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Employment and UnemploymentA2 Economics, Autumn 2010

Measuring Unemployment

• A Working Definition of Unemployment

– People able, available and willing to find work and actively seeking work – but not employedseeking work but not employed

• The Claimant Count Measure

– The number of people claiming the Jobseekers’ Allowance – a monthly headcount of the unemployed

• The Labour Force Survey

– Must have actively sought work in the previous four weeks and be available to start work immediatelyand be available to start work immediately

– A large sample – but subject to sampling error

– This is the government’s preferred measure

– The basis for cross-country comparisons

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Unemployment in the UKUnemployed people aged 16-59 (women) / 64 (men), seasonally adjusted

Unemployment in the UK Economy

10

11

12

13

10

11

12

13

3

4

5

6

7

8

9

10

pe

r ce

nt

of

the

lab

ou

r fo

rce

3

4

5

6

7

8

9

10

Claimant Count

Labour Force Survey

Source: Labour Force Statistics

90 92 94 96 98 00 02 04 06 08 100

1

2

3

0

1

2

3

Changes in the world of work

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Flows in the Labour Market

New hiresR llEmployed

Labour force Unemployed

RetiringTemporarily

l i

Recalls

Job-losersLay-offs

Quits

Discouragedworkers

Out of the labour force

Takinga job

leaving

Re-entrantsNew entrants

Types of Unemployment

• Seasonal Unemployment

– Regular seasonal changes in employment / labour demand

– Unemployment data is usually given a seasonal adjustment to reflect this

– Not a major concern for labour market economists

– Affects certain industries more than others

• Catering and leisure

• ConstructionConstruction

• Retailing

• Tourism

• Agriculture

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Types of Unemployment

• Frictional Unemployment

– Irreducible minimum unemployment in a dynamic economy

– Often involves short spells of unemployment

– Includes new and returning entrants into the labour market

– Imperfect information about available jobs canImperfect information about available jobs can lengthen the period of job search

– Some frictional unemployment is useful – a pool of available workers, can help to keep wage inflation down

Graduate unemployment in the UK

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Structural Unemployment

• Labour market failure

– Mismatch of skills as pattern of labour demand in the economy changes over time

– Involuntary unemployment

– Factor immobility of labour is a major cause of structural unemployment – labour market failure

– Often involves long-term unemploymentOften involves long term unemployment

– Prevalent in regions where industries go into long-term decline and have been major sources of employment

– Labour market disincentives – poverty trap

Cyclical unemployment

• Cyclical (Keynesian) Unemployment

– There is a clear cyclical relationship between demand output employment anddemand, output, employment and unemployment

– Caused by a fall in aggregate demand relative to potential GDP leading to a loss of real national output and employment

– If national output grows less than potential output then a slowdown in demand is nearlyoutput then a slowdown in demand is nearly always enough to create some more cyclical unemployment

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Growth and unemployment in the UKAnnual % change in UK GDP at constant prices,% of labour force unemployed

Growth affects unemployment

7.5

10.0

7.5

10.0

Unemployment (% of the labour force, LFS)

Pe

r ce

nt o

f th

e la

bo

ur

forc

e

-2.5

0.0

2.5

5.0

Pe

rce

nta

ge g

row

th o

f G

DP

-2.5

0.0

2.5

5.0

Real GDP (Annual % Change)

Source: UK Statistics Commission

02 03 04 05 06 07 08 09 10-7.5

-5.0

-7.5

-5.0

Short term unemploymentAnnual % change in GDP and short term unemployment

The recession leaves many out of work

llio

ns1.3

1.5

n (

mill

ion

s)

1.3

1.5

O t f k f l th 6 th

2

0

2

4

erc

en

t

2

0

2

4

Annual growth of real GDP

mi

0.9

1.1

Pe

rso

n

0.9

1.1Out of work for less than 6 months

Source: Reuters EcoWin

Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q305 06 07 08 09 10

-6

-4

-2Pe

-6

-4

-2

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Hours workedMillion hours per week

UK - Total actual weekly hours worked

940

950

940

950

mill

ion

s

900

910

920

930

per

we

ek

(mill

ion

s)

900

910

920

930

Source: Reuters EcoWin

00 01 02 03 04 05 06 07 08 09 10880

890

880

890

Real wage unemployment

• Real Wage Unemployment

– Created when real wages are maintained above their market clearing level leading to an excess supply of labourmarket clearing level leading to an excess supply of labour at the prevailing wage rate

• Possible causes of real wage unemployment

– Trade unions using their collective bargaining power to drive wages above their free market level

– Successive rises in the national minimum wage

– Globalisation is driving down real wages in some industries e.g. textiles

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Consequences of unemployment

Economic and social impact of high unemployment

A selection of news reports

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Economic Costs of Unemployment

• Private Costs for the Involuntary Unemployed

– Loss of income – but many people have major commitments (mortgage, credit agreements)

– Fall in real living standards

– Unemployment in your 20s has a huge effect on living standards for people in their 50s

– Increased health risks (particularly for long term unemployed)

• Stress / reduction in quality of diet

• Increased risk of marital break-up

• Social exclusion• Social exclusion

– Loss of marketable skills (human capital)

• The longer the duration of unemployment, the lower the chances of finding fresh employment

• Particular problem facing the youth unemployed – the ‘lost generation’

Long term unemployment in the UKMillions, seasonally adjusted, using Labour Force Survey data

UK's Long Term Jobless Problem

1 2

1.4

1.6

1 2

1.4

1.6

mill

ion

s

0.4

0.6

0.8

1.0

1.2

Pe

rson

s (m

illio

ns)

0.4

0.6

0.8

1.0

1.2Unemployed for up to six months

Unemployed for over 12 months

Source: Reuters EcoWin

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 100.0

0.2

0.0

0.2 Unemployed for over 24 months

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Youth unemploymentThousands, people out of work for at least a year aged 18-24

The Youth Unemployment Crisis

225000

250000

275000

225000

250000

275000

75000

100000

125000

150000

175000

200000

75000

100000

125000

150000

175000

200000

Source: Reuters EcoWin

92 94 96 98 00 02 04 06 08 100

25000

50000

0

25000

50000

Unemployment and businesses

• Economic Consequences for Businesses

– Negative consequencesg q

• Fall in demand for goods and services

• Fall in demand for businesses further down the supply chain

• Consider the negative multiplier effects from the closure of a major employer in a town or city

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Unemployment and businesses (2)

– Some positive consequences

• Bigger pool of surplus labour is available – but gg p pstill a problem if there is plenty of structural unemployment

• Less pressure to pay higher wages

• Less risk of industrial / strike action – fear of job losses – leading to reduced trade union power

Consequences for Government

• Consequences for the Government

– Drop in employment hits trend growth - hysteresisp p y g y

– Increased spending on unemployment benefits and other income –related state welfare payments

– Fall in revenue from income tax and taxes on consumer spending

– Fall in profits – reduction in revenue from corporation tax

– Rise in government borrowing

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Macroeconomic costs of unemployment

• Consequences for the Economy as a whole

– Lost output (real GDP) from people being out of p ( ) p p gwork – the economy will be operating well within its production frontier

– Unemployment seen as an inefficient way of allocating resources – labour market failure?

– Some of the long-term unemployed may leave the labour force permanently – fall in potential GDP (hysteresis effects)

– Increase in income inequality – rise in relative poverty

David Blanchflower on the costs of U

• “In past recessions rising long-term unemployment had a persistent adverse effect on the supply potential pp y pof the economy. Rising unemployment may lead to a reduction in the supply capacity of the economy. If workers remain unemployed for sustained periods they may lose their skills, thus reducing their human capital.

• High rates of long-term unemployment in the economy may mean there is a mismatch between those skills thatmismatch between those skills that workers possess, and those for which there is demand. People may also be less likely to participate in the labour market the longer their spell of unemployment persists.”

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External costs of unemployment

• High unemployment creates external costs

• Rising relative poverty

• Increased risk of

– Crime

– Family breakdown

– Premature death

– Chronic illnessesChronic illnesses

• Increased burden on the welfare state which may require higher taxes – “crowding-out” effect on private sector businesses and individuals

Demand-side policies to raise employment

• Measures to boost labour demand

– Lower interest rates (monetary stimulus) + unconventional monetary policy such as quantitative easingmonetary policy such as quantitative easing

– Lower direct and indirect taxes (fiscal stimulus) including cuts in employment taxes

– Attempts to achieve a more competitive exchange rate to boost the export sector

– Government spending on major projects (e.g. improving the transport infrastructure) – labour intensive / shovel-ready

– Employment subsidies including youth jobs subsidies

– Incentives to encourage foreign investment into the UK

– Targeted policies to reduce youth unemployment

– Welfare reforms to incentivise people off benefits

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Supply-side policies to reduce unemployment

• Measures to improve labour supply (i.e. reduce frictional and structural unemployment)

– Increased spending on education & training including an emphasis on “lifetime-learning”)

– Investment in human capital

– Measures to improve geographical mobility

– Improved flows of information on job vacancies

– Changes to income tax and benefits to improve incentivesChanges to income tax and benefits to improve incentives to find work (raise the active labour supply)

– Changes to further and higher education

– Changes to policies on net labour migration

Trends in UK unemployment

Developments in the UK labour market

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Regional / local unemployment rates

Source: BBC News website

Unemployment by GenderPer cent of the labour force, source: Office of National Statistics

Claimant Unemployment for the UK by Gender

10

11

12

13

14

10

11

12

13

14

4

5

6

7

8

9

10

GB

P

4

5

6

7

8

9

10

Claimant count rate - all - % Claimant count rate % : Males Claimant count rate % : FemalesSource: Reuters EcoWin

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

1

2

3

1

2

3

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Expectations of unemploymentNet % balance of people expecting higher unemployment in the next year

Unemployment Expectations

70

80

70

80

30

40

50

60

Ne

t ba

lan

ce

30

40

50

60

Source: Reuters EcoWin

05 06 07 08 09 1010

20

10

20

International comparisonsPercentage, seasonally adjusted, 2011 is a forecast

Unemployment in the Euro Area and the UK

10

11

10

11

Euro Area Unemployment

6

7

8

9

Pe

r ce

nt

of

the

lab

ou

r fo

rce

6

7

8

9

UK unemployment rate

Source: Reuters EcoWin

99 00 01 02 03 04 05 06 07 08 09 10 114

5

4

5

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Euro Zone Unemployment

Unemployment in SpainPer cent of the labour force, standardised measure

Comparing Unemployment Rates

15 0

17.5

20.0

15 0

17.5

20.0

Spain

7.5

10.0

12.5

15.0

PE

RC

EN

T

7.5

10.0

12.5

15.0

UK

Spain United KingdomSource: Reuters EcoWin

80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12

2.5

5.0

2.5

5.0

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Spanish Youth Jobs Crisis

Recent audio-videos on unemployment

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