Business Environments - Labour Market and GDP Development in the UK

University Degree Business and Administrative studies

Coursework – Labour Market and GDP Development in the UK

Business Environments – Management

Part I:

1. Historical Development of the Labour Market

The history of unemployment in the UK is also an important element in the economic and social history of the country. Marginal changes of the labour market may impulse economic and profound reaching change in society. The major changes of the last years were an increase of the unemployment rate, a decrease of job opportunities in the economic sector, flexibility of working times (e.g. part-time work) and a higher demand for high qualified employees (Bertola, 1999).

The unemployment rate is the most common indicator to evaluate the economic situation of a city, region or nation. This statistic shows the demand for employees as well as the wealth and prosperity of a certain area. The UK suffers from/of inter-regional disparities. The development of the unemployment rates of south east England, the Midlands or north England are different. These significant disparities were clearly seen in the mid 90’s. The big recession in the finance sector led to a higher unemployment rate in the London region.

At the beginning the graph shows a very low rate of unemployment. In the 1950s and 1960s it was around 3 per cent on average (Burda, 1998). This might be understood as a result of the "post-war boom". All British servicemen (of World War II) were a full employment promised after the victory over Nazi Germany. Winston Churchill and his government could not breach this pledge. Other reasons of this success might be seen in technological advance and a stable international trade environment. Especially after the world war people yearn for every kind of products – productivity was high. Full employment also been supported by the success of Keynesian economics and the stability of the Phillips Curve. Interestingly, after the war the majority of women who worked in war production no longer needed. They remained in the category of the "economically inactive" (Bertola, 1999).

These boom years rapidly collapsed in the 1970s. The energy crises of 1973 and 1979 generated a stagflation. In addition it came to a rising of inflation and a rising of unemployment (in contrary to the Phillips Curve theory).

On the European Market it came to a fixed exchange rates pegged to the German mark. All EU member states were forced to deflate their economies to keep pace with low-inflation West Germany.

Another reason for the downturn is the failure of Labour’s labour market policy in the late 1960s. Their market reform ("In Place of Strife") had led to a stronger union power. This union power was used to keeping wages high. In January 1972, the unemployment rate topped the marginal line of one million the first time.

The year 1979 is known as the "Winter of Discontent". A lot of people went on strike to protest against pay freezes. The unemployment rate stood at 1.1 million. Hence, the Conservative Party swept to power on the message that the labour concept of the Labour Party is not working (Burda, 1998).

Nevertheless, the unemployment rose further during the early 1980s. In 1982 it topped three million. Significantly, in January 1982 over 3,070,621 were unemployed. This represented 12.5 per cent of the working population of the UK. As mentioned above, in some parts of the country it was even higher. Especially in Northern Ireland, the unemployment rate was at 20 per cent. In some industries, e.g. coal mining, it was even higher (Layard et al, 1991).

In addition, the development of unemployment in Great Britain and Germany in the 70s and 80s is comparable. The absolute numbers of unemployed people as well as the unemployment rate in Britain were almost always higher than in Germany. The dramatic increases in unemployment in the years 1974 to 1976 and 1980 to 1984 is very similar in both countries.

Großbritannien = Great Britain
Deutschland = Germany
Arbeitslose = unemployed in million

However, the increase in the number of unemployed people in the UK lasted longer than in Germany. In Germany the number of unemployed people decreased in 1988. In 1986 to 1988 there was already a significant drop of almost 813 000 in the UK. This led to the increase in the proportion of long-term unemployed among the unemployed in Germany and Great Britain. Since 1986, however, there also declined. Important indicators for the development in Great Britain were the reform of the employer-employee relations in the Employment Act 1988, the state withdrawal from formerly state-owned areas, the promotion of training and retraining at a particular workplace and the promotion of business start-ups (Layard et al, 1991). The British Government determined the change of attitudes to work among the unemployed as particularly important. Therefore, they tried to apply pressure to prevent the unemployed from actively seeking employment by the novel-regulation of relevant legislation such as the Social Security Act of 1989.

The restart program:

July 1986 nationwide the so-called "Restart Program" was introduced in the UK. Any long-term unemployed (defined as unemployed with a previous unemployment duration of one year or longer), was invited to a detailed consultation. The program was expanded in April 1987. From this point on, the circle of unemployment was widened. People who been more than half a year unemployed were registered. In addition, as of this date are still invited back into unemployment remaining people every 6 months for a consultation. The program has the following objectives (Layard et al, 1991; Bertola, 1999):

Firstly, attempts to motivate the ...

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The restart program:

Firstly, attempts to motivate the unemployed to apply for open positions and / or to help them to seek the participation of appropriate labour market policies. Secondly, objective of these consultations, the placement into employment aggravating personal characteristics, such as health and other problems were discussed. It should also be on the need to resort to other institutions pointed than those of the employment service (the state employment agency and employment counselling agency). Thirdly, the issue of availability for unemployed people. The consultation may be found evidence for the assessment of entitlement to benefits. It may become to an end of unemployment benefits because of the unavailability.

Basically, the second and third goal led to a decline in unemployment after the consultation. On the other hand, the effect of improving motivation depends on the availability of jobs. It depends on how that is suitable for the unemployed with an unemployment duration of 6 months or longer. Are not enough vacancies available, including positions in labour market programs, might the number of unemployed only be reduced if workers are displaced or previously abandoned the search for a job. The displacement of workers due to long-term unemployed is likely to be regarded as little. The hiring of long-term unemployed created no further advantages for the companies, such as the granting of wage subsidies. The transition from unemployment to inactivity may have been accelerated by the restart program. Altogether, the number of employees increased by 828 000 between June 1986 and June 1988. However, a demographic component might be considered as well.

From the perspective of the dual labour market theory the labour market consists of two segments. In the first segment, there are high wages, good working conditions, stable employment and relatively high returns on investment in human capital. In the secondary segment the opposite features are characteristic. Recently experienced the segmentation theory is something like a "second flowering". By a new theoretical foundation for decision on the basis of the efficiency wage theory. The efficiency wage theory has developed models that show that workers and firms in the expectation and with the aim of securing stable employment to invest in trust relationships. The concept of the wage structure flexibility in immobility of the workforce required wage cuts from the decline in product demand would affected labour market performance from the perspective of efficiency wage theory to a reduction in work productivity and competitiveness in the labour market and triggered by the decline in product demand decline in demand for strengthen labour. Therefore, companies have an interest in short-term stable wage structures. The lack of wage structure flexibility and the consequent refusal of companies to respond to under price offers of unemployed workers creates unemployment (e.g. those of the companies deliberately used strategy, through higher wages than the competition they offer to increase the pool of candidates for vacancies). The newer efficiency wage theory consider the companies, who are guided by theoretical considerations and efficiency-wage high-wage strategies. The secondary segment consists in other companies. Burda (1988) and van de Klundert (1990) have emphasized that the resulting of unemployment in the primary segment is not degraded by the fact that the workers accept a job in the secondary labour market segment. Instead, they remain in a "waiting position" and search jobs exclusively in the primary labour market segment (Burda, 1988; van de Klundert, 1990). This sort of unemployment differs from search unemployment. That is the fact of unemployment in searching jobs, where workers would be willing to work. These workers have not found a job yet. Unemployed seek for vacancies on jobs in the primary segment. There are several reasons why the unemployed are waiting for these jobs.

To sum up, the restart program promoted employment in jobs with relatively low productivity compared to other measures that aim to qualify the long-term unemployed people for jobs with higher productivity. In addition, competition for jobs in the secondary segment amplified and attenuated in the primary segment. The increase in competition for low paying jobs speaks against the hypothesis that workers give up their employment due to the restart program (Bertola, 1999). This labour market and economic strategy stays in direct contrast to the "Swedish model", which aims at modernising the economy's sake, low wage differentials between sectors and regions (Schmid 1989).

In the 1990's the unemployment rate began to fall. In 1999 was below the two million mark at a level of about 1.7 million. This downwards trend continued until 2005. The official figures showed unemployment at 1.397 million. However, in the last two years of the Blair government unemployment began to rise again. In 2008, Gordon Brown had to deal with a global recession. The unemployment rose up to 1.79 million. That is the highest figure for a decade. In May 2010 unemployment had risen to over 2.5 million. At this time the new coalition came into power. The Prime Minister, David Cameron, argued that the unemployment will be falling every year. However, unemployment continued to rise. Even with Mr. Cameron’s policies. From June to August 2011, 2.57 million people were unemployed. That is the highest figure since 1994.

2. Using the ‘Philips Curve’ to explain unemployment in the UK Market

Basically, the Phillips curve analysis comparing money wage growth with unemployment (Begg, 2009). A.W. Phillips discovered in ’The Relationship between Unemployment and the Rate of Change of Money Wages in the United Kingdom 1861–1957’ an empirical relationship between the rate of change in money wages and unemployment. Later the analysis was extended to look at relationship between inflation and unemployment. The Phillips curve shows that higher inflation is accompanied by lower employment (Begg, 2009). In other words, a rise in unemployment may be associated with declining wage growth and vice versa.

However, Monetarists have always been critical of this analysis. They argue that for the Phillips curve in the long run there is no trade off. Significantly, in the 1970s evidence was found. These years witnessed a rise in stagflation. The result was a rose of unemployment and inflation. At the beginning of 2000s there was a low global inflation. The unemployment in the UK fell without any rise in inflation. In 2008 the unemployment rate rose and the inflation fall. One of the reasons for the fall in inflation is the fall of the oil prices. In addition, it also shows the development in a recession. If the unemployment rise up the inflationary pressures fall away.

There are many factors influencing inflation and unemployment. After all, the Phillips curve is not stable. There is no long-run trade-off between inflation and unemployment (Begg, 2009). Moreover, the trade-offs between inflation and unemployment are often changing. This might be compare due to supply side factors.

However, economists agree there is a trade-off, at least in the short term. The short-run Phillips curve is a negative relation between inflation and output (Begg, 2009). A boost in aggregate demand tends to the result that unemployment will fall. After all a higher inflation can be witnessed.

Another example may be an economy which experienced inflation. Basically, the Central Bank might raise interest rates. The increasing in interest rates will reduce consumer spending and investment leading. That will lead to lower aggregate demand. Further, this fall will lead to lower inflation. After all, a decline in GDP tends to a rise in unemployment because companies will employ fewer workers.

As a result Begg (2009) argues, that ‘the Phillips curve is simply the mirror image of the aggregate supply curve’ (Begg, 2009, p. 255). On the one hand, the latter relates inflation to output. On the other hand, the former relates inflation to unemployment. This is a logical result because there is a connection between them. A high output ever stays in combination with low unemployment.

Part II:

Is GDP a good way of looking at how well-off a country and its people are?

Economists want to be able to make statements that compare the standard of living between different countries or between different time periods. One of the main uses of national income data is in measuring the economic well being of the population through the concept of the standard of living (Begg, 2009). Basically, the standard for this analysis is to use real GDP per person (per capita).

However, real GDP per capita have some weaknesses when assessing the standard of living:

1.) Regional diversities in income and spending

A national GDP figures the number of all regions. It is more a representative number in general. In real life, there is much diversity within on country. Stronger economic regions have another GDP than regions with less industry or a finance sector (e.g. London and the Midlands). In other words, some prosperity and wealth regions with less unemployment face other regions with a devastating social and economic deprivation. To sum up, the GDP hides significant regional variations in incomes and employment per head of population.

2.) Economic growth and external effects

An upward trend in national output very often goes along by an increase in pollution and other negative externalities. If an economy produces more products – it tends to a higher use of facilities, higher production of waste and at least a higher pollution of the environment. These are negative factors of an economic welfare effect. Furthermore, the number of produced products and output figures do not tell anything about the quality of goods or the services produces. This might be seen in the light of low cost production countries (e.g. in the Asian region).

3.) Leisure / working hours

If an economy has a bigger output that might be achieved by certain factors. Basically, companies might be hiring more employees in times of high production. Or, the normal stuff has to do extra hours to achieve the production target. In maintaining the output rate high it tends at the expense of leisure time for the workers (because of longer working hours).

British workers have the longest working week in Europe. Basically, full-time workers have to deal with an average of 44 hours per week. That is three and a half hours longer than the European average.

4.) Inequalities of income and wealth

One of the biggest weak spots of the GDP figures is that it does not show the distribution of income within the people. Therefore, an uneven spread of financial wealth might be possible. A good example might be to examine some African countries. In some of them rules a totalitarian regimes. They combine all powers in their hands. Even if the GDP is on a normal level (e.g. because of oil or gas producing, diamonds etc.) compare to other states in the world – it say nothing about the wealth of all inhabitants in the country. Incomes and earnings may be very unequally distributed among the population. Therefore, a rising of national prosperity may still be accompanied by rising relative poverty. A good example might be Brazil or Venezuela. Through the stronger oil production the prosperity of these countries rose up. At the same time the prosperity of the inhabitants stays nearly at the same level.

5.) The balance between consumption and investment

In order to analyse the GDP it is important to analyse the balance between consumption and investment. Therefore, it is essential to examine the resources an economy needs to satisfy the consumer (in the short-run) and how these resources might be seen for the economic development (in the long term). A quick economic growth might lead to a higher standard of living. This development finds an end in the limitation of resources. Therefore, a limit in the future growth might be possible.

6.) The black economy and non-monetised sectors

The GDP figures do not include the results of the black economy growth. Basically, the black economy includes economic activity that is not recorded by the Inland GDP measurement. Some industries have a higher black economy growth than others. Therefore, the true living standard might be different. In the world, there is a total value of the black economy of $9 trillion. The average of the underground economy is estimated about 15% of national output for rich developed economies and 33% of national output for emerging not developed economies. According to a survey, Nigeria and Thailand have the world’s largest black economies, both accounting for more than 70% of official GDP.

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