Unemployment in the UK - Report Example

Evaluate the different economic explanations of the current level of unemployment in the UK, discuss the economic and social costs and consider the policy measures available to the government to tackle the problem’ Introduction Economists have long been intrigued by theories and concepts surrounding unemployment in conjunction with economic and social costs associated with it. Despite the level of growth and development of different countries all over the world, the problem of unemployment continues to persist. In the United Kingdom alone, latest statistics reveal an unemployment rate of 7.8% or an estimated 2.7 million in absolute terms as of May 2010 (Office for National Statistics, 2010). In this regard, the objectives of this essay are four-fold, to wit: (1) to present a clear definition of unemployment; (2) to state and determine how it is measured; (3) to identify the different types: seasonal, frictional, cyclical, structural, among others; (4) to state and clearly explain the nature of economic, social costs of unemployment and cost to the individual; and (5) to determine the ways to solve unemployment. Definition of Unemployment The Office for National Statistics follow the definition of the International Labour Organization, as quoted below: “(1) The "unemployed" comprise all persons above a specified age who during the reference period were: (a) "without work", i.e. were not in paid employment or self-employment, as defined in paragraph 9; (b) "currently available for work", i.e. were available for paid employment or self-employment during the reference period; and (c) "seeking work", i.e. had taken specific steps in a specified reference period to seek paid employment or self-employment. The specific steps may include registration at a public or private employment exchange; application to employers; checking at worksites, farms, factory gates, market or other assembly places; placing or answering newspaper advertisements; seeking assistance of friends or relatives; looking for land, building, machinery or equipment to establish own enterprise; arranging for financial resources; applying for permits and licences, etc.” (ILO, 2009). As indicated, the basic criteria for being classified as unemployed are: people without work, currently available for work, and seeking work “in the last 4 weeks and are available to start work in the next 2 weeks” or “out of work, have found a job and are waiting to start it in the next 2 weeks” (ONS, 2009, 4). Measurement of Unemployment Unemployment is measured by the ONS through survey, the Labour Force Survey (LFS). According to ONS (2009), their office conducts the LFS every three months using 53,000 households as samples. The survey focuses on questions inquiring about personal circumstances and activities in the labour market. Then, the unemployment rate is computed first on a residence basis by determining “the proportion of economically active who are unemployed” (ILO, 2009, 7). Types of Unemployment There are different types of unemployment: frictional, structural, cyclical and seasonal. The frictional unemployment has been defined as “the amount of unemployment that is due to the normal workings of the labor market. It includes people who are temporarily between jobs because they are moving or changing occupations, or because their old firm went out of business, or the like” (Baumol & Blinder, 1979, 93) Structural unemployment, on the other hand, has been stated as referring to “workers who have lost their jobs because they have been displaced by automation, because their skills are no longer in demand, or for other similar reasons”(Baumol & Blinder, 1979, 93). In additional, cyclical unemployment, as the name reveals, occurs when “the unemployment rate moves in the opposite direction as the GDP growth rate. So when GDP growth is small (or negative) unemployment is high" (Moffat, 2010, par. 12). Seasonal unemployment is a form of structural unemployment where people get unemployed depending on the demands or requirements of the season. For example, after the Christmas season, people get laid off due to lack of demand. Demand-deficient unemployment is also another name of this type. Thus, various factors account for the differences in types of unemployment depending on the nature influencing them: work situation, processes in the organization, seasonal demand, economic activity in the national level, and other personal or professional decisions of the employees. Economic and Social Costs of Unemployment ECONOMIC COSTS 1. The waste of scarce economic resources Unemployment means people are not actively producing the output that they are expected to produce for the economy. As a consequence, the future prospects for growth of the economy are reduced resulting in a waste of the economy’s scarce resources. The hours that the unemployed could have utilized for productive purposes can never be realized. 2. Scarce factors of production (workers, machines, factories) are lying idle, under-used or wasted Factors of production are also considered wasted as their potentials are not duly maximized to obtain their expected outputs. This results to an economic drain in terms of a loss of potential output (GDP) representing an inefficient use of resources. Economy is operating within its production possibility frontier (PPF) with high levels of unemployment. 3. Cost to the Government (Fiscal Costs) A high unemployment rate means higher spending on welfare payments and falling tax revenues (Income and VAT) to the treasury. The overall result is government may have to raise taxes or cut public spending to deal with the rise in the budget deficit. 4. Loss of Investment in Human Resources Trained workers no longer using their skills have tendencies to become outdated if unemployed for a long period. The effect of this would be to reduce the chance of gaining employment in the future. 5. Loss of income for those now unemployed For the unemployed, a loss of income is concurrent with a fall in living standards. Lesser income gives families lower potentials for spending on basic economic needs. Further, this dilemma ultimately contributes to social costs of unemployment SOCIAL COSTS Studies have revealed that rising unemployment is linked to economic and social deprivation (Tutor2U, n.d., par. 9). The social costs of unemployment are clearly indicated by the following social problems: 1. Poverty – in terms of deprivation of material goods, and psychologically - feeling of rejection and degradation. the prevalence of poverty continues due to the big five factors that are inherent in society: ignorance, apathy, disease, dependence and dishonesty – more than economic. 2. Rising Crime – in line with poverty, people from lower income groups have been found to have preponderance to criminal behaviour. There is also a strong correlation between criminal activities being propagated by people from neighborhoods classified as being in the poverty level and these groups exhibit more impulsively than those in other higher income bracket (Lynam, et.al., 2000). 3. Social Dislocation (increased divorce rates, worsening health and lower life expectancy). Unemployment puts additional pressure and risk in maintaining a smooth interpersonal relationship between spouses and in terms of personal health condition. 4. Areas become less attractive for new business investment - areas found to have majority of people to become unemployed are deemed to be notorious in terms of work ethics and values becoming less attractive to investors and employers. Costs of Unemployment to the Individual Apart from the abovementioned economic and social costs of unemployment, the detrimental repercussions it causes the individual are noteworthy. Among the most critical costs of unemployment to the individual are: de-skilling; lower income in terms of reduced purchasing power and lower standards of living; effects on the family unit; and increase in likelihood of stress related illnesses and mental breakdown. There is a strong correlation between the status of employment and the prevalence of psychiatric problems among adults. There is a predominant increase in rates of psychiatric problems for groups who have been found to be unemployed. The rate of psychiatric problems quadrupled in samples where drug dependence has been found to be existent. Further, with people who had been unemployed, the possibilities of contracting phobias and psychosis have trebled. Concurrently, there were fifty percent more probabilities of being depressed, having anxieties and being diagnosed to have obsessive-compulsive disorders and preponderance for other psychiatric dilemmas such as mood disorders, anxieties and depressive disorders by as much as two-thirds (Murali & Oyebode, 2004). Ways to Solve Unemployment Economists have proposed measures to solve unemployment through fiscal policies, both from the demand and supply side. The chart below summarized the proposed ways to solve unemployment using fiscal policy: Demand side policies Supply-side policies Employment subsidies for employers who take on the long-term unemployed (New Deal) Welfare reforms – including lower starting rates of income tax and the introduction of tax credits Financial assistance for inward investment from overseas Policies to promote entrepreneurship and the growth of small-medium size enterprises Monetary policy – low interest rates has allowed aggregate demand to grow despite a global economic slowdown. Fiscal policy is also boosting AD as the budget deficit increases Increased spending on education and attempts to increase private sector spending on training However, according to a discourse published by the Economics.help (2008), “fiscal policy cannot solve supply side unemployment. If there is frictional or structural unemployment, fiscal policy will not solve this” (par. 8). The limitations of fiscal policy come in the form of “crowding out (government borrowing reduces size of private sector); tax cuts may be saved not spent; and time lags” (Economics.help, 2008, par. 7). Conclusion As in every other economy from diverse nations around the globe, the unemployment situation continues to pervade and elude the grasps of economists, scholars, and government leaders as to its ultimate solution. An interplay of reforms and assistance in terms of encouraging the participation of community members into awareness and positive action towards recovery from poverty and unemployment, are critical in designing measures to prevent unemployment. Despite all these proposed solutions, unemployment will always be a challenging problem. By making an active stance, by being proactive rather than reactive, by making one’s own personal accountability to counter the factors contributory to unemployment, the first step to eliminate it starts with each and every one. The time to act is now. Reference List Baumol, W.J. & Blinder, A.S., 1979. Economics: Principles and Policy. Harcourt Brace Joyanovich, Inc. New York. International Labour Organization (ILO), 2009. Main statistics (annual) – Unemployment. [Online]. Available at: http://laborsta.ilo.org/applv8/data/c3e.html. [Accessed 26 July 2010]. Lynam, D. R., Caspi, A., Moffitt, T. E, et al,. 2000. The interaction between impulsivity and neighbourhood context on offending: the effects of impulsivity are stronger in poorer neighbourhoods. Journal of Abnormal Psychology, 109, 563–574. Moffat, M. 2010. What are the three types of unemployment? [Online] Available at: http://economics.about.com/od/typesofunemployment/p/three_types_of_unemployment.htm. [Accessed 26 July 2010]. Murali, V. & Oyebode, F. (2004). “Poverty, social inequality and mental health.” Advances in Psychiatric Treatment, 10: 216-224. Office for National Statistics (ONS), 2010. Employment. [Online]. Available at: http://www.statistics.gov.uk/cci/nugget.asp?id=12. [Accessed 26 July 2010]. --------------------------, 2009. How exactly is unemployment measured? [Online] Available at: http://www.statistics.gov.uk/downloads/theme_labour/unemployment.pdf. [Accessed 26 July 2010]. Read More