15 The Labour Market Unemployment is one of the major macro-economic performance indicators. Fed – “Dual Mandate” Keeping unemployment as low as possible is a major policy objective of the government. WHY? U.K Forward Guidance 1

Why high unemployment matters Effect of unemployment depends on the type e.g. Structural more significant than frictional Inside PPF; Allocatively and productively inefficient Negative output gap Economic Costs Lost output Inefficiencies Fiscal Costs Less tax revenue Higher welfare payments External Costs Anti-social behaviour Demands on NHS Automatic stabilisers – G rises, helping AD Income tax + N.I + VAT : >50% of UK tax revenue Hysteresis and permanent effects could cause PPF to shift in Automatic stabilisers – less tax revenue means less leakages Workless households more likely to be in poverty… intergenerational issues… Youth unemployment rising, more crime, more stress

Don’t confuse unemployment with inactivity Stay-at-home parents Unemployed are looking for a job; whilst Inactive are not in the labour market Disabled Retired Students Prisoners The inactivity rate in the UK for those aged from 16 to 64 was 22 per cent The unemployment rate is 7.2 per cent of the economically active population

As many people unemployed in UK as there are long-term sick

What are the causes of unemployment? Look at the case studies on page 15. You have 2 minutes to work out which type of unemployment applies to the three people You have 2 minutes 15 Charlie Sarah Andrew

What are the causes of unemployment? Cyclical Hidden Frictional 15 Charlie Sarah Andrew

Types of unemployment (1) Unemployment related to the process of changing jobs, which may involve a period out of work. Frictional The category of unemployed whose number varies according to the business or economic cycle. Cyclical Improve by: increasing flow of information – job centres Demand-deficient / Keynesian NB: Not just in a recession (e.g. in a boom, bankruptcy lawyers have no business!)

Types of unemployment (2) When there is a mis-match between the skills of those unemployed and the skills that new jobs require. Structural Unemployment which is known to exist but is not included in the official government figures Hidden Improve by: supply-side policies such as retraining Especially amongst illegal immigrants – evaluation on official figures

Types of unemployment (3) This type of unemployment occurs when trade unions bargain for higher wages, which leads to fall in the demand for labour.  Classical / real-wage A type of unemployment that occurs due to the seasonal nature of the job is known as seasonal unemployment. Seasonal The more they push wages up, depending on the elasticity of labour supply and demand, the more unemployment E.g. tourism

Key Facts about unemployment Task : Using the chart, identify two significant points of comparison between UK unemployment and economic growth over the period shown. 16 Key Facts about unemployment Demand-deficient (Keynesian) unemployment Unemployment tends to LAG real GDP… Why?

Key Facts about unemployment 16 Remember, if the question asks for a comparison then don’t just describe. What is the same? What is different? Is the level of change different for the two statistics? What’s the overall change over the course of the time period? You have 2 minutes

Key Facts about unemployment 16 Key Facts about unemployment Task : Using the chart above, identify two significant points of comparison between UK unemployment and economic growth over the period shown. Comparison 1 Unemployment has grown throughout the period, economic growth has been variable (add figures!) ADD UNITS! %, £, levels, etc Comparison 2 Largest increase in unemployment occurred during 2008-2009, during the same period economic growth was negative (add figures).

16 What do you think are the current rates and levels (March 2014) for the categories below? Statistic Real statistic Unemployment rate (as a % of the economically active population, Labour Force Survey)   Unemployment total (no. of people registered unemployed, Labour Force Survey) Economically inactive (i.e. people without a job who have not actively sought work in the last four weeks) Unfilled Vacancies (where employers are actively seeking additional workers) Employment Total (the number of people over 16 in employment) Youth Unemployment (the number of people aged 16 – 24 who are registered unemployed) 7.2% 2.34 m 8.94 m 144 k 30 m 950k

Key Facts about unemployment 16 Key Facts about unemployment In an evaluative question relating to unemployment you need to be able to DISAGGREGATE: demonstrate the importance of youth unemployment, long-term unemployment and the availability of jobs. You will not be asked to state a macro-economic performance statistic. However, the ability to state a current trend may be a useful way of demonstrating knowledge to an examiner.

25% of ALL Eurozone youth unemployed are in Spain!

Youth unemployment: Fears of a ‘lost generation’ Around a million young people are now unemployed across the UK. Demographic of unemployment

Atrophy of skills Hysteresis Permanent effects

c.25% of UK’s youth unemployed have been unemployed are LONG TERM unemployment

Unemployment during the Recession Analysis: Suggest three reasons why unemployment has not been as high during the economic downturn since 2008. You have 2 minutes 17

Unemployment during the Recession Period Peak Unemployment Rate 1979 - 84 12% 1990 - 94 10.8% 2008 - present 8.4% Reason 1 Higher proportion of part-time jobs / Zero hours contracts… Reason 2 Employers less willing to make workers redundant (holding out for improvement in demand); Labour hoarding Reason 3 Less available benefits/more robust benefit claim system

Unemployment during the Recession Period Peak Unemployment Rate 1979 - 84 12% 1990 - 94 10.8% 2008 - present 8.4% Analysis: Suggest two possible consequences of this different pattern of unemployment. Consequence 1 Employers keeping less effective workers Productivity impact? Consequence 2 Employers have a higher proportion of part-time workers

Unemployment during the Recession   Keeping less effective workers Point: Faced with falling output, firms are more willing to keep workers employed which suggests that they have been keeping some less productive workers. Evidence for this: Productivity levels in the UK have remained stagnant and have not improved (unlike during other recessions). Explanation of why this is a problem: Lower productivity leads to higher possible costs and potentially higher prices compared to competition (from abroad). It depends upon…… (an evaluative point): Other factors leading to lower productivity such as quality (and age) of machinery leads to a lower levels of output

Unemployment during the Recession   Having a higher proportion of part-time workers Point: Evidence for this: Explanation of why this is a problem: It depends upon…… (an evaluative point): leads to lower levels of consumption Employers have seen an increase in the proportion of their workers who are part-time. Statistics show an increase in the number of people who work part-time even though they wish to work full-time. Part-time jobs attract a pro-rata level of wages, meaning that people earn less than if they worked full-time. How much of their shortfall in income is compensated by any potential state benefits

Underemployment… Part-time employees who could not find full-time work UK labour productivity (2010=100) Underemployment… Source: ONS Source: Labour Force Survey - ONS

Exam question: Evaluate the policies that might be most effective in reducing youth unemployment in the UK. Definition: Young people aged between 18 and 24 who are actively seeking work but are unable to find a job. 19

TWEEP Evaluation

Analysis: Explaining high youth unemployment – 16-24yrs 17 Analysis: Explaining high youth unemployment – 16-24yrs RULC? Human Capital Problems Reluctant Employers Reduced retirement rates Weakness of training schemes Tax? Both demand-side AND supply-side causes Supply side issue? Competition?

Exam question: Evaluate the policies that might be most effective in reducing youth unemployment in the UK. 19 Effects of unemployment depends on government’s response Policy depends on cause of unemployment Policy Example Targeted macro stimulus policies to boost growth   Expansion of apprenticeship schemes Improving geographical mobility of labour Measures to stimulate business start-ups Active regional development policies Reduce corporation tax To include new skills such as brick-laying Expansion of EU Short term vs long term New Employment Allowance to reduce NI contributions for new small businesses Regional employment funds No guarantee of success – quality not quantity of policy matters Time lags

Using TWEEP T W E P 20 Reduce corporation tax Immediate or delayed impact? Policy Impact Targeted macro stimulus policies to boost growth T   Expansion of apprenticeship schemes W Improving geographical mobility of labour E Measures to stimulate business start-ups Active regional development policies P Productivity impact? Reduce corporation tax Efficiency – new skilled workers To include new skills such as brick-laying Improve female employment Expansion of EU New Employment Allowance Regional unemployment priority Regional employment funds No guarantee of success – quality not quantity of policy matters Time lags

Twitter: @tutor2u_econ 08/11/2018