2.1.3: Employment and unemployment

Unemployment+Employment

• Unemployment can be stated as a number of percentage of the population working

• It represents a waste of resources and therefore an unemployment level is a good indicator of a country’s economy

• Employment is linked to economic growth due to fast growth resulting in an increase in job creation

Measures of unemployment: Claimant count

• Is he number of people receiving unemployment benefits

• It provides the number of claimants on particular days each month and the number of people joining and leaving

Measures of unemployment: Labour Force Survey and the International labour Organisation

• ONS (the office of national statistics) uses the ILO (International labour organisation) definition of unemployment

• Which includes; those who do more than 1 hour of paid work a week, are temporarily away from or on a Government supported training scheme or do minimum 15 hours of unpaid work for their family businesses

• The LFS is a sample of people living in households and is a legal requirement for every country in the EU

• Asks questions about personal circumstance and labour market activity

• It classes people as inactive, employed or unemployed

• However, these figures are only an estimate of the unemployment level

What classifies as unemployment

• Those of working age who are without work, able to work and seek work and have actively sought work in the last4 weeks and are available to start work in the next two weeks

Inactive

• Those who are neither unemployed or employed

• Includes people of working age not seeking employment as well as those seeking work bug not able to start e.g: those in study, or looking after family

Claimant account and LFS comparison

• Some people may be included in claimant account as unemployed but not the LFS

• It could include people working in the hidden economy or those who illegally

• However, some people aren’t eligible for benefits but could be classed as unemployed- these people would be included in the LFS not the claimant

• LFS tends to be higher than the Claimant account due to CC and LFS rates going in different directions

• LFS is only a sample and different types of people have been asked which can lead to short term changes in the rate

• This may also happen due to things happening in the labour market not caused by the CC e.g: more students look for work after their studies

• It is argued that both underestimate the figure as they do not include:

• Those working part time but would like to work full time, involved with government training schemes but would prefer employment, those classed as sick or disabled, those who aren’t actively looking for jobs but would take a job if offered or are in education due to no being able to get a job

Rates

• Thee economically active are the unemployed and employed- those engaged in the labour market and people employers look to recruit

• The workless are unemployed and inactive

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

• The unemployment rate is the % of the economically active who are unemployed

• The participation/activity rate is the % if people of working age who are economically active

• The inactivity rate is the % of the population of working age who are inactive

What is underemployment

• Those who are in part time or zero hour contracts when they would prefer to be full time and people who are self employed but would rather be employees

• Also includes those in jobs which do not reflect their skill level

• Underemployed people aren’t included in any statistics

• Underemployment tends to to increase during recessions because firms will just reduce staff hours instead of making them redundant and having to pay expensive redundancy packages

• Doesn’t have as any negative effects as unemployment

• However dies mea the underemployed have lower incomes and therefore spends less resulting in a fall in economic growth and therefore AD is impacted

Significance in changes in inactivity

• Increases in activity will decrease the size of the labour force therefore causing a full in productive potential of the country

• This will in turn lower GDP and decrease tax revenue due to the decrease in people working

• However, deceases in inactivity could just result in more people being unemployed if there are no available jobs

What is frictional unemployment?

• Unemployment due to people moving between jobs

• Could be due to the 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

• It is not a serious problem if it is only short term

What is seasonal unemployment?

• Occurs due to the fact that some employment is strongly season e.g: tourism

• Once that time of year has passed, the labour force is drastically reduces

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

What is cyclical unemployment?

• Occurs due to a general demand of goods and services within the country

• AKA a Keynesian ‘demand deficient’ unemployment

• When there is a recession or severe slowdown in economic growth, there is an increase in unemployment due to the fact that would be plant closures, business failures and increase in redundancies and worker layoffs

• This is due to a decrease in demand causing businesses to cut employment in order to control costs and restore some of their profitability

Real wage inflexibility

• Unemployment considered to be the result of real wages being above their market clearing level

• This results in an excess labour supply

• As a result some workers might be prepared to work below the minimum wage and companies may be prepared to take them on if they were able to pay them below minimum wage

• However, this is illegal therefore unemployed workers can’t get a job

• Some economist believe that minimum wages risk creating unemployment in industries where international competition from ow labour costs producers us severe

• However, there is little evidence that minimum wage has created rising unemployment on the scale that was feared

• It can also be caused by unemployed workers refusing to take low paid jobs due to the fact that they can receive more from welfare benefits

Migration

• An increase in net inward migration tends to lead to increased jobs

• This is due to the circular flow income, which means that immigrant spending creates jobs and increases total employment without an increase in unemployment

• They are also less likely to claim benefits from the existing population

• However, it can also result in lower wages since usually they work for already low wage, low skill jobs

• As a result, Uk firms are able to recruit foreign workers which increases the labour supply and therefore the price equilibrium point is reduced

• This increases competition for jobs and UK workers who have low motivation to work and are low skilled

• They are competing in a job market with hard working, more skilled workers prepared to take the same jobs as them

• The impact is small and middle class ad higher incomes are rarely affected

Impacts of unemployment: Workers

• Those made redundant have a loss of stable income- this reduces their MPS and decreases their standard of living

• They may also suffer from the stigma of being unemployed and feel degraded by the process of claiming benefits- can cause mental stress etc

• The long term unemployed (longer than 12 months) find it more difficult to get another job as they lose valuable skills required for them to perform jobs

• Those in jobs suffer from reduced job security will fear bing made redundant- they may also feel a fall in wages because the firm is able to easily find replacements if they complain about pay

Impacts of unemployment: Firms

• Usually a decrease in demand for their goods- however this depends on their YED- it could result in a fall of profits e.g: brands who sell luxury goods may see a fall in demand due to a decrease in disposable income of consumers

• Long term unemployment can lead to a loss of skills and reduce the employability of many job candidates meaning firms have a smaller pool of skilled workers to employ form

• However, firms are able to to offer lower wages as people will take the job due to the limited supply and high demand of jobs

Impacts of unemployment: Consumers

• In areas of high unemployment, consumers tend to lose out due to the fact that local shopping centres tend to be run down- reduced range of goofs/shops available to those in areas of low unemployment

• Unemployed consumers have less disposable income

• Firms may however potentially lower prices and put on sales to increase demand for their goods

Impacts of unemployment: Government

• Reduced income results in an increase in welfare spending and decrease in tax revenue- therefore increases the budget deficit

• The government will have to raise taxation or scale back spending on public and merit goods

• May have to increase borrowing

Impacts of unemployment: Society ad a whole

• Rising unemployment is linked to social deprivation

• There is a correlation between crime and social dislocation- there is an increase in divorce rates, lower life expectancy and worsening health

• Areas of high unemployment often see a decrease in income for those working or even job loss- this results in a. Loss of potential national output as output is within the boundary- represents and inefficient use of scarce resources

• If people permanently eavesdrop on the l market, it has a negative effect on LRAS and therefore damages the economy’s potential growth so the country is unable to achieve the desired PPF

• Taxpayers paying money to the unemployed is not a loss for the economy as it is a transfer payment however the economy is affected due t the fact that there is a fall national output and there are social costs of the unemployed e.g: violent crime