The Level of Unemployment in the United Kingdom - Coursework Example

?The level of unemployment in UK 5th December Main trends in UK unemployment Introduction Unemployment is an economic pointer that refers to the proportion or the number of people in an economy who are competent and ready to work, but are not able to get a job. A person who is capable and willing to work but cannot do it for whichever reasons is said to be economically inactive. Lofty levels of unemployment are usually characteristics of a struggling economy, where supply of labor outstrips demand from employers. Increased unemployment in a country shows that a country does not use its resources appropriately. It carries momentous social costs in that, unemployed people must habitually depend on benefits for income from other people. Besides, the sense of boredom rejection and failure of being unemployed brings a lot of social consequences to their lives. Recent studies have constantly linked unemployment to deterioration of health and rising suicide and crime rates. The causes of unemployment are diverse and economists differentiate a number of types: structural unemployment is caused by changes in the labor market or the economy. This is the failure of available jobs to fit workforce skills; frictional unemployment is the occurrence of people being amid jobs; cyclical unemployment is caused by the vagaries of cycles in the business; and seasonal jobs are caused by different seasonal jobs e.g. construction and farm work (Bassanini and Duval, 2009). Background The history of UK unemployment is central to social and economic history of the country. As a result of post war boom, 1950s and some parts of 1960s saw very low rates of unemployment going to as low as three percent. This was far- off much lower compared to other years and this has made a number of hypotheses to be put forward to account for this unique time in the history of labor market. The servicemen who were in the far front had been promised full employment if they won in the Second World War. The government was not prepared to break this pledge. The record quantities of exports and imports went through docks in London when the reconstruction endeavor was in full dangle. The skilled labor was enthusiastically recruited from the countries forming commonwealth to help in building of hospitals, schools and houses in London. Growing prosperity brought a new boldness to young generations in London who was looking to America for models f music and other behaviors. In around 1958, the growing western community of India in Notting Hill was attacked by rampaging youth gangs. This was disaffected infantile delinquents that became a problem to Londoners. The manufacturing companies flourished very much in 1950s especially the ones that were making consumer goods such as radios, televisions and washing machines. The offices in London increased white collar jobs bringing a boom of over 50,000 jobs. By the, the services went up to 51 % of London’s economy while manufacturing accounting for 42 % (UK unemployment, 2011). The office jobs benefited women very much outnumbering men in for the first time ever (Kalachek and Westebbe, 1961). Unemployment in (%) 1950 1.5 1955 1.1 1960 1.6 1965 2.6 1970 4.1 1975 4.5 1980 6.8 1985 6.4 1990 7.1 1995 8.6 2000 5.4 2005 4.9 2009 5.8 2010 8.1 2011 7.9 Source: Kalachek and Westebbe, (1961), Bell D., Blanchflower G. (2008) and Nickel S., Nunziala L. (2005) Technological progress, the achievement of Keynesian economics, steady international trade environment and constancy of the Phillip curve (which postulated an affiliation amid high inflation and reduced unemployment) brought a situation of full employment approach. Before this, the preponderance of the women lingered in the category of the people who were economically inactive. The economic prevailing attitude of the detonation years collapsed in late 1960s and early 1970s. The energy crises of 1973 as well as 1979 created stagflation, rising unemployment, and rising inflation. This is something that reckoned impossible using Phillip curve. In UK, fixed exchange rates doweled to the German mark strained EU member countries to let down their economies to move with reduced inflation of West German. The crash of labors in places of strife labor markets reorganization proposals in the early 1970s and late 1960s led to situations where the union powers were increasingly mugging markets through keeping the wages high. By the unemployment had topped 1 million for the first time ever. There came to a point where ‘winter discontent’ emerged making even the gravediggers to go strike protesting against pay (OECD, 2011). The employment went up to 1.1 million making the Conservatives to be swept to power with a claim of labor not working. The Gross Domestic Product of UK recorded weak growth when it fell to 1.1 % compared to other nations in Europe in 1970s. This continued further even when there was no recession. This made the economy to be blighted by double digit as unemployment and inflation went increasing. The picture of the overall economy went on deteriorating with acceleration of inflation as well as slouching sterling pound shoving the UK to admit IMF salvage with a loan of 2.3 billion pounds (approximately 12.5 billion pounds in today’s currency). Chancellor H. Denis was forced by the IMF to harshly cut the public spending and to take stern economic measures as a start point of reforms to recover the economic situation. Unfortunately, the government fell in 1979 (Unemployment in the UK, 2011). Nonetheless, by 1980s, unemployment went further topping to 3 million. In January 1982, 3 million represented the number of unemployed people while 3,070,621 represented 12.5 % of the working population. Some areas like Northern Ireland recorded the highest percentage of unemployment going to over 20 %. Areas dominated by reduced industries like coal mining were still recording high percentages of unemployment (Keese and D’Addio, 2010). Many of the state owned ventures were made private, the markets were deregulated and the taxes were cut in 1980s. This resulted to 5.9 % fall in the Gross Domestic Product and 5 % growth of the economy. This was one of the highest rates in all the nations of Europe. In early 1990s unemployment started falling and by early 1999, it started going below 2 million to mark 1.7million. The propensity continued until year 2005 when the official figures recorded 1.397 million of unemployed people. This was a considerable rate of increase. Nonetheless, unemployment started rising again in the last two years of Blair’s Government making Gordon to cope with global recession in2008. At that time, unemployment hit 1.79 million marking the highest rate ever seen for decades (Unemployment in the UK, 2011). Unemployment had risen to 2.5 million by the time the alliance came to power in year 2010. According to the new Prime Minister, D. Cameron, unemployment would fall each and every year in the current parliament. For a long time, the policy makers have taken the view that the economic and social cost of unemployment overshadows the macro economics reimbursements of high inflation. This case was realized in 1980s. However, the government permits high unemployment as a result of demonstrated social effects, the underperformance of the economy as well as the public costs in requisites of benefit payments it stresses. Structural differences amid the regions of the United Kingdom have repeatedly meant that countrywide form masks localized problems. For long, unemployment in Scotland, Wales and Northern England have been significantly higher than in the affluent London and South East. The highest numbers of towns are dominated by small numbers of large employers particularly when locally momentous business closes e.g. the mines. This brings devastating effects to the economy (Pollitt and Bouckaert, 2011). In addition, caption figures can masquerade other complexities such as the pervasiveness of unemployment amongst racial minorities, disabled people, women, people who have been under the unemployment for a long time and young people. Currently, there are two main principal measures of unemployment that the government is using: the Claimant Count; and the International Labor Organization (ILO). In UK, the version is known as the LSF (Labor Force Survey). They are based on a survey of households, approximately 57,000 classifying the partakers as economically inactive, unemployed or employed on the basis of weekly work done previously. The latter is based on the people claiming not to be employed and related benefits. When it was elected in 1997, the governments in charge of labor declared its preference for the ILO measure due to its international recognition (Pollitt and Bouckaert, 2011). Nevertheless, it announced that unemployment had gone down recording one million and below by 2001 on the basis of claimant count measure. In that time, ILO recorded unemployment of 1,535,000 (Fisher, 1972). Many of the governments are keen to reduce the manifestation of unemployment, not only for political rationales but also for the signals of the economy sent out. For the last 25 years, plentiful revisions to the bureaucrat definition of unemployment have been made, which have commonly revised it downwards. Labor recurrently accused the Conservatives of the duration of 1980s for moving unemployed people to receive sickness benefits. They classified the as economically inactive instead of unemployed as an approach for wounding the unemployment figure. The predicament of bringing more economically unmoving people into the labor force has been rising on the political program throughout Europe. In 2000, a survey done shown that the economically energetic proportion of the population in UK was only 69 % in a population of 77 million adults. The saving of the present labor force are gradually more believed to be inadequate to pay the soon to retire their pensions. The government has trailed the agenda by amalgamation of inducements, e.g. childcare and training, and sanction, principally tapering eligibility for reimbursements such as Incapacity Benefits (Pollitt and Bouckaert, 2011).. According to pamphlet of figures in October 2011, the unemployment had gone up reaching 2.75 million. Ed Miliband, the opposition leader said that the prime minister had validated economic policy when he said that the level of unemployment would fall consecutively from the current year. He was supposed to change his course because the rate of unemployment was increasing instead of reducing. In June 2011, the rate of employment was 70.4 % with 29.10 million people employed. The rate of unemployment was 8.1 % showing an increase of 0.4 % as compared to the previous year. The figures indicated that 25.5 million people were not employed. This rate was the highest ever since 1994. It had increased by 114,000. The rate of inactive people was 23.3 % with 9.35 million economically inactive people. The age of inactive people ranged between 16 to 64 years. The Total Pay (bonuses included) for the previous year rose by 2.8 % as the regular pay (bonuses excluded) rose by 1.8 %. Based on the Claimant Count, the unemployment was 1,070,000 in year 2000 (Unemployment in the UK, 2011). Number in (millions) Percentage Unemployment 25.5 8.1 Employment 29.1 70.4 Economic inactive 9.35 23.3 Claimant unemployment recorded 1597.2 thousand in year 2011. This was a decrease of 17.5 thousands from the previous month (August) and a decrease of 129.2 thousand for the year. In claimant unemployment rate, it is up by 0.1 % points in a month’s time and 0.4 % points in a year (OECD, 2011). The figures have continued to be affected by the wellbeing restructuring including the continuing process of re- assessing the existing claims for inability benefits. This has led to increase in the JSA caseload. The number claiming the benefits of the incapacity fell by 36000 to record a figure of 2.58 million. However, the recent figures have shown a fall in caseload to record 2.55 million in August 2011 (Unemployment in the UK, 2011). In February 2011, the number of single parents who were receiving the income support had fallen to 613,800 with a reduction of 78,200. According to the provisional figures released in August 2011, the number had gone down further in latest months, to 590,000. This was due to rise in welfare reforms (UK Economy 2011). As per claimant unemployment, the level of economic inactive population is 9.4 million with an increase of 26 thousand quarterly and 75 thousand in a year’s time. This shows a constant growth of 23.3 % for economic inactivity rate quarterly but 0.1 points increase in a year. With the students excluded, the economic inactivity remains constant, quarterly and yearly in a population of 16 to 64 years. How Philips curve is used to explain unemployment Phillip curve seems to suggest a trade- off short- run between inflation and unemployment. The theory behind the use of Phillip curve was reasonably straightforward. Decrease in unemployment can result to rise in inflation and a fall in inflation can only be possible by increasing the rate of unemployment. Therefore, if the government is interested in reducing the rate of unemployment, the aggregate demand should be increased. However, this may temporarily lead to increase in the rate of employment or result to inflationary insinuations in the product and labor markets. These details about the rate of unemployment in relation to inflation can be analyzed using Phillips curve (Bassanini and Duval, 2009). Phillips curve is also effective in explanation of NAIRU. NAIRU is the rate of unemployment at the time when the rate of wage inflation becomes stable. It assumes that the competition is imperfect in the labor market making some workers to have collective bargaining power (Pollitt and Bouckaert, 2011). This is achieved through registration in the trade unions which fight for their rights. According to NAIRU concept, the equilibrium point of unemployment is brought about by the collective bargaining processes between workers and firms. In the model, the workers have target real wage in their minds. The target real wage depends on what happens to unemployment. This gives an assumption that, the lower the rate of unemployment, the higher the wages demanded by the employees. When the actual unemployment goes below the NAIRU, the balance of power in labor markets is said to move to employees instead of employers. This leads to acceleration in settlement of pay in the economy as the average earnings record growth. Ceteris paribus, increase in wage inflation increases cost push inflation pressure. The unemployment can never deviate from NAIRU unless there are transitory and random mistakes in developing anticipations about inflation rates in future (OECD, 2011). In simple terms, Phillips Curve shows that, there is stable and inverse relationship between unemployment and wage inflation. Inflation (%) Unemployment In UK, the latest statistics hold up the view that, the tremendous trade off between inflation and unemployment that occurred many years ago is reducing. The effective supply side transformations have shown that the economy of the UK can grow without experiencing inflation. Limitations of using Phillips Curve The idea of Phillip curve was subjected to ferocious criticism from the American Economist, Minton Freidman and other Monetarist School. According to Milton, the Phillip Curve can exist in the short run but not in the long run. It shows no trade – off between inflation and unemployment and it is also vertical. The short run curves were drawn with the assumption of an expected inflation rate (Pollitt and Bouckaert, 2011). There would be an up ward movement in the curve if at all; there were increases in inflation caused by a hefty monetary expansion. The inflationary expectations would also move higher (Bassanini and Duval, 2009). According to him, the government cannot drive unemployment permanently down below the NAIRU. This is because; inflation will increase resulting to increase in the rate of unemployment as well the expectations of inflation. Burst of price inflation triggers high pay claims, increased labor costs and higher prices for the services and goods people buy (OECD, 2011). In the long run, there will be an inward shift of the curve. This might be brought by the economy’s supply side improvements particularly, reduction in the natural unemployment rate. A good example is the labor market. The reduction of structural and frictional unemployment can be successful because of enhanced incentives to get work in the human capital of the labor force. Using the Human development index Is GDP a good way of looking at how well-off a country and its people? Human development index (HDI) can be defined as a comparative measure of literacy, life expectancy, living standard, and education for different countries world wide. It is used to make out whether the countries are developing, underdeveloped or developed as well as to measure the force of economic guidelines on quality of life (Lambert, 2011). The UK has the sixth largest economy by nominal Gross Domestic Product. It also has number 7th largest economy in purchasing power correspondence. In 19th and 20th centuries, it was ranked number one in industrialization and foremost power. Today, it remains a great power because it has the leading cultural, economic, scientific, political and military influence. However, a country may have very high Gross Domestic Product- resulting, for example from extraction of valuable minerals e.g. oil- while some segments of the population lack basic necessities or live in poverty. Therefore, the significance of Human Development Index is to measure the non- economic facets of country’s development. The GDP per capita gives an accurate gauge of a country’s capacity to tackle material needs of the residents. As long as the necessities of life remain limited, additions to GDP can be expected to associate closely with advancement in meeting the basic needs of the population. The consensus on the application of GDP per capita as proxy gauge of well being is becoming less obvious to economists. This is because more developed societies leave from a situation of scarcity to plentiful. Concerns have also emerged on how the growth of the economy led to environmental depletion an element that is never included in the GDP. Consensus has not appeared yet on the most excellent way to go, but Istanbul Declaration which was signed in June 2007 by European commission, United Nations Development Programme, World Bank, and United Nations reveals that; need to go beyond GDP is completely recognized at the political level (OECD, 2006). Alternative measure of well- being Social indicators Social indicators aim at providing information on well being ahead of that expressed by conventional economic measures. It focuses on observable results in a variety of fields e.g. literacy, poverty and health based on the basis that most people concur with, about the value of what is described (Boarini et al, 2006). On the other hand, economic literature presumes that individuals derive well being out of the satisfaction of their needs and wants according to their preferences, predominantly as exercised in the souk. Social indicator provides a harmonizing approach to GDP- derived alternatives for well being (Sharpe, 1999). In section, four indicators are chosen to represent the four domains; health, equity, self- sufficiency and social cohesion- used by the OECD to classify social indicators. Monetary measures of economic resources This involves use of ways of calculating authentic income from National Accounts’ systems. There are some of the issues that the GDP fails to address but monetary measures are capable of addressing. Monetary measures include a sort of non market activities that manipulate the well being due practical anxiety with measuring them, because their cost is not easily defined in souk terms. It also discerns inter country differences in allotment of income. To many people, a large increase in national income that goes entirely to a tiny handful of very prosperous families will not increase universal well being as much as it were more evenhandedly distributed (Atkinson, 2005). Additional adjustments to national accounts measures Measure of economic resources derived from national accounts can be adjusted by attaching a pecuniary value to diverse non- monetary factors so as to obtain a better alternative of the well being of society and individuals. Different approximates generally value the inputs into activities based on opportunity cost or replacement costs. Estimates of per capita income of households in the national accounts are derived by adding the income of all households and then dividing the overall among the resident population (Kolm, 1969). Well being and happiness This involves asking individuals on the level of satisfaction in their daily lives. Subjective measures of well being are fraught with procedural difficulties. They can reflect different fundamental concepts, be influenced by fleeting factors, or be affected by cultural or linguistic differences (OECD, 2006). 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