UNEMPLOYMENT

• Unemployment


  People who are available and willing to work (at current wage rates) but who do not have a job (i.e. are out of work)
• Unemployment level


  Total number of people looking for work, who cannot find a job
• Unemployment rate


  Proportion of people out of work as a % of the labour force
• Labour force


  The total number of people of working age (16-64) who are either in work, or unemployed but actively seeking work. It includes both full-time and part-time workers, and employees and the self-employed
• Economically inactive


  People not actively looking for work, for reasons including: the need to look after elderly or infirm relatives, parents who are full-time carers for their children, people who have taken early retirement, those wealthy enough not to work, discouraged workers
• Full employment


  • A key macroeconomic policy objective in most countries and at the very centre of economic debate
  • For Neo-Classical (free market) economists, full employment is where all workers who want to work, at the current wage rate, have a job (i.e. Natural Rate of Unemployment). There is no involuntary unemployment
  • Keynesians usually see it as being where everyone (except the frictionally unemployed) is employed. Traditionally, where 97% of the working population are in employment at any one time (Beveridge Report, 1944)
• ILO (International Labour Organisation) Labour Force Survey


  • The main UK measure since 1997 (replacing Claimant Count, as ILO Count is an internationally comparable measure of unemployment)
  • Figures collected via a monthly questionnaire (survey) called the Labour Force Survey which is sent to a representative sample of the country's population
  • It is the largest continuous household survey in the UK and provides the official measures of employment and unemployment

  
• ILO measure of unemployment

  Someone is unemployed if they are: without a job, want a job, have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks; or out of work, have found a job and are waiting to start it in the next 2 weeks
• Claimant Count (CC)


  • The main UK measure up to 1997, still collected and published by the Office for National Statistics (ONS) to enable comparisons over time
  • It measures the number of unemployed people who are claiming unemployment benefit (called Jobseeker's Allowance - JSA) though recent measures also include people claiming other types of unemployment benefits (such as those included in Universal Credit)

  
• ILO Count vs Claimant Count

  • Under normal circumstances, ILO tends to give a bigger measure of unemployment than the Claimant Count, because it includes the "hidden unemployed", while the Claimant Count tends to miss them out
  • Recently though, largely due to the way the COVID-19 epidemic has affected the figures, the ILO Count has been lower than CC

  
• Hidden unemployed


  Unemployed people who do not or cannot claim JSA, usually because they have partners who earn too much for them to claim benefit, are early-retired people on company pensions who receive above the threshold for JSA payments but would like to work at least part-time, or are recently unemployed people who need to wait before they become eligible for JSA payments
• Types of unemployment


  • Frictional (or "Search") unemployment
  • Seasonal unemployment
  • Structural unemployment
  • Cyclical (or demand-deficient) unemployment
  • Real Wage or "Classical" unemployment
• Frictional (or "Search") unemployment


  Where people are moving between jobs or looking for work
• Seasonal unemployment


  Where workers are only employed at certain times of the year

  
• Structural unemployment


  Where the supply in an individual labour market in the economy is higher than the demand, often due to changes in the industrial structure of a country, particularly those which result in a lack of competitiveness leading to industries closing down and unemployment
• Examples of structural unemployment


  • Regional unemployment
  • Sectoral unemployment
  • Technological unemployment
• Regional unemployment


  Unemployment that occurs in a particular part of the country
• Sectoral unemployment


  Unemployment where jobs are lost in specific industries
• Technological unemployment


  Where workers are replaced by machines, e.g. computers, robotics, etc.
• Cyclical (or demand-deficient) unemployment


  Caused by a lack of demand resulting from a downturn in the trade cycle
• Real Wage or "Classical" unemployment


  Where workers make themselves unemployed by refusing to work for the current "going wage rate"
• According to the Classical economists, only cyclical unemployment is "involuntary", all other unemployment is "voluntary", with the main cause of this being real wage unemployment
• Costs of unemployment


  • Costs to the unemployed and their dependents (families)
  • Costs to the local community
  • Costs to Government finances
  • Costs to the economy as a whole
• Costs to the unemployed and their dependents (families)

  • Loss of income - offset by increased benefits and perhaps redundancy payment
  • Social problems - loss of self-esteem (the "stigma" of being unemployed and increased poor health; higher divorce rates)
  • The long-term unemployed find there is a loss of work skills due to being out of work a long time (scarring)
  • It is harder for them to find work, as prospective employers believe they will not be able to do the job
  • They remain unemployed, even though the original cause of this unemployment has now disappeared (lack of demand causing cyclical unemployment) and economic conditions are now favourable (situation known as hysteresis)
• Costs to the local community

  • Social problems - vandalism, crime
  • Negative multiplier effect on local businesses due to fewer customers
• Costs to Government finances

  • Increased public expenditure due to increased welfare payments to the unemployed (e.g. JSA/housing benefit)
  • Loss of tax revenue. Higher unemployment leads to lower income tax payments. It also reduces consumption spending - reducing indirect tax revenue. People in work are less confident of keeping their job, so spend less, further reducing indirect taxes
• Costs to the economy as a whole

  • Loss of output and falling economic growth
  • Increased inequality. Widening gap between rich and poor, as those in work get richer
  • Increasing regional imbalance as traditional industries close in the older industrial areas
• Benefits of unemployment


  • Less inflation pressure from excess demand (lower consumption) and cost push pressure (lower real wage increases due to workers being glad to have a job and are not likely to ask for large pay rises)
  • More flexible labour market; as workers are more mobile (mobility of labour) in search of a job. They are prepared to work more flexible hours, to retrain and move to those parts of the country where the jobs are available
  • Increased productivity
  • Trade balance may improve
• Increased productivity


  • More inefficient firms are forced to close, leaving the leaner and fitter ones. Though this may be changing.
  • Productivity (output per worker) normally rises in a recession, but during 2008-9 "great recession", it went down in the UK for the first time. Unemployment increased less than usual but workers had their hours reduced instead (underemployment) and so there were no longer only the most efficient workers left working
• Trade balance may improve

  Fewer imports as households and firms have less money to spend. Firms will look to increase their exports to replace reduced domestic sales
• Causes of unemployment


  • Demand-side factors (cyclical unemployment)
  • Supply-side factors (classical/real-wage, frictional, structural and seasonal unemployment)
• Cyclical (demand-deficient) unemployment

  Unemployment caused by a downturn in the business cycle, when there is a negative (or recessionary) output gap. The downturn arises from a fall in aggregate demand (demand-side factor).
• Cyclical unemployment was first suggested by Keynes in his book: "The General Theory of Employment, Interest and Money" at the time of the Great Depression of the 1930s
• (Keynesian) Demand Deficient Unemployment

  1. Consumption, Investment, Government spending or Exports (C, I, G or X) fall or Imports (M) rise

  2. Result is a fall in Aggregate Demand (AD)

  3. Firms unable to sell all their output

  4. Cut output and need fewer workers

  5. Result is more unemployment

  
• Classical ("Real Wage") Unemployment


  Unemployment that occurs when real wages for jobs are forced above the market clearing level (leading to market disequilibrium), even when the economy is booming
• Classical economists claimed that, like any good or service, when the price of labour rises, the demand for it will fall</b>
• If labour productivity does not rise at the same rate as wage rates, firms will seek to reduce their increased labour costs by reducing the number of workers they employ
• Classical or Real Wage Unemployment


  A form of unemployment that occurs when real wages for jobs are forced above the market clearing level (leading to market disequilibrium), even when the economy is booming
• Voluntary Unemployment


  Jobs exist, but workers choose not to take them, because they are not prepared to work for the wage rate being offered (or where minimum wage legislation exists, are unable to)
• Supply-side rigidities in the labour market that can cause classical/real wage unemployment


  • Unemployment benefit (JSA) payments being too close to the wage rate (high replacement ratio)
  • Trade union power driving up wage rates
  • Immobility of labour
  • Government legislation, such as minimum wages, stopping wage rates from falling