depth later).

Costs of Unemployment

The costs of unemployment are dependant on the numbers of unemployed and the length of time that they have been unemployment. The costs are:

  • Cost to the economy from lost production
  • Fiscal cost to the government
  1. Lost revenue from income tax etc
  2. Increase in social security payments that result from unemployment

Also the threat, or fear, of unemployment means that people are less likely to buy houses or expensive consumer goods, and so it aggregate demand is reduced.

Policies to Reduce Unemployment

The Labour government has introduced a number of policies to reduce unemployment by acting on the supply of labour, these include:

  • Welfare to Work – This scheme started in 1998 and combines several schemes designed to improve the labour market incentives for both employers and employees
  • Making Work Pay – These aim to reduce the unemployment trap and poverty trap. Such methods include the Working Families Tax Credit and National Minimum Wage

Unemployment Trends in the UK

  • 1970s: From 1974-1979 the main influence on unemployment was caused by the OPEC oil shock, 1973-4. The rise in oil prices led to a rise in the target real wage in comparison to the feasible real wage, and so the NAIRU increased. The impact of the oil shock was far greater in the EU than in the US or non-EU Europe – it has been calculated that the EU lost 3.3% of its purchasing power as a result of the terms of trade loss, whereas the US and non-EU Europe losses on there terms of trade were only 2.2% and 2.3% respectively, and so their unemployment was lower.
  • 1979-1985: High unemployment, rising well over 10%. The main cause for unemployment was demand deficient unemployment due to the governments attempt to reduce inflation. Tight fiscal and monetary policy, as well as the resulting overvalued pound, led to output falling by around 5% in this time period. There was also much structural unemployment, because of the transition the economy made away from the traditional heavy manufacturing industries to a more service based, flexible, labour market.
  • 1986-1990: Unemployment fell significantly in the late 1980s, partly because the NAIRU fell (possibly because of supply-side measures improving the working of the labour market) and partly as a result of increases in aggregate demand. This period also saw 1.9 million new jobs being created, mainly in the service sector. Unemployment fell below the equilibrium rate and as a result inflation rose to around 10% p.a. in 1990
  • 1990-1993: During this period there were high levels of unemployment, and the causes of mass unemployment were fairly clear. In the winter 1990-91 firms were under great pressure to reduce the level of debt, and so caused unemployment to rise. Firms attempted to export as a means to reduce the domestic recession, but this only caused further problems. The world economy was slowing down. Also the decision to join the ERM in October 1990 has increased the domestic recession. The pound’s artificially high value caused firms exports to be relatively less competitive. In an attempt to remain competitive, firms had to reduce costs, and so non-essential employees were made unemployed.
  • 1993-1997:  Unemployment fell significantly by 1995, with unemployment only 3.2 of the labour force. This can be explained by the UK’s exist of the ERM in September 1992 and the recovery phase which the economy then entered. The was also very significant growth in part-time employment opportunities, mainly caused by the increase in women becoming economically active.

This student written piece of work is one of many that can be found in our AS and A Level Macroeconomics section.


Here's what a star student thought of this essay

4 star(s)

Response to the question

I liked this essay as it gives a good overview of unemployment, without getting bogged down in argument. This should be a good resource to look at for revision. The definition of unemployment is covered, the types are summarised, the ...

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Response to the question

I liked this essay as it gives a good overview of unemployment, without getting bogged down in argument. This should be a good resource to look at for revision. The definition of unemployment is covered, the types are summarised, the costs are covered. The policies to reduce unemployment is poorly covered, however, as this should be looking at fiscal and monetary policies also. Trends are briefly looked at, but if you are preparing for an exam it would be wise to look at more recent data.

Level of analysis

The analysis in here is sound. I liked the definition of unemployment, as this is a popular question and often the definition is confused. You must put "willing and seeking work" and this essay does this well. I would note that exams often like to catch people out by asking you to define the unemployment rate, this is as simple as quoting the definition and then adding the formula given in this essay! The types of unemployment are given a good overview, however I would've liked to have seen some diagrams showing shifts in aggregate demand, etc. Diagrammatical analysis is an easy way to pick up marks, as it shows a variety of skills and a strong understanding of what causes unemployment. The discussion of NAIRU is strong, as this is a concept which is commonly forgotten about or misunderstood. When talking about the costs of unemployment, it would be good if a PPF was included as this shows the misallocation of resources and waste of capacity. I always like to talk about the costs to the unemployed, as this can bring social problems. Hysteresis is a concept which examiners like, whereby the long term unemployed lose any skills or confidence making it harder for them to find work. As mentioned above, when talking about policies you really need to be clearer and discuss monetary and fiscal approaches.

Quality of writing

There isn't much to structure here, as this is more of an overview and revision sheet than an argument. Bullet points are used well to differentiate between points, and technical terms are used throughout. Spelling, punctuation and grammar are fine.

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Reviewed by groat 13/03/2012

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