AS Macro Revision: Unemployment

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Information about AS Macro Revision: Unemployment

Published on February 21, 2014

Author: tutor2u


AS Macro Revision Unemployment in the Labour Market Spring 2014

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Unemployment The unemployed are those people able, available and willing to work but cannot find a job despite an active search for work • Unemployment means that scarce human resources are not being used to produce goods and services to meet people’s changing needs and wants • Persistently high levels of joblessness have damaging scarring consequences for an economy causing economic and social costs • Problems caused by unemployment are often deeprooted in local and regional communities and within particular groups of society – for example in the UK, more than one in six young people are out of work

Measuring Unemployment – Key Terms Claimant Count The number of people claiming unemploymentrelated benefits Labour Force Survey (LFS) All those actively seeking and available for work, whether or not they are claiming benefit Long-Term Unemployed People unemployed for at least one year Labour force The number of people of working age able, available and willing to work Full employment When there enough job vacancies for all the unemployed to take work Discouraged workers People often out of work for a long time who give up on job search Economically inactive Those who are of working age but are neither in work nor actively seeking work Employment rate The percentage of the population of working age that is in paid employment

UK Unemployment Rates in Recent Years A fall in the unemployment rate does not necessarily mean more people are employed The LFS unemployment rate peaked at 8.5% in 2011 – lower than in the previous recession

Are the Unemployment Figures Accurate / Reliable? Strength of Unemployment Data Problems / Limitations of Data Timely figures new each month Much hidden unemployment Large sample size for LFS measure Sample errors are inevitable Local data aids policy decisions High level of under employment In UK, a low level of benefit fraud Hard to measure scale of inactivity

Main Types of Unemployment Seasonal Structural Frictional Cyclical Regular seasonal changes in employment / labour demand e.g. tourism, retail, agriculture and construction sectors Arises from the mismatch of skills and job opportunities as the pattern of labour demand changes – linked to labour immobility Transitional unemployment due to people moving between jobs e.g. New entrants to the labour market Caused by a fall in or persistent weakness of aggregate demand leading to a decline in GDP and jobs

Cyclical Unemployment – Falling Aggregate Demand Cyclical unemployment is due to a lack of demand for goods and services. In a recession, firms are likely to reduce employment to cut costs – this is called “labour shedding” or “down-sizing” Cyclical unemployment has been a major problem for a number of European Union economies. In 2012, Spanish unemployment rose above 6 million for the first time, with over 25% of the workforce unemployed GPL AD2 AS GPL1 GPL2 AD1 Y2 Y1 Real GDP

Structural Unemployment Structural unemployment occurs when the demand for labour is less than the supply of labour in an individual labour market Decline of manufacturing Occupational immobility Geographical immobility Robotics replacing jobs Foreign competition – rising imports Long term regional decline Disincentives e.g. Poverty Trap Outsourcing of production overseas

Economic and Social Effects of High Unemployment Economic costs • Lost output, the economy is inside the PPF – lost efficiency • Fall in real incomes and lower living standards • Drop in tax revenues and higher welfare – budget deficit • Possible decline in labour supply as unemployed move overseas Social costs • Increase in relative poverty and welfare dependency • Extra demands on national health service (stress-related illness) • Link between persistent unemployment and social problems Are there any beneficial effects? • Reduced risk of inflation – lower wage claims and price discounts • Pool of unemployed labour available for growing businesses • Rise in self employment start-ups as alternative to being unemployed

Long Term Unemployment in the UK Economy The long term unemployed have been out of work for at least one year

“Labour Scarring Effects” from high Unemployment Loss of work experience • Reduced employability from a depreciation of skills • Gaps in CVs may influence potential employers • Decline in quality of human capital Loss of current and future income • Vulnerability to consumer debt at high interest rates • Decline in physical health and increase in psychological stress – less likely that someone will find work again Changing pattern of jobs in the economy • New jobs in recovery stage are different from lost ones • Structural unemployment – occupational immobility – makes it much harder to get people into the new jobs

Policies to Reduce Unemployment – Labour Demand Macro Stimulus Policies (+ Multiplier Effects) • Low interest rates and policies to increase business lending • Depreciation in the exchange rate (to help exports) • Infrastructure investment projects (fiscal policy) Cutting the cost of employing workers • Reductions in national insurance contributions (tax) • Financial support for apprenticeship programmes • Extra funding for regional policy – business grants Competitiveness Policies • Reductions in corporation tax (to increase investment) • Tax incentives for research / innovation spending • Enterprise policies to lift the rate of new business start-ups

Policies to Reduce Unemployment – Labour Supply Reducing occupational mobility • Better funding for and more effective training • Teaching new skills e.g. Coding for gaming, languages • An expansion of apprenticeship / internship programmes Improving geographical mobility • Rise in house-building will help to keep property prices lower and encourage more affordable rents • Active regional policy to create new jobs and businesses Stimulate stronger work incentives • Higher minimum wage or a living wage • Reductions in income tax / national insurance • Welfare reforms to reduce the risk of the poverty trap

The Problem of Youth Unemployment • In October 2013, 941,000 young people aged 16-24 were unemployed • The unemployment rate for 16-24 year olds was 20.5% • High rates of youth unemployment have serious economic and social consequences • Young people out of work risk a permanent fall in their expected lifetime earnings from work Some of the causes of high youth unemployment are shown below Skills Gaps Employers may not be willing to employ people who lack the ability to read and write Reluctant Employers – they may prefer older, more experienced workers Falling Retirement Rates caused by declining pension incomes = fewer jobs for younger people Weak Macro Fundamentals – i.e. low real GDP growth and low business confidence

Evaluation: Barriers to Lowering Unemployment • High levels of long term structural unemployment in the UK • There are pockets of exceptionally high unemployment and low economic activity rates, high youth unemployment • Hard to overcome the disincentive effects of • A complex welfare benefits and tax system • Unaffordable housing sector (both to buy and to rent) • Low-paid jobs that keep families in relative poverty • High rates of public sector dependency in some areas • Many people are under-employed, stuck in part-time jobs • Skills shortages, creaking infrastructure, huge variations in educational performance and opportunity • Weak demand in domestic & overseas markets e.g. the EU

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