Employment and Unemployment

Definitions

The__ labour force __(also known as the economically active population) is the number of people of working age who are either in work, or unemployed but actively seeking work. It includes both full-time and part-time workers, and employees and the self-employed. The UK labour force is currently (2017) 33.6 millions (32.14 in work and 1.46 millions unemployed).

__Unemployment __means not in employment or self-employment, but looking for work and being available for work.

__Underemployment __means being in work or self-employed, but not working as many hours as desired. About a quarter of the labour force comprises part-time workers, many of whom would like to work full-time.

The __economically inactive __population refers to people of __working age __(between school leaving age and retirement age) who are not working or looking for work. It includes students, some people with disabilities that prevent them from being able to work, parents looking after pre-school children and people who take early retirement.

Measuring Unemployment

The__ claimant count __is a very narrow measure of unemployment as it just refers to the number of people on unemployment benefits.

ILO measure __(International Labour Organisation) in the U.K. uses data collected by the Labour Force Survey__. This is a monthly survey comprising a questionnaire put to a representative cross section of the population. Over 40,000 households take part - to be counted as unemployed on the ILO measure, a person must fill these criteria:

1. Currently not working at all
2. Be actively looking for work
3. Be available to start work within a fortnight

The ILO measure is generally considered to be more accurate than the claimant count because:

1. A lot of people looking for work may not be able to claim benefit, for instance mothers returning to the workforce whose partners/husbands are in work, or older workers already claiming a pension. Others may be eligible but choose not to claim it
2. It is based on internationally agreed methodology, so can be used when comparing unemployment rates between countries
3. The claimant count can be affected by changes in the rules for claiming benefits. For instance claimants now have to wait several weeks before they are eligible for benefits. During this period they are not registered as unemployed
4. The claimant count may include some people who are working in the ‘black economy’ but illegally claiming benefits

Points 1 to 3 leads to a higher ILO measure compared to the claimant count. Point 4 leads in the opposite direction, but is likely to be a smaller number of people. Overall, therefore the ILO measure is greater, by nearly a million people.

But:

There is no single, ‘true’ measure of unemployment. Both the ILO and claimant count do not take account of the following:

1. Underemployment – many part-time workers who want full-time work could be thought of as partly unemployed. There has certainly been an increase in part-time rather than full-time jobs in recent years, including those on ‘zero hours’ contracts.
2. Discouraged workers – people who would take a job if offered, but because they perceive their prospects as bleak, have given up looking. This can particularly affect older workers and school leavers. In the latter case they may choose to go into higher education when they would really prefer to have a job.
3. Short and long term unemployment – Neither measure captures the importance of this. Short term unemployment is defined as a period of less than a year. The majority of unemployed people actually find work within weeks rather than months, but during a prolonged recession, or in parts of the country with structural unemployment (see below), a much higher proportion of unemployed people become long term unemployed. This causes much greater social and economic problems than short term unemployment (see below).

For these reasons both measures could be argued to under-estimate unemployment, but on the other hand there are some people who could be thought of as ‘unemployable’ because they lack physical or mental capacity for work. The benefits system may be forcing some of these people into looking for work as a condition for receiving benefits. Some economists argue that people in these circumstances should not be treated as available for work.

Causes of Unemployment

Seasonal unemployment – Some regions (eg coastal towns) and some industries (eg agriculture, tourism and building) need more workers at some times of the year (especially summer) than at other times. Winter generally sees a rise in seasonal unemployment. The problem can’t be eliminated altogether, but flexible working patterns may help some workers to have more than one job.

Frictional unemployment_ –_ In a market economy there will always be some firms closing down or reducing their workforce, whilst others are expanding. This is usually a short-term problem for workers who are currently unemployed. Government action can reduce the average length of frictional unemployment by making it easier for workers to find job vacancies at Job Centres. The government has also made it harder to claim benefits in the early weeks of unemployment to encourage workers to find a job more quickly. Compared to some countries U.K. firms are obliged to pay relatively low redundancy pay, so that workers do not have such a ‘cushion’ to fall back on when they lose their job.

Cyclical unemployment – Market economies are vulnerable to changes in the level of aggregate demand. Economic booms (rapid growth and high demand) usually give way to recessions (negative growth and low demand). In a recession there is an _output gap__as the economy is producing below its potential output. Unemployment usually rises as workers get laid off due to weak demand. Cyclical unemployment can be tackled by interventionist policies to boost aggregate demand. _In the global recession following the financial crisis in 2007/8, governments all over the world boosted demand through fiscal and monetary policy to prevent a more severe recession.

Structural unemployment – Like many mature developed economies, the U.K. has some regions that suffer from unemployment as traditional industries (i.e. shipuilding, coal, textiles, iron and steel) have one into decline. This partly reflects changes in comparative advantage that favour the growth of these industries in newer industrialised countries such as China.

Structural unemployment can also result from technological change, such as automation, or the move towards renewable energy that reduces demand for coal, oil and gas.

Structural unemployment is a very intractable problem. Parts of south Wales, for instance, have not yet recovered from the closure of steel plants and coal mines in the 1980s. The area was highly dependent on these two industries. Tackling the problem requires a mixture of policies to encourage inward investment, retraining of workers and policies to increase geographical mobility of labour.

Real wage unemployment – This occurs when the level of wages in a particular industry is above the market equilibrium rate, resulting in some workers not being able to find jobs. In the past, trade unions were perceived as being able to maintain high wages at the expense of fewer jobs. More recently, some economists argue that minimum wage legislation can destroy jobs for low skilled workers_. _Also, if unemployed people can get more in benefits than by working, they may be reluctant to take low paid jobs. This is one reason why there have been changes to the benefits system in recent years, aimed at incentivising unemployed people to look for and take low paid jobs. This includes working tax credits, which top up wages of low paid workers without the wage rate having to rise.

NB: Apart from cyclical unemployment, which results from a fall in aggregate demand, all other causes of unemployment can be regarded as supply side problems and can be addressed by a mixture of supply side policies, including labour market reforms_._

Changes in Employment and Activity Rates

In recent years governments in the U.K. and other rich countries have tried to increase both the numbers in work and seeking work. This helps raise GDP and growth and also benefits the public finances by increasing income tax revenues and reducing the benefits bill. A great concern is the ageing population, which is reducing the proportion of the population that is of working age. To counter this problem, there are three groups that have been targeted:

1. People on disability benefits – In the 1980s the UK government encouraged many long term unemployed people to claim disability benefits. This made the claimant count of unemployment look better, but now the government is trying to reverse this process by making it harder for people to claim these benefits – they have to undergo regular ‘work capability assessments’
2. Older workers – Many governments have raised the age at which workers can claim a state pension to encourage them to stay in work longer. Changes in employment law to prevent discrimination against older workers, including ending compulsory retirement ages has also happened in some countries
3. __Women __– The employment and participation rates of women is generally lower than for men, mainly due to how child earing and home maintenance tasks have traditionally been shared. In the U.K. government funding of nurseries has made it easier for women with young children to work. At the same time, single parents (mainly women) with children over 5 years old now have to be seeking employment or in work to receive benefits

Impact of Immigration on UK Labour Market

In recent decades the U.K. has experienced significant net inward migration, especially since a number of countries from eastern Europe joined the European Union. There are now some 3 millions nationals from other EU countries living and working in the U.K., compared to just over 1 million U.K. nationals living elsewhere in the E.U.

The impact of this migration is mixed. Most are young and economically active and pay much more in taxes than they receive in benefits. They also add significantly to the overall supply of labour and help to offset the problems of an ageing population. Some sectors of the economy, such as hospitality, agriculture and social care now depend on migrant workers, who are willing to work long hours at low rates of pay.

There is some concern that the abundance of migrant labour depresses wage rates and employment opportunities for U.K. workers as it increases the supply of labour. However, it should be remembered that unemployment is at historically low levels in the U.K. and many migrants work in industries that are avoided by British workers (especially agriculture and social care).

The Skills Problem

The U.K. has a problem with a shortage of skilled workers, particularly in high tech manufacturing and science based industries. Around 40% of school leavers do not have a minimum of 5 GCSE passes including maths English and science. Young adults without these basic qualifications become increasingly difficult to employ and risk become long term unemployed. The key to an internationally competitive and productive economy depends in part on investment in education and training beyond school years.

The Effects of Unemployment

Some unemployment is an inevitable feature of a dynamic market economy, as some firms and industries decline whilst others grow. It is chronic, long term unemployment that is generally regarded as an economic and social problem because of its effects on:

Unemployed workers and their families– It is the main cause of poverty in the U.K. and children growing up in workless households generally do less well at school and so there is a cycle of poverty. Long term unemployed people are much more at risk of both physical and mental health problems. Long term unemployment also becomes self-reinforcing; the longer someone is unemployed the harder it is to get back into work. Confidence and skills deteriorate and employers may look to hire people with recent work history.

Government finances – Spending on benefits goes up when unemployment rises, but tax revenues go down. The government has less to spend on public services and infrastructure.

Communities – Towns and cities with high unemployment, especially youth unemployment have more social problems such as vandalism and drug abuse. More affluent families move away and whole areas of a town can become progressively more run down. Local shopping centres suffer as shops close to be replaced by betting shops, money lenders and charity shops.

The wider economy – High levels of unemployment mean the economy is operating inside its production possibility frontier, so that it is not achieving its potential output. Living standards are therefore lower.

Businesses – Firms may find it increasingly difficult to recruit skilled and motivated workers in areas of high unemployment.