2.1.3 Employment and Unemployment

What is the definition of unemployment?

Those who are able and willing to work, but are not currently working

What does unemployment represent?

Unemployment represents a waste of resources and so the level of unemployment is a good indicator of a country’s economy. Employment tends to be linked to economic growth as fast economic growth will lead to more jobs being created

How can the level of unemployment be represented?

The level of unemployment can be stated as a number or as a percentage of the working age population

What are the two measures for unemployment?

• The Claimant Count

• The UK Labour Force Survey

What is the Claimant Count?

The Claimant Count is the number of people receiving benefits for being unemployed. It provides the number of claimants on particular day each month and the numbers joining and leaving the count each month.

• For example, Jobseekers Allowance.

What does the Office of National Statistics use to define unemployment and employment.

• The International Labour Organisation (ILO). Anyone over 16 can be classed as employed, unemployed or economically inactive

What are the International Labour Organisation’s definition of employed, unemployed and inactive?

• Employed: Those who do more than 1 hour of paid work a week or are temporarily away from work (e.g. on holiday), are on a government supported training scheme or do minimum 15 hours of unpaid work for their family business.

• Unemployed: Those of working age who are without work, able to work and seeking work and have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks.

• Inactive: Those who are neither employed nor unemployed; they are people of working age not seeking employment as well as those seeking employment but not able to start work e.g. those in study, looking after family, health related issues, discouraged workers (those who are fed up of applying), retirement and those who do not want or need a job.

What is the Labour Force Survey?

The Labour Force Survey is a sample of people living in households and is a legal requirement for every country in the EU.

• It asks questions about personal circumstances and activity in the labour market to class people and employed, unemployed or inactive by ILO definition.

Are the Labour Force Survey’s statistics completely accurate?

NO. The figures are only an estimate of the true level of unemployment as it is measured by a sample of 80,000 households.

What are the 3 comparisons between the Claimant Count and the Labour Force Survey?

• However, some people aren’t eligible for benefits but are classed as unemployed so would appear in the LFS but not the Claimant count. This can be if their partner is working, if they are looking for work along full-time study or if they are around State Pension Age. The LFS tends to be higher than the Claimant Count because of these reasons.

• Sometimes, the claimant count and LFS rates can be going in different directions. This could be due to the fact that the LFS is only a sample and different types of people have been asked which can lead to short term changes in the rate. Also, there may be things happening in the labour market not covered by the Claimant Count, for example more students could look for work along their studies or more people above State Pension Age may look for work.

Why is it argued that both the Claimant Count and the Labour Force Survey underestimate their figures, and what are these factors known as?

It is argued that both underestimate the figure as they do not include THE HIDDEN UNEMPLOYED:

• working part time but would like to work full time

• on government training schemes who would prefer employment

• classed as sick or disabled

• who aren’t actively looking for jobs but would take a job if offered or are in education because they can’t get a job

What is the economically active?

The economically active are the employed and unemployed. They are engaged in labour market and are people employers can look to recruit

What are the workless?

The workless are the unemployed and inactive

What is the definition of the employment rate?

The employment rate is the percentage of the population of working age who are employed

What is the definition of the unemployment rate?

The unemployment rate is the percentage of the economically active who are unemployed.

What is the definition of the activity/participation rate?

The activity/participation rate is the percentage of the population of working age who are economically active

What is the definition of the inactivity rate?

Percentage of the working age population who are inactive

What are the underemployed?

• The underemployed are those who are in part time or zero hour contracts when they would prefer to be full time

• People who are self-employed but would rather be employees.

• Those who are in jobs which do not reflect their skill level , for example a university graduate that can’t find a graduate job so is working as a bartender.

Are the underemployed included in unemployment statistics?

The underemployed aren’t included in any unemployment statistics

When does underemployment tend to increase and what is its effects?

Underemployment tends to increase during recessions because firms will just reduce staff hours instead of making them redundant and having to pay expensive redundancies packages. It doesn’t have as many negative effects as official unemployment, but it does mean the underemployed have lower incomes and so will spend less, reducing aggregate demand and growth of the economy.

What is the impact of an increase in inactivity +eval?

Increases in inactivity will decrease the size of the labour force, therefore causing a fall in productive potential of the country . There will be a lower GDP and lower tax revenues as less people are working.

However, decreases in inactivity could just result in more people being unemployed if there are no jobs available to them.

What are the 5 types of unemployment?

• Frictional Unemployment

• Structural unemployment

• Seasonal unemployment

• Cyclical unemployment

• Real wage/Classical unemployment

What is frictional unemployment and is it a serious problem?

Frictional unemployment is due to people moving between jobs. This could be due to new workers entering the labour market or people who have chosen to leave their previous job. These people may take a while to locate and gain a job that they are willing to accept.

● This isn’t a serious problem as it is only short term.

What is structural unemployment?

This is a much more serious form of unemployment as it is a long term decline in demand in an industry leading to reduction in employment perhaps because of increasing international competition or technology.

• It is where the demand for labour is lower than the supply in an individual labour market e.g. ship building.

What are the 2 causes of structural unemployment?

• Geographical immobility. This is where workers struggle to move to different areas.

• Occupational immobility. This is where workers lack the skills needed to move between different jobs

How can occupational immobility and geographical immobility be solved?

• Government funded apprenticeship schemes

• Relocation subsidies

• Improvements in transport

What are the 3 different types of structural unemployment?

• Regional unemployment

• Sectoral unemployment

• Technological unemployment

What is regional unemployment?

Regional unemployment is where certain areas of a country suffer from very low levels of employment due to industry closures; this is made even worse by the fact that the loss of jobs can mean a fall in demand for other businesses in the area, forcing more closures and job losses.

What is sectoral unemployment?

Sectoral unemployment is where one sector (primary, secondary and tertiary) suffers a dramatic fall in employment.

What is technological unemployment?

Technological unemployment is where an improvement in technology means that jobs are replaced.

What is seasonal unemployment?

Some employment is strongly seasonal in demand . Industries such tourism are only prominent during certain times of the year so only demand large numbers of workers at a specific time. Once that time of the year has passed then the labour force is drastically reduced.

• There is little that can be done to prevent this from occurring in a free market economy.

What is cyclical unemployment?

This is unemployment due to a general lack of demand of goods and services within the country. This is also known a Keynesian ‘demand deficient’ unemployment.

When do we see cyclical unemployment in the business cycle?

When there is a recession or severe slowdown in economic growth, we see a rising unemployment because of plant closures, business failures and an increase in worker layoffs and redundancies. This is due to a decrease in demand causing businesses to cut employment in order to control costs and restore some of their profitability.

What is real wage inflexibility?

Unemployment due to real wages being set above equilibrium wage leading to excess supply of labour.

• Some workers might be prepared to work for less than the minimum wage and companies may be prepared to take on more workers if they could pay them less than the minimum wage, but this is illegal and so unemployed workers cannot get a job.

What do some economists believe the minimum wage risks?

Some economists believe that the minimum wage risks creating unemployment in industries where international competition from low-labour cost producers is severe. As yet, there is relatively little evidence that the minimum wage has created rising unemployment on the scale that was feared.

How does migration impact employment?

An increase in net inward migration tends to lead to increased jobs. Since the 1990s, the UK has seen a large increase in immigration from mainly Eastern European countries. Most of these people come to the UK to work, are of working age and often take lower skilled jobs; they are less likely to claim benefits than the existing population. Due to the circular flow of income, immigrants’ spending creates jobs and total employment increases without an increase in unemployment. This depends how much money immigrant workers send back home.

• However, it also leads to lower wages, particularly for lower-paid, low skilled jobs. UK firms are able to recruit foreign workers meaning that supply of labour is increased and so the price equilibrium of labour is reduced. There is more competition for jobs and UK workers who have low motivation to work and are low skilled are most affected as they are competing in the job market with hard working, more skilled workers prepared to take the same jobs as them. The impact of this is only small and middle and higher income wages are rarely affected.

How do skills impact employment?

Economies progress over time, and as a result, higher skills are needed to work in them. In the UK 50 years ago, many jobs were available for those who couldn’t read or write but now there are few.

• For the UK to maintain its employment levels, it needs to increase the skills of its workforce over time. Structural unemployment is caused by a lack of, or the wrong, skills. For example, engineering companies struggles to recruit skilled workers even though there are unemployed workers in the local area.

• If firms will not train staff, the government has to step in to correct the market failure but this is costly. As a result, people become long-term unemployed as their skills don’t fit the jobs on offer.

• Migrant workers may fill these shortages if their skills fit.

What is the impact of unemployment on workers?

Those who are made unemployed normally have a loss of income which usually results in a decline in their living standards.

• They often suffer from the stigma of being unemployed and feel degraded by the process of signing on to receive benefits to support their family. This can lead to stress, marital breakdown, suicide, physical illness etc.

• The long-term unemployed (those unemployed for more than 12 months) often find it more difficult to get another job as they lose skills.

• Those who are in jobs will suffer from lower job security and will fear being made redundant. They could also see a fall in wages because the firm can easily find someone to replace them if they complain about pay.

What is the impact of unemployment on firms?

There will tend to be a decrease in demand for their goods (but this depends on the YED) and so this could lead to a fall in profit.

• Long term unemployment can lead to loss of skills and reduce employability of workers, so firms have a smaller pool of skilled people to employ.

• They can offer low wages as people will take the job anyway because they know there is a lack of jobs so have few options

What is the impact of unemployment on consumers?

Consumers in areas of high unemployment lose out because local shopping centres tend to be run down and don’t offer the range of shops available to those in areas of low unemployment. They suffer from less choice. The quality of goods may also decrease.

• The unemployed consumers lose out as they have less available to spend.

• However, firms may lower prices and put on sales in order to increase demand for their product.

What is the impact of unemployment on the government?

The reduced income results in a fall in tax revenues and higher spending on welfare payments for families with people out of work, incurring an opportunity cost as the money could be better spent elsewhere.

• This will result in an increase in the budget deficit. It will be likely that the government will have to raise taxation or scale back plans for public spending on public and merit goods, such as the NHS or education. They may need to increase borrowing.

What is the impact of unemployment on society as a whole?

Rising unemployment is linked to social deprivation. There is a relationship with crime and social dislocation (increased divorce rates, worsening health and lower life expectancy).

• Areas of high unemployment often see a fall in demand for local goods and services, leading to a fall in income for those working in the services and sometimes further loss of jobs.

• It results in a loss of potential national output and represents an inefficient use of scarce resources. If people chose to leave the labour market permanently, then this will have a negative effect on LRAS and therefore damage the economy’s growth potential so the country is unable to achieve their desired PPF.

• Taxpayers paying money to the unemployed is not a loss for the economy as it is a transfer payment but the economy is affected because there is a fall in national output and the social costs of the unemployed e.g. violence and crime