The Economic Causes of the Current Level of Unemployment in the UK - Term Paper Example

Topic: Unemployment Introduction Before finding an answer to the economic causes of the current level of unemployment in the UK, it is essential to define unemployment. Let’s consider a web definition of employment, which states that unemployment is “An economic condition marked by the fact that individuals actively seeking jobs remain unhired. Unemployment is expressed as a percentage of the total available work force. The level of unemployment varies with economic conditions and other circumstances” (InvestorWords.com). From a European perspective, unemployment is “A measurement reflecting the number of people actively looking for, but unable to find work” (www.unc.edu/depts/europe/euroeconomics/glossary.php). We can say that unemployment is normally limited to the wage economy. It is a situation when there is no work to do, neither in paid employment nor in self employment to be done for profit and livelihood. In official statistics, an unemployed person is one who is ready to take employment when offered and is searching for it. Measurement of Unemployment Measuring unemployment is not easy; generally it is taken as the work force ready to work at the offered wage rate. Defining a term and making computations are two different concepts. A number of methods have been formulated to measure unemployment. Claimant Count The method of Claimant Count has been in use in the 1980s and 1990s. It is based on the counting of unemployed persons, availing benefits of remaining without a job. Those claiming benefits and those registered in employment exchanges should be counted carefully to avoid double counting. The method of claimant count has its own benefits and limitations. First, it is possible to count all those who are unemployed; there is no scope of committing error in counting. Secondly, it is a cost-effective and recurrent resource of gathering data (www.bized.co.uk). Labour Force Survey The Labor Force Survey takes into consideration samples of households, asking all people of work age to provide the data whether they are employed, unemployed or economic active. This data is computed to know the exact number of unemployed, employed and underemployed. The biggest advantage of this computation method is that it adheres to global computing parameters. Statistically it is possible to compare data among countries and different time periods (www.bized.co.uk). Types of Unemployment Although types of unemployment are many but selected few are cyclical, frictional and structural unemployment types. Cyclical unemployment is due to lack of demand for all those who want to work. Keynesian economists stressed specifically on this type of unemployment arising from disequilibrium in the economy. It is called cyclical unemployment because it goes up and down according to the trade cycles. When there is boom in industry, it is quite low but in depression times, cyclical unemployment increases. For example due to the recent downturn worldwide, level of cyclical unemployment had increased drastically (www.bized.co.uk). Frictional unemployment occurs for a short period of time when a new job search begins after loosing a job. It creates temporary unemployment. Such unemployment is lower when the economy is in good health and high when economy is passing through difficult phase. The recent downturn saw both tides of the economic waves. Initially when the affects of downturn were severe, people were out of jobs and struggling to find jobs. Currently, the situation has reversed as people are leaving their current jobs for seeking better opportunities, which means that frictional unemployment is lower (ibid). Structural unemployment occurs when industry structure changes overall. Some new industries come into being and some old business disappears totally causing structural unemployment. In Britain, for example, many big industries like ship building and mining have totally disappeared and new industries particularly in service sector have emerged like call centres and technology based industries. Structural unemployment depends on factors like mobility of labour, the speed of change in the economy and the regional body shape of industry (ibid). Impact of unemployment -- Economic cost It is a loss of the economic output. It becomes huge when we derive the economic cost by multiplying the average output of an unemployed person with total number of unemployed people. For example if average output per person is £15,000, the economic loss would accrue by multiplying it with two million unemployed, which reaches to £30 billion in goods and services. Benefits awarded to unemployed also become an economic liability in monetary terms. Consider some statistics based on HM Treasury 2006 budget data, according to which about £130 billion were disbursed on social security benefits in 2005-2006. It shows the extent of economic cost of unemployment. Government earnings through income tax and national insurance also change into economic costs of unemployment (www.bized.co.uk). Impact of unemployment --Social cost Social costs include social ousting, loss of self-esteem, reduced self confidence, psychological loss and loss of physical health of the unemployed. Social life of unemployed people becomes difficult as they are unable to fulfill family or financial responsibilities. After-effects could make the person feel rejected, dejected and neglected and provoking towards crime or suicide or health loss (Work & Willott 2004). Feldstein (1998) has stressed the need to differentiate among types of unemployment before considering the social costs as the cost depends on the type of unemployment and the cost of minimising that unemployment also differs. Actually, it should be evaluated by the policy the employee has been reinstated. According to Office of National Statistics, working age employment rate in 2010 is 72.3% while unemployment rate for March-May 2010 is 7.8%, as shown below (http://www.statistics.gov.uk/cci/nugget.asp?ID=12). According to current labour market statistics, the unemployment rate has come down by 0.1% over the quarter but up by 0.3% over the year. The working age employment rate as indicated in the table above from March to May is 72.3%, which is up by 0.3% from the previous quarter but down from the previous year by 0.5% (HRM Guide 14 July 2010). As we know that one of the reasons of unemployment is low GDP caused by recession, the following tables shows the rate of unemployment for different time periods’ recessionary trends (http://www.statistics.gov.uk/cci/nugget.asp?id=2294). Gross Domestic Product Unemployment The policy measures available to the government to tackle the problem The problem of unemployment can be tackled from demand side and supply side policies. The demand side policies should include employment subsidies for employers who provide employment to those remaining unemployed for long-term. Government should provide monetary help to employers to attract investment from abroad. The government’s monetary policy can help by reducing interest rates so that aggregate demand rises amidst worldwide recession. Through fiscal policy measures also aggregate demand can rise by adopting deficit budgeting. Affects of economic and social costs draw attention towards monetary and fiscal policy measures for economic stability culminating in price stability and reducing the disturbing effect of policy changes. Different policies impact output levels but an increase in output is achieved at the cost of too high or too low unemployment compensation. The supply side policies need to promote welfare schemes like decreasing the starting rates of income tax and offering tax credits. Small and medium enterprises should be provided all help as maximum employment generation happens through SMEs. Entrepreneurs should be provided all guidance and training by the local government to successfully run their business. Government should increase its education budget. Efforts should be focussed on encouraging the private sector to invest on providing training so that level of unemployment comes down. As per the research report of Globalisation and Economic Policy Centre (GEP) at the University of Nottingham, small business provides jobs to 65% British new job seekers. The co-author of the research, Dr. Peter Wright, associate professor of Economics, also backs the discussion on the potential of creating jobs by the SME sector. The latest data taken from the Office for National Statistics Inter-Departmental Business Register for the period 1997-2008 indicates that on an average 53,000 jobs in a week were created in the private sector in comparison to 47,000 lost annually. Data indicates that jobs are decreasing in manufacturing sector. Important consideration is that people are changing jobs although they are not willing because of market dynamism. It requires burden of adjustment costs and spending on training of work force. Workers are propelled to update their skills to remain in the job and keep up their income levels (HRM Guide 2010). Dale Mortensen has evolved a dynamic general equilibrium model of employment generation and destruction to analyse the policy reform effects. He has also measured the effects on UK unemployment and economic well being through a collective reform programme, according to which, unemployed employees’ benefit entitlement for a period of six months should be decreased. It would remove the firing costs related with employment security legislation. Later, subsidies can be offered to boost new hiring and steps taken to minimise the bargaining power of already employed. As per the numerical calculations, such policies minimise the rate and time of remaining unemployed but for that it is crucial to reduce the benefit period to finally increase production and earning (CEPR 2010). Edmund Malinvaud has recommended the long awaited theory of medium-term unemployment published in Edmund Phelps’s latest book, Structural Slumps: The Modern Equilibrium Theory of Unemployment, Interest and Assets. Short-term and long-term unemployment policies have got elaborate discussion through Keynesian and classical models but there exists no matching model for medium-term unemployment affecting the developed countries. It has a non-monetarist base with the importance given to real interest rate. He has found irregularities in the analysis and recommended that the theory must be examined to find more proof of its policy implementation, especially on the deviation of efficiency wages from competitive layers (CEPR 2010). In `The Employment Content of Output Growth: A Cross-country Analysis, Ana Revenga (World Bank) and Samuel Bentolila have recommended to the European governments inclined to minimise the level of unemployment by advancing growth that they should formulate policies focussed towards heightened product market competition, decentralize wage bargaining, and decrease the costs of employment adjustment (CEPR 2010). Policy Proposals One of the policy proposals pinpoints the significance of tax structure. A payroll tax puts a corrective impact on unemployment while a value-added tax does not. The pathetic condition of low-wage employees is an alarming social issue in the whole of OECD, wherein unemployment cannot be justified as it creates negative repercussions and neighbourhood effects. Phelps has recommended providing tax benefits to entrepreneurs recruiting low wage workers. It will reduce unemployment and increase wages resulting in payment of transfers to working poor in stead of non-working poor. He observes that other policy options would not provide sufficient benefits or would be pricey. Concern has been made regarding the misuse of the system due to the difficulty in the mechanism of benefits, holding people from leveraging from it while giving an opportunity to those in the higher income group not sharing the responsibility. The loopholes can be filled by implementing the policy via graduated scheme as against applying flat rates and also maintaining accounts disciplined way and securely (CEPR 2010). Dennis Snower has stated that unemployment benefits in stead of solving the problem aggravate it further. Instead the funds should be used to distribute vouchers to unemployed, which they can transfer to employers for providing them training and jobs. Vouchers should be equal the value of unemployment benefit, time period of remaining unemployed and later employed besides the training cost to employer so that there is no burden on the employer and no inflation thereon (CEPR 2010). Conclusion Unemployment can not be fought without active government participation. Important thing is that the government should consult the economists before implementing policy level changes. All risks cannot be covered because of the dynamic nature of economy and also due to globalization, as (Lucas, Jr. 1978) reducing of cyclical risks at policy level is very difficult by practicing monetary and fiscal policies. It is very crucial to distribute unemployment risks over people in a satisfying way. No policy measures can fulfill the aim of achieving full employment but strenuous efforts should recurrently be made to reduce the level of unemployment to safeguard the interests of the people in general from its social and economic costs. References Bized.com, 2010. Unemployment theories - types of unemployment - which type is typical? Bized.com. Available from: http://www.bized.co.uk/virtual/economy/policy/outcomes/unemployment/unempth2.htm [Accessed 23 July 2010]. CEPR, 2010. Bulletin: Unemployment Policy Government Responses. CEPR. Available from: http://www.cepr.org/PUBS/Bulletin/meets/487.htm [Accessed 27 July 2010]. Euro Economics, 2009. Euro economic glossary. Available from: http://www.unc.edu/depts/europe/euroeconomics/glossary.php Feldstein, Martin 1978. The Private and social costs of unemployment. The American Economic Review, 68, (2), pp. 155-158. Available from: http://www.jstor.org/stable/1816681 [Accessed 27 July 2010]. HRM Guide, 19 May 2010. Small businesses create most jobs. Available from: http://www.hrmguide.co.uk/jobmarket/sme_growth.htm [Accessed 23 July 2010]. HRM Guide, 14 July 2010. UK unemployment: labour market statistics. Available from: http://www.hrmguide.co.uk/jobmarket/unemployment.htm [Accessed 23 July 2010]. Investor Words, 2010. Definition unemployment. InvestorvWords. Available from: http://www.investorwords.com/5838/unemployment.html [Accessed 23 July 2010]. Lucas, Jr. Robert E. 1978. Unemployment policy. The American Economic Review, 68, (2), pp. 353-357. Available from: http://www.jstor.org/stable/1816720 [Accessed 27 July 2010]. Statistics, 14 July 2010. Employment rate up to 72.3 per cent, Labour Market. Available from: http://www.statistics.gov.uk/cci/nugget.asp?ID=12 [Accessed 23 July 2010]. Work, Shadow., Willott, Jenny 2004. Unemployment: what is unemployment? Available from: http://www.politics.co.uk/briefings-guides/issue-briefs/employment/unemployment-$366619.htm [Accessed 23 July 2010]. Read More