2.1.3 Employment and unemployment

EMPLOYMENT AND UNEMPLOYMENT

• unemployment: represents a waste of resources so level of unemployment is a good indicator of a country’s economy

• employment: links to economic growth as fast economic growth will lead to more jobs being created

• level of unemployment can be stated as a no. or % of population of working age

MEASURES OF UNEMPLOYMENT

• claimant count

• international labour organisation

• UK labour force survey

CLAIMANT COUNT

• no. of people receiving benefits for being unemployed

• provides no. of claimants on particular day each month and no. joining and leaving count each month

INTERNATIONAL LABOUR ORGANISATION

• through ILO, anyone over 16 can be classed as employed, unemployed or economically inactive

ILO- 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 gov supported training scheme or do minimum 15 hours of unpaid work for their family business

ILO- 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 next 2 weeks

ILO- ECONOMICALLY INACTIVE

• those who are neither employed nor unemployed; 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, who do not want or need a job, etc.

UK LABOUR FORCE SURVEY

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

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

• figures are only an estimate of the true level of unemployment as it’s measured by a sample

COMPARISONS BETWEEN CLAIMANT COUNT AND LFS

• some may not be included in LFS unemployment measure but would be in Claimant Count-may include people working in the hidden economy or those who fraudulently claim benefits

• but some people aren’t eligible for benefits but are classed as unemployed so would appear in LFS but not the Claimant count

• e.g. 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

• LFS tends to be higher than Claimant Count because of these

• sometimes, claimant count and LFS rates can be going in diff directions- could be due to the fact that the LFS is only a sample and diff types of people have been asked which can lead to short term changes in rate

LIMITATIONS OF CLAIMANT COUNT AND LFS

• argued that both underestimate figure as they don’t include those:

  • working part time but would like to work full time

  • on gov 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 bc they can’t get a job

• these are the hidden unemployed

RATES

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

• workless are the unemployed and inactive

• employment rate- % of population of working age who are employed

• unemployment rate- % of economically active who are unemployed

• activity rate- % of population of working age who are economically active

• inactivity rate- % of population of working age who are inactive

UNDER-EMPLOYMENT

• underemployed are 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 who are in jobs which don’t reflect their skill level e.g. uni graduate that can’t find a graduate job so is working as a bartender

• underemployed aren’t included in any unemployment statistics

• underemployment tends to increase during recessions because firms will just reduce staff hours instead of making them redundant

• doesn’t have as many neg effects as official unemployment, but it does mean the underemployed have lower incomes and so will spend less, reducing AD and growth of economy

SIGNIFICANCE OF CHANGES IN ACTIVITY

• increases in inactivity will decrease size of 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

• but decreases in inactivity could just result in more people being unemployed if there are no jobs available to them

TYPES OF UNEMPLOYMENT

• frictional

• structural

• seasonal

• cyclical

• real wage inflexibility

FRICTIONAL UNEMPLOYMENT

• due to people moving between jobs

• could be due to new workers entering 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

• isn’t a serious problem as it is only short term

STRUCTURAL UNEMPLOYMENT

• long term decline in demand in an industry leading to reduction in employment perhaps bc of increasing international competition or tech

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

• lack of geographical and occupational mobility means that people will remain unemployed, so need to be retrained in order to gain a job

• different types of structural unemployment

  • regional unemployment- where certain areas of a country suffer from very low levels of employment due to industry closure

  • sectoral unemployment- where one sector (primary, secondary and tertiary) suffers a dramatic fall in employment

  • technological unemployment- where an improvement in tech means that jobs are replaced

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 passed then labour force is reduced

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

CYCLICAL UNEMPLOYMENT

• unemployment due to a general lack of demand of g and s w/in country

• also known a Keynesian ‘demand deficient’ unemployment

• when theres a recession, we see a rising unemployment because of plant closures, business failures and an increase in worker layoffs and redundancies

• 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 due to real wages being above their market clearing level leading to an excess supply of labour

• some workers might be prepared to work for less than min wage and companies may be prepared to take on more workers if they could pay them less than minimum wage- but illegal and so unemployed workers can’t get a job

• some economists believe that min wage risks creating unemployment in industries where international competition from low-labour cost producers is severe

• but there’s little evidence that min wage has created rising unemployment on the scale that was significant

• can also be caused by unemployed workers refusing to take low paid jobs bc they can receive more in welfare benefits

MIGRATION

• increase in net inward migration leads to increased jobs

• since 1990s- UK has seen a large increase in immigration from mainly Eastern European countries

• most of these people come to UK to work, are of working age and often take lower skilled jobs; less likely to claim benefits than existing population

• due to circular flow of income, immigrants’ spending creates jobs and total employment increases w/out an increase in unemployment- depends how much money immigrant workers send back home

• but 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 price equilibrium of labour is reduced

• more competition for jobs- low skilled/motivated UK workers most affected

• impact of this is only small and middle and higher income wages are rarely affected

SKILLS

• economies progress over time so higher skills needed

• in UK 50 yrs ago- many jobs were available for those who couldn’t read or write but now there are few

• for UK to maintain its employment levels, it needs to increase skills of its workforce over time

• structural unemployment is caused by a lack of, or wrong, skills

• if firms don’t train staff, gov has to to correct market failure but this is costly

• so 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

IMPACTS OF UNEMPLOYMENT- ON WORKERS

• loss of income- decline in living standards

• feel degraded by process of signing on to receive benefits to support their family- can lead to stress, marital breakdown, suicide, physical illness etc.

• long-term unemployed find it more difficult to get another job as they lose skills

• those who are in jobs will suffer from lower job security and may see a fall in wages bc firm can easily find someone to replace them

IMPACTS OF UNEMPLOYMENT- ON FIRMS

• decrease in demand for their goods (depends on the YED) and so 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

• can offer low wages as people will take the job anyway bc they know there’s a lack of jobs

IMPACTS OF UNEMPLOYMENT- ON CONSUMERS

• consumers in areas of high unemployment lose out bc local shopping centres tend to be run down- suffer from less choice

• quality of goods may also decrease

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

• but firms may lower prices to increase demand for their product

IMPACTS OF UNEMPLOYMENT- ON GOVERNMENT

• reduced income leads to a fall in tax revenues and higher spending on welfare payments for families with people out of work- opportunity cost

• will result in an increase in the budget deficit

• will be likely that gov will have to raise taxation or scale back plans for public spending on public and merit goods, such as the NHS or education

• may need to increase borrowing

IMPACTS OF UNEMPLOYMENT- ON SOCIETY

• rising unemployment is linked to social deprivation

• there’s a relationship w/ crime and social dislocation (increased divorce rates, worsening health and lower life expectancy)

• areas of high unemployment see a fall in demand for local g and s leading to a fall in income for workers

• if people chose to leave the labour market permanently, then this will have a neg effect on LRAS and damage economy’s growth potential so is unable to achieve their desired PPF

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