Female Unemployment
Participation rates of women have increased from 57% in 1971 to 70% in 2000.
Maintain standard of living.
Part-time working now constitutes 25% of the workforce and is mainly women.
Female unemployment in the UK is normally less than male unemployment.
Problems
Unemployment rate of single mothers is rising.
Emergence of work-rich and work-poor households.
Age-Related Unemployment
Youth unemployment rates are higher than older age groups
Periods of unemployment can damage future performance.
Older workers, aged 50+, tend to have high unemployment rates.
Duration of unemployment for older workers also tends to be longer.
Qualifications
Low-skilled and poorly educated workers are in low demand.
Employers are short of high skilled and educated workers.
33% of men aged 25-49 years without qualifications are unemployed.
5% of men with university degrees are unemployed.
The Wage Gap for workers aged 25-49 years for no qualifications versus a uni degree was 61% in 1979 and 89% in 1998.
Unemployment and Economic Theory
Frictional Unemployment
The time it takes for workers to move between jobs.
Structural Unemployment
Changes in the demand and the supply of labour in particular occupations, industries and regions.
Technological Unemployment
Classical Unemployment
Real wages are set ‘too high’. A Labour market problem.
Demand Deficient Unemployment
Keynes rejected the classical unemployment and instead argued that unemployment was due in part to too little demand in the market for goods.
Remedies for Unemployment
Laissez faire. Leaving the market to do the work.
Keynesian Demand Management. Active Government intervention, using fiscal and monetary policy.
Create right conditions to establish non-inflationary growth.
Encourage the use and diffusion of technology.
Encourage entrepreneurship and establishing businesses.
Incomes Policy. Control wage increases.
Profit Related Pay.
Flexible wages and pay –regional differences.
Job Guarantees. Aimed at the long term unemployed.
Improve the education and skills of the workforce. Vocational and University training.
07/03/02
UK Approach to Unemployment
The New Labour Government elected in 1997 has in many ways continued with the policies of previous Conservative Governments.
Emphasis on creating the right conditions. An independent Bank of England.
Avoid boom and bust periods of growth and decline.
Promote labour market flexibility. More part-time jobs, willingness to work when the employer wants, geographical mobility.
The National minimum wage and the signing up to the European Chapter are social and equity-based polices.
Improve the standard of education – schools (lower class sizes), vocational training, university education, life-long learning. Remove the dependency culture on state benefits.
The New Deal introduced in 1988 provided subsidies to help people make the transition from state benefits to employment in the private sector.
For those who did not secure jobs, opportunities for education and training or voluntary work on an Environmental Task Force.
Sanctions if unemployed people refused to participate.
April 2001 the New Deal extended to the over 25s on a national basis.
UK unemployment is low. But problem areas remain. North-East England, Northern Ireland higher rates on average and also concentrated in certain towns or parts of cities.
Problem of families where several generations are unemployed.
Consequences of Inflation
First of all it is necessary to distinguish between anticipated and unanticipated inflation.
Anticipated inflation occurs when there are no price changes which are surprises.
In contrast, with anticipated inflation, price rises are surprises and cannot be taken account in contracts.
With fully anticipated inflation there are two main costs: ‘shoe leather’ costs and ‘menu’ costs.
Given that interest is not paid on cash and on some bank accounts, then the cost to holding cash is the interest foregone.
Thus at times of inflation, it is better to leave money in a bank earning interest and that people would make more trips to their bank and hence wear out their ‘shoe-leather’.
Menu costs are the costs involved in actually physically changing prices. Examples include the cost of altering vending machines, telephones and cash registers as prices change.
Inflation, in so far as it is not anticipated, changes the distribution of income and wealth, which depends on the speed with which different social groups react to it.
With unanticipated inflation, price rises are surprises and cannot be taken into account in contracts. Now imagine that we have 20% inflation in the economy over a year. The interest rate charged by the lender is 10%. After the year the person repays the £110 (consisting of the £100 borrowed plus the £10 interest payment). However, with inflation at 20% the lender would need £120 to maintain the buying power of the original goods. There has been a re-distribution of money from the lender to the borrower.
While in aggregate over a number of years the losses and gains will offset each other, the effects do not. Some lenders may become bankrupt, resulting in jobs being lost.
Inflation effects UK competitiveness, and hence the balance of payments.
Depreciation of the exchange rate by itself is not necessarily a bad thing, but the danger is that it can start a spiral. An initial depreciation causes price inflation to increase at home, which causes further wage increases, which leads to further depreciation and so on.
Inflation can breed insecurity and industrial unrest.
Among businessmen/women it increases uncertainty, reduces investment and reduces growth.
German Hyperinflation
The simplest way to envisage the scale of the inflation is to remember that inflation means the loss of a currency’s purchasing power.
What you could have bought for 1 mark in July 1921 would have cost 54,000 million marks in November 1923.
In two years inflation had wiped out many people’s savings, transforming a fortune into small change.
Waves of panic buying left shops with nothing left to sell, while manufacturers, operating at full capacity, refused to accept new orders.
In the final stages of hyperinflation, foreign currencies and emergency monies issued by state governments, chambers of commerce and private traders replaced the mark until 2000 different currencies were thought to be in circulation.
Eventually the absence of a single widely acceptable means of exchange brought commerce to a halt, closed factories, threw thousands of people out of work and even threatened the inhabitants of some towns with starvation.
Causes of inflation
Monetarists believe that the long run inflation rate is determined by the rate of increase of the money supply, where the money supply is basically the quantities of cash, bank deposits and building society deposits held by individuals and firms.
To reduce inflation it is necessary to reduce the rate of increase in the money supply by cutting the government deficit (by higher taxes and/or lower government expenditure).
This is not easy to do and it may take some time to have an effect, during which unemployment will rise because of the needs for prices and wages to adjust to the new situation.
One alternative view, originally proposed by Keynesian economists but now discounted by them is that inflation is caused by ‘demand-pull’.
That is, if the economy is near to full employment, an increase in aggregate demand could result in inflation occurring.
To reduce this, taxes should be increased to reduce aggregate demand.
Another view, accepted by Keynesians is that inflation is caused by ‘cost-push’ factors, so that it is the costs to firms of materials and wages which pushes up prices.
To reduce inflation in this framework it is necessary to persuade unions to moderate their wage demands.
Import Prices
Prices of imported food and raw materials are determined in the world markets, in which Britain is only one of many purchasers.
Prices in raw materials and food markets can fluctuate wildly.
Big increases in commodity prices occurred during the Korean War, in the early 1970s and in 1979 with the second oil price shock.
Second Oil Crisis
The price of oil doubled over the course of 1979, rising $13 to $25 a barrel.
This was due to the halving of Iranian oil production after the revolution in Iran, and to a scramble for oil stocks by the consuming countries.
In 1980, assisted by the outbreak of war between Iran and Iraq, the OPEC oil price averaged $32 a barrel.
The source of domestic inflation has tended to be looked for in the tendency of wages and salaries, or profits, or other incomes to rise faster than real output; and this one or other of them has done in almost every year since the war.
The influences of demand
An explanation of domestically generated inflation is that it arises not so much from increased costs as from demand pressures increasing prices and profits.
If there is an increase in aggregate demand for goods and services in the economy, how does the economy respond? If it is operating at less than full employment, producers are able to expand their production to meet the additional demand.
But if full employment has already been achieved, it is the price level and not production which rises.
Given the excess demand for goods and services, there is competitive bidding for the limited supplies and producers are able to sell at a higher prices.
A variant of this approach is the so-called Quantity theory of money, in which inflation is seen as a response to an increase in the supply of money; there is too much money chasing too few goods.
The theory dates back to at least to David Hume, but it was generally discredited as a result of the writings of J.M.Keynes in the 1930s. However, it was revived by Milton Friedman and has received some measure of acceptance among economists, especially in the United States.
Wages and Inflation
When a trade union negotiates a wage increase, firms will immediately consider whether they should increase their prices to cover their increased wage-costs.
Moreover, in deciding whether or not their customers will stand for such increases, firms will be influenced by the knowledge that their competitors have to pay the increased wages too, and will probably therefore be raising their prices. So industry-wide advances – and the changes in costs of materials – are particularly likely to be passed on to the consumer; and, as wage-earners are also consumers, to generate further demands for wage advances to cover the increased prices.
The Phillips Curve
Even if wage behaviour is primarily responsible for inflation, the pressure of demand will still be important.
If unemployment is low or falling rapidly, and unfilled vacancies are high, there is competitive bidding among employers to obtain and retain their workers.
Moreover, with the economy booming the bargaining strength of trade unions increases: employers are more willing to concede wage demands.
These possibilities have led economists to postulate – and indeed to measure – the so-called Phillips curve relationship: the lower the level of unemployment, the faster the rate of increase in money wages.
But it is dangerous to postulate ‘general laws’ in economics: in the 1970s inflation increase despite high and growing unemployment and governments in most Western countries were confronted with a phenomenon known as stagflation. (stagflation – inflation associated with static or declining output and employment)
The major part played by labour market pressures in generating demand inflation gives rise to perhaps the most familiar relationship in macroeconomics, the inflation-unemployment trade-off.
The original Phillips curve captured this relationship by plotting the rate of change of money wages against unemployment in the UK economy over the period 1861-1913.
These empirical observations implied a non-linear negative correlation between wage inflation and unemployment.
Phillips explained the non-linearity of the relationship, specifically the fact that the curve is steep when the economy is close to full employment but fairly flat when unemployment is high, as the outcome of workers’ resistance to money wage cuts.
Workers are unwilling ‘to offer their services at less than prevailing rates when the demand for labour is low and unemployment is high so that wages fall only very slowly’ (Phillips, 1958, P283).
The first development in what was to become the complicated evolution of the Phillips Curve involved the substitution of price inflation for the rate of change of money wages, on the grounds that they are closely correlated.
The Phillips Curve was immediately transformed into a map of the options facing macroeconomic policy makers, implying that monetary and fiscal policy measures are likely to be important factors in explaining demand-pull inflation.
An expansion of aggregate demand would move the economy along the Phillips curve in a north-western direction from a to b as policy makers accepted higher demand pull inflation as the cost of reducing unemployment (Figure 3.3)
Lower interest rates might be used to encourage borrowing to finance extra consumption and investment, taxes might be cut to stimulate consumption or government expenditure might be increased.
If, on the other hand, the priority was to reduce inflation, higher interest rates or tax increases or cuts in government expenditure would move the economy along the Phillips curve in a south-easterly direction, for example from b back to a (Figure 3.3).
Probably the most spectacular episode of demand pull inflation in recent years was the so-called “Lawson boom”, named after the Chancellor of the Exchequer Nigel Lawson.
In the 1988 budget there were significant income tax cuts. At the time, house prices were rising rapidly, and people felt wealthier and were prepared to borrow more money to increase consumption.
However, perhaps the most striking feature of the UK Phillips Curve in the 1970s is that the inflation rate accelerated most rapidly when unemployment was either constant or also rising.
