Unemployment

Why do we measure unemployment?

Unemployment is seen as a social evil, that should be tackled – we need to know the level of unemployment to see how well the economy is doing.

The government needs to know so it can intervene if necessary. Government may decide to alter the level of aggregate demand or institute special policies e.g., sponsored training schemes, or expand jobs in the public sector.

We need to know the level of unemployment for social welfare purposes. The government need to budget and wants a forecast of future payment levels to the unemployed and other social security benefits.

International obligations – the United Nations makes us collect data on unemployment – all members of the UN accept the rules as a condition of membership.

Trade unions, political parties, the Confederation of British Industry, and doubtless others, would strongly object if we stopped collecting the data. So we could not stop anyway!

How do we measure unemployment?

(This was mentioned briefly last time).

We take the number actually unemployed and divide it into the number in the workforce to get a percentage, e.g., 3.0%. There were 28.3 million in the UK workforce in July
2004.

But it is not easy to determine who is unemployed or who is in the workforce.

The “workforce” means those who are 16 years and older who work for pay or else register as “available” for such work. This excludes students, housewives or house- husbands, pensioners and the early retired, and all who do not bother to register themselves. There were 29.7 million economically active people at mid 2004.

There are two ways we measure unemployment.

Method 1 The claimant unemployed. This includes those who claim benefit within the last month (the “job seekers allowance”); the measure is taken on the second Thursday of each month.

It excludes all those not eligible for benefits; all men over 60 years; and all those registered at private commercial job-finding agencies but not state ones.

It includes fraudulent claimers, e.g., those working but claiming benefit at the same time.

It is generally thought to ignore “hidden unemployment” and thus underestimates the real figure.

At mid 2004 the claimant-based rate of unemployment was 2.7 %.

Method 2. The survey method. This is a standardised international measure, based on the International Labour Organisation method (ILO).

There is a quarterly survey of 61,000 households – a person is counted as “unemployed” if they say they have no job but have actively sought work in the last four weeks or they are waiting to take up a job offer in the next fortnight.

This measure probably overestimates the degree of unemployment as people can easily claim they are looking for work when they are not!

At mid 2004: the Labour Force Survey-based rate of unemployment was 4.8% (cf. 2.7%
by the claimant method above).

Some problems involved in unemployment include:

Issues in being able to find work:

o Where a person lives (in the north-east it may be hard to find job, in London it is easy).

o Gender – males are less likely to be fired than females; but unemployed females are more likely to be offered a job than men. However, this is likely to be part-time work even though many might prefer a full time position.

o Race – whites are more likely to be offered work than non-whites.

o Age – youth are less likely to be offered a job, as are older people, say over 50 years of age.

Seasonal adjustments - some jobs are more on offer at certain times, e.g., fruit pickers or when school leavers flood onto the market seeking their first job. The government adjusts the unemployment figures to take account of it (this is called “the seasonal adjustment”).

The time unemployed: the average can mislead. Some people stay unemployed for long periods and may never find work, even if the average length of unemployment is only a few weeks. Also, if a person is unemployed for more than about two years (USA case studies) the person tends to lose their work habits, becomes unpunctual, and may not bother to turn up if he or she does not feels like it. Such people give up in effect, and may never work again.

Types of unemployment and the role of the state in tackling them

Other than giving unemployment pay to those who have paid for their stamps (national insurance), we usually do better by tackling the cause of the unemployment if we can.

These causes can be:

Deficient demand. Structural. Cyclical. Frictional.

Deficient demand

If the cause is deficient aggregate demand: the government can simply increase demand.

Structural unemployment

At any one time, some industries are dying and have surplus labour with skills that fit that industry; and some industries are growing and are short of people, particularly those with the necessary new skills. A major cause of structural unemployment is a change in demand in consumer markets, together with the time lag needed to educate and re-
educate people.

In addition to changes on the demand side, some technology changes on the supply side mean we also need new skills, for example computer scanner repair workers. We always see a mismatch between the skills workers have and the skills employers need, because society is constantly changing.

Note: manufacturing is a dying area and service industries a growing one in all developed societies. This has strong implications for the type of education we need and the training in particular skills.

To tackle structural unemployment the government may:

a) Provide information on what jobs are available as well as likely in the future. This can be done via job centres, advertising on TV, informing careers advisors in schools and the like.
b) Help people to move away from the area of low job opportunity in which they live. Some possibilities include: subsidise travel to look for work; pay all the costs of selling
the house and buying a new one elsewhere; allow people in council accommodation in
different local authorities easily to exchange dwellings; make all pensions transferable between companies.

A major problem is the house cost around the South-East of England. Prices are so high compared with the North.

A minor problem is that welfare payments allow people to stay where they happen to be born, even if there is no work there for them.

People often do not or will not move:

Some people do not want to move away from their families, friends and social groups or clubs of which they are members.
Some people often unaware of the possibilities elsewhere (lack of knowledge). Local accents are strong and they fear they might be laughed at or not find work easily even if do move – with some justification.
Sheer inertia.

c) We may need to train and later retrain adults through life to gain new skills.

Some possibilities include: subsidise retraining for the worker and for the company they currently work in; tax breaks given to those who gain a needed skill; allow the worker time off work with full pay; or “bribe” people with cash handouts. This would seem a more desirable way and less disruptive socially than moving people to new areas where they may be unhappy.

Cyclical unemployment

This is due to the business cycle. We can try to iron out booms and slumps to reduce this type of unemployment.

Frictional unemployment

These are people in the process of changing jobs and who are briefly and temporarily unemployed. We need do little or nothing here.

The 1998 Labour “New Deal”

This was partly to tackle unemployment, partly to tighten up on “dole bludgers” and persuade people to go back to work.

The unemployed now have three choices:

Stay in school or go back to school. Find a job.
Join a recognised training scheme.

Their benefits can be cut off if they do not do one of these.

“Full employment”

This does not mean “no one is unemployed”! There will always be frictional unemployment; some people will never work because of mental or physical incapacity. Lord Beveridge, in 1944, felt that 3% was roughly “full employment” (made up of 1% frictional, 1% seasonal, and 1% because of overseas factors like a fall in demand for some of our exports).

Now we prefer to focus on the “natural rate of unemployment”, which is the level where the rate of inflation does not increase (but there still is inflation). This is abbreviated to “NAIRU”, “the non accelerating rate of unemployment”; there is a bit of confusion around this term, as some writers use it to mean the level where prices are constant, i.e., there is no inflation at all, rather than there is some inflation but which is steady. We will look at NAIRU later in more detail when we examine the Phillips Curve below.

Demographic and social changes and employment (some points that might prove useful for exams – you never know!)

An ageing population: fewer workers exist to support the greater number of living retirees which will lead to an increasing burden on the working population.

The population pyramid: this is usually a “normal” shape, i.e., it is like a pyramid. However, in developed countries such as the UK, the base is narrowing as fewer babies are being born.

The government response has been to encourage people make more provision for
their own old age and save more. Stakeholder pensions (2001+) encourage people to take out their own private pension plan; Independent Savings Accounts, better known as ISA’s (1998+) mean people do not pay tax on savings in an ISA account or on shares held in an ISA account.

Women have increased their share of the workforce. Generally they take part-time work more than men. This is partly because they prefer it as they may have children to cope with; for many, however, they take it because it is all that they can get.

There is a problem hidden in the overall unemployment statistics in that many of the unemployed are full time males; while many of the newly created jobs are for part- time women workers.

The participation rate. This is the proportion of the working age group (15-60 or 15-
65) that choose to work, i.e. are in work or actively seeking work. The share of women has increased!

Technological change and unemployment

Manufacturing industry is declining as service industries expand (these are now 70% of GDP in the UK). This means that some old skills may be out of date and are no longer needed, while the demand for new skills is high and also constantly changing.

Age effects: the old learn new skills slowly if at all, so demand for them is low. One result is that it is harder for them to find a job; firms just hire younger workers.

There is a normal distribution curve of intelligence (half the population is below it by definition!). In a modern society, heavily based on services and with many
automated machines, the less intelligent people have fewer and fewer jobs to go for
(there is less demand for their services using muscle) but the demand for the
intelligent ones steadily increases. The long term prospects of those born slightly dim through no fault of their own does not look good, especially if they lack a natural talent. If someone is born with an ability to cut hair, they will probably be OK, in
fact do rather well. But those with a low IQ and no natural skills may find it quite
hard. There is probably a social problem in the offing here.

 

This temporary old revision section will automatically redirect to new version once ready.