2.12 Employment & Unemployment Why is a high rate of unemployment bad for the economy?

2.12 What you need to know The main UK measures of unemployment How employment and unemployment may be determined by both demand-side and supply-side factors The different types of unemployment: seasonal, frictional, cyclical and structural How unemployment links to the output gap, economic growth and the price level

2.12 You should be able to: Describe the main UK measures of unemployment: The Claimant Count and the Labour Force Survey Explain how employment and unemployment may occur on the demand-side and supply-side Analyse and evaluate these determinants using production possibility curves and AD/AS analysis Explain the different types of unemployment that may occur: seasonal, frictional, cyclical and structural Understand and explain the links between unemployment, the output gap, economic growth and the price level

Definition More precisely however, we are concerned with the members of the labour force who want to work, are able to work, but are unable to find a job. “The number of people looking for work but who cannot find a job at a point in time.”

Crucial Distinction: Level v Rate The level of unemployment = The number of people who are unemployed The rate of unemployment = The number of people unemployed as a % of the labour force Unemployed x 100 = Rate of unemployment Labour Force  The labour force includes all those who are economically active i.e. willing and able to work

Measuring Unemployment Two principle measures 1. Claimant Count  The number of people claiming Job Seekers Allowance (JSA) 2. Labour Force Survey (ILO)  Quarterly survey of approximately 60,000 households compiled by the Office of National Statistics studying the employment circumstances of the UK population Watch the videos and read the article about the latest unemployment figures. Notice the difference between the Claimant Count and Labour Force Survey measures. Why do you think the two are so different?

Some Problems with the Claimant Count 1. Does everyone who is eligible sign on? 2. Self-employed workers who are temporarily unemployed tend not to claim 3. Under 18s + Over 60s don’t count 4. Changing criteria for JSA 5. Some people who claim JSA aren’t actively seeking work 6. Some have jobs in black economy but continue to claim benefits Points 1-4 above underestimate unemployment statistics Points 5-6 above overestimate unemployment statistics

Is the Labour Force Survey Better? 1. Internationally recognised 2. Potential for analysis of data 3. Picks up trends in sectors 4. Better guide for policy makers 5. Generally accepted to be more accurate BUT Costly to compile Subject to sampling and extrapolation errors

Source: BBC News Unemployment Trends Look at the gap between the Labour Force Survey measure and the JSA measure. The trend appears to be widening over time. Why do you think this might be the case?

Consequences of Unemployment  The extent of the consequences depend upon two key factors 1. The rate of unemployment 2. The duration of unemployment There will be consequences for… 1. The economy 2. Businesses 3. The unemployed

Lost output: If there is unemployment, this represents a significant wastage of economic resources, and it is likely that the economy will be producing within the PPF e.g. at point X. If there was full employment, then the economy could produce closer to the PPF e.g. Point Y. Increased government spending on JSA and employment programmes. Lost tax revenue through lower income tax receipts. There is also likely to be lower consumption, so VAT receipts will also fall. Consequences for the Economy Consumer Goods Capital Goods X Y

Consequences for Businesses Reduced demand for goods/services Reduced productivity Reduced profitability Less incentive to invest Reduced morale and productivity of remaining workforce who are perhaps concerned over future potential job losses

Consequences for the Unemployed Lower living standards  The unemployed will have lower incomes, meaning a reduced standard of living Social costs  Unemployment can enhance the likelihood of illnesses such as depression and cause marital stress as strains are placed on family finances Financial costs  Looking for work incurs a time cost  More time spent at home may increase utility bills De-Skilling  The longer you are unemployed, the more “de-skilled” you become as workplace skills are not developed  This leads to diminishing ‘human capital’ over time Reduced chances of finding work  The longer you are unemployed, the less likely you are to find a job

Cyclical  This is heavily linked to the economic cycle and occurs when there is a negative output gap  It indicates that demand is low (sometimes referred to as demand-deficient unemployment) Types of Unemployment (1) GDP Time Actual GDP Trend line If the economy is in a recession and operating at Point X, firms do not need to employ as many workers because they do not need to produce as many goods because demand has fallen. As the economy recovers and moves towards a positive output gap, cyclical unemployment will reduce. X Negative Output Gap

Types of Unemployment (2) Frictional  This is unemployment that occurs as workers move between jobs, mainly through career moves or geographical changes  This type of unemployment is typically short-term, and often exists because workers do not have perfect and immediate information about every job opportunity that may be available to them  It is assumed that there is always likely to be some frictional unemployment that persists in an economy Seasonal  This occurs when workers are unemployed at different times of the year  This tends to happen in seasonal industries such as leisure and tourism and farming  It can also apply in retail industries as more workers are employed over busy periods, such as Christmas  As a consequence, this seasonality in employment patterns can distort unemployment figures, and so you will often find unemployment that is “seasonally adjusted” which seeks to smooth out the fluctuations in employment levels to provide more accurate statistics

Types of Unemployment (3) Structural  This occurs when long term shifts in the structure of the economy impact upon the job market  For example, in the UK there has been an ever-increasing shift towards tertiary sector employment and away from primary and secondary sector employment due to low wage economies in Eastern Europe and the Far East  As a consequence, large pools of highly skilled workers may find themselves unable to find work as there is limited demand for their labour because production and supply has been moved to other countries  Structural unemployment tends to increase in line with the pace of globalisation  These workers will therefore need to re-train and gain new skills in order to find employment  This of course, will take time and may be costly

Other Types of Unemployment It is also worth noting two other types of unemployment that can exist. Technological  This occurs when improved capital, which may be more productive and efficient than labour, replaces labour as a factor of production Regional  This is heavily linked to structural unemployment, and occurs when unemployment occurs within particular towns, cities or regions  This is often because the local area has specialised in the production of a good or provision of a service that is no longer demanded or is produced in cheaper economies  As a consequence, there is a further impact as demand drops locally  A good example of regional unemployment is the jobs lost in Bradford and surrounding communities as a result of the decline of the textile industry in the UK Is this a good way to avoid regional unemployment?

Demand-Side Unemployment 1) If cyclical unemployment occurs, then this can be represented by a shift in AD to AD 1. Price Level Real National Output LRAS FE 2) This may also occur through seasonal or frictional factors. 4) Notice that real national output has reduced to Y 1 indicating a lower rate of economic growth. AD 1 P1P1 Y1Y1 AD P 5) Notice also that the price level has reduced to P 1, indicating a lower rate of inflation. Whilst this itself may be desirable, a government may need to weigh up the benefits of this versus the lower rate of economic growth and higher rate of unemployment. 3) As a consequence, unemployment of Y 1 -FE has now been created.

Supply-Side Unemployment Price Level Real National Output SRAS P Y 1) If a firm experiences an increase in costs, perhaps as a result of higher wages, they may decide to reduce their supply. AD 3) This will shift supply from SRAS to SRAS 1, and create unemployment of Y-Y 1. P1P1 Y1 4) As a result, Real National Output has also fallen, and there has been an increase in the price level from P to P 1 indicating inflation. SRAS 1 2) Or, in response to cyclical unemployment, they may scale back production in order that they are not left with surplus stock that they cannot sell or may be expensive to hold.

Read the article on UK unemployment. What type of unemployment do you think the UK is suffering from?

Multiple Choice 1 Structural unemployment is most likely to be caused by a) a recession in the economy b) changes in the demand for labour at different times of the year c) an increase in the number of people changing jobs d) the skills of the unemployed not matching those skills required for the available jobs Can you explain your answer?

Multiple Choice 2 A decline in consumer confidence is represented by a leftward shift in the aggregate demand curve from AD1 to AD2. As a result, output falls from Y1 to Y2 and unemployment rises. The type of unemployment that results from this fall in demand is best described as a) structural unemployment b) cyclical unemployment c) seasonal unemployment d) frictional unemployment Can you explain your answer? Price Level Real National Output SRAS Y2Y2 Y1Y1 LRAS AD 1 AD 2

Multiple Choice 3 Which of the following is most likely to be an example of frictional unemployment? a) Gill lost her job as a television engineer two months ago and is waiting to start a new job next month b) Brian has not worked for 15 years since losing his job as a coal miner c) Hitesh lost his job as a construction worker six months ago when a recession led to a downturn in the construction industry d) Faith works in the hotel trade as a casual chef and spends November to April out of work Can you explain your answer?

2.12 You should be able to: Describe the main UK measures of unemployment: The Claimant Count and the Labour Force Survey Explain how employment and unemployment may occur on the demand-side and supply-side Analyse and evaluate these determinants using production possibility curves and AD/AS analysis Explain the different types of unemployment that may occur: seasonal, frictional, cyclical and structural Understand and explain the links between unemployment, the output gap, economic growth and the price level