Unemployment

Those individuals who are 16 to 66 who are willing and able to work, though are not currently in employment.

Macro Objective - Achieve "Full employment"
Full employment - Unemployment at 3% or less

\(\text{Unemployment Rate} =\frac{\text{People Working}}{\text{People able to work}}\)

Example:
1.64 million unemployed 32.5 million in work

UK = \(\frac{\text{1.64 million}}{\text{32.5 million}}\) = 4.8%

Economically Inactive

  • Students
  • Disabled
  • Pensioners
  • Not actively seeking a job
  • Under 16
  • Retired
  • Asylum seekers
  • Discouraged Workers

Measuring unemployment

Claimant count

The number of people claiming job-seekers allowance each month. Used to be used but no longer used by the ONS.

It is straight forward to compile
However, it may be inaccurate because

  • People have too much pride to claim / enough wealth already
  • It doesn't recognise people who have been raising children and are looking to return to the workforce as unemployed
  • Excludes people who aren't eligible to claim JSA (e.g people with no permanent address)
  • Doesn't include people who are unemployed but choose not to claim.

ILO - Labour Force Survey

Measures the percentage of the workforce who are without a job but are available for work, and actively seeking employment.

This measure involves a labour force survey.

  • Considered to be more accurate than the claimant count method
  • It is the international standard and therefore makes comparisons between economies more accurate

Drawbacks:

  • The data relies on a sample of the population. It will not be fully representative
  • Doesn't represent underemployment, those who have jobs, but are qualified to do more skilled work. They are settling for what they can get.
  • Doesn't include the hidden unemployed. These people who have been out of work for a long time, who are seeking work. They are classified as discouraged workers.

Types of unemployment

Frictional Unemployment

Individuals that are between jobs, for example transferring from one sector to another. This tends to be a short term situation.

Structural Unemployment

Individuals who have left one sector due to it contracting, but do not have the skills to move into another that is expanding. This is due to occupational immobility.

Cyclical Unemployment

Unemployment that arises due to an economic downturn or onset of a recession.

Demand-deficient Unemployment

Arises due to AD being low within an economy. Easily rectified by boosting AD.

Seasonal Unemployment

Some jobs are linked into certain times of the year, such as the tourist industry during the summer will need less workers in the winter.

Consequences of Unemployment

For individuals

  • Fall in earnings, even if claiming benefits
  • Fall in their standard of living (relative poverty)
  • Loss of status
  • Stress that can lead to health issues
  • The longer they are unemployed, the less employable they become

For the economy

  • Unemployment represents an opportunity cost to an economy. Lost output cannot be regained. The economy is operating inefficiently.
  • The government will have to increase their spending in order to pay for JSA. They will also receive less money (from taxes). This can lead to a deficit.

Positives of high unemployment

  • Firms may be able to lower their wages and find it easier to recruit staff
  • Downward pressure on inflation

Depends on

  • The rate of unemployment (If unemployment is high, it is harder to get a job)
  • How long individuals have been unemployed for
  • The type of unemployment

Voluntary Unemployment

Involuntary Unemployment - Individuals made unemployed due to a recession / demand deficient unemployment
Voluntary Unemployment - Individuals who are unwilling to accept the going wage rate or the type of job available.

Real wage Unemployment - The wage rate is above the equilibrium leading to firms reducing the amount of workers they employ.

Causes

  • Generous unemployment benefits, making accepting a job less attractive
  • High marginal tax rates, which reduce effective pay
  • Unemployed hoping to find a job more suited to their skills / qualifications
  • Some jobs too tedious, e.g. Fruit picking / Security guard

Solutions

  • Reduce unemployment benefits
  • Reduce income tax
  • Better information / easier to find a matching job
  • Retrain to the job they want to do, e.g. Nurse, Teacher (fill skills gaps)

NAIRU

NAIRU - Non-accelerating rate of inflation

NAIRU on Keynesian LRAS

NAIRU the level of unemployment above which there will be inflation (labour market tightening). This is shown on the diagram - Moving AD past NAIRU will cause the price level to increase - i.e. inflation.

Decreasing NAIRU

  • Training and Education
    • To fill skills gaps
  • Net migration for skilled workers
  • Reduce trade union power
    • To stop wages increasing
  • Reduce benefits and income tax