Policy Makers and Unemployment in the UK - Essay Example

Since the start of recession in 2008, the increase in annual unemployment rate persists. Policy makers aside from the people affected by unemploymentare the ones who are mostly concerned of the prevailing unemployment rate in an upward spiral. By defining unemployment and including some remarkable models of unemployment, the work at hand presents the point if policy makers should be concerned the surging unemployment rate in the UK. Definition of Unemployment As reported, a person is unemployed if he or she is not only out of work, but in continuous search for a job just to get started within a period of two weeks (BBC News Business, 2014). Unemployment must satisfy the three criteria: without work, currently available for work, and seeking work (Hussmanns et al., 1990, p.97).Unemployment size is usually measured using statistical tools. It may be essential to employ surveys and other fundamental scientific principles to generalise the overall health condition of economically-active population. However, the source of information can also lead to a small variation in the definition of unemployment (MacLean and Osberg, 1996, p.209). There are also theoretically sophisticated definitions of unemployment, which are apart from the use of relevant statistical tools or statistics in general (Wagner, 2000, p.66). In some cases, unemployment is used as indicator of the health of an economy. As argued, unemployment is just a part of the labour force looking for jobs, and so should not be totally relied upon to indicate the state of an economy, because unemployment is not loss of employment in the first place (Wessels, 2006, p.169). Theories of Unemployment There are various models of unemployment including Frictional Unemployment, Seasonal Unemployment, Structural Unemployment, Technological Unemployment, Classical and Real Wage Unemployment, Demand Deficient Unemployment (Keynesian), Natural Rate of Unemployment and the Non-accelerating Inflation Rate of Unemployment (NAIRU). Frictional unemployment refers to the labour’s natural turnover (Lipsey and Harbury, 1992, p.421). As people continuously seek for better jobs and some of them retire, workers are left to fill these vacant jobs or seek for jobs. The main assumption of this theory of unemployment is that the occurrence of unemployment is independent on the unchanging structure of employment, may it be occupational, industrial or regional. Frictional unemployment can also be voluntary, which means that if a person does not want to take the job, he has the power to refuse it and look for other better jobs. Seasonal unemployment prevails when the industry’s demand for labour changes due to seasonal requirements of manpower (Tragakes, 2011, p.271). Structural unemployment takes place when there is no match between the unemployed and the required jobs to be filled based on the regional location, skills required, and other related dimensions (Lipsey and Harbury, 1992, p.421). As the name implies, technological unemployment is unemployment taking place due to technological changes. Today, as new discoveries of technologies prevail, machines or technologies replace manpower in the hopes of obtaining more cost-efficient output in the labour force. When the labour market offers higher wages for jobs beyond the equilibrium or market-clearing level, job seekers are assumed to exceed in number over the actual vacancies, allowing the classical and real wage unemployment to take place (Knight, 1986, p.110; Anderton, 2006, p.598; Meller, 1992, p.86). Based on this theory, the more the government intervenes into the economy to alleviate problems with job deficiency level, the more the unemployment rate will increase. Under the Keynesian model of unemployment, the actual deficiency in demand creates involuntary unemployment due to the point that the number of job vacancies in the labour market is less than the number of individuals looking for jobs (Schmidt, 2009, p.481; Friedman and Woodford, 2010, p.303). The natural rate of unemployment on the other hand is an unemployment that cannot be changed by fiscal or monetary policy, because it depends on the supply structure between the labour market and relationships and function in the production (Handa, 2000, p.351). Inflation rate affects unemployment and this is the point of NAIRU, an unemployment model taking into account that unemployment takes place under the point where inflation rises (Wessels, 2006, p.169, Grant and Vidler, 2004, p.354; OECD, 2000, p.157). This model assumes that unemployment higher than NAIRU means decreasing rate of inflation because of excess supply in the economy. When unemployment is below NAIRU, inflation rises due to tight labour markets and excess demand in the economy. All frictional, real-wage, and structural unemployment is voluntary, as workers in these cases of unemployment have the total control over their unemployed condition (Lipsey and Harbury, 1992, p.421). Analysis Recession started in 2008, then after this unemployment rose sharply. In 2008, right after the recession, unemployment was said to be 5 percent or 1.6 million of the economically active people (BBC News Business, 2014). Then the figure even rose more sharply in 2009, around 8 percent or 2.5 million of the economically active people (BBC News Business, 2014). For 17 years, UK’ unemployment reached to a highest level in 2011, around 2.7 million at the end of the said year (BBC News Business, 2014). Today, from 8 percent in 2009, the actual percentage of unemployment alleviated a little. Recently, the unemployment rate in the UK is 7.2 percent among the economically active population (BBC News Business, 2014). This can be translated as around 2.34 million people in the UK were out of work in December 2013, based on the latest estimate (BBC News Business, 2014). The actual trend of unemployment is eventually trying to recover, but it is still higher, and something that the policy makers must have to closely take into account. Prior to be alarmed, policy makers are careful to know whether the said unemployment is either voluntary or involuntary. In reality, firms are after of optimising the value or amount of how much they are making. The economic crisis, without any question forced the labour market to shut down and even delay hiring, some firms even had laid off employees just for them to ensure their firmness to stand amidst the crisis. Other companies will take this opportunity to hire for the best, knowing that they have to optimise their resources including the human resource. For this reason, the classical and real wage unemployment may not take place due to the economic constraint. Considering that the employees have no choice when laid off, they do not have much control over the job’s wage too. The government cannot even take control, because it cannot set further the minimum wage or even a wage higher than the equilibrium because firms are delaying the hiring process or are trying to refrain from hiring new employees in order to reach their basic requirements in sustaining their actual business. The Keynesian model on the other hand speaks about the tendency of having more individuals looking for jobs, but lesser job vacancies. This eventually will happen in the actual setting triggered by the economic crunch. As many firms control their hiring and initiate firing their employees, many job seekers will then flood in the labour market, but only firm will at some point delay hiring for the mean time due to economic condition. For this reason, the Keynesian model might be an appropriate model of unemployment that will have to be used in explaining the prevailing unemployment in the UK. Finally, due to economic crunch, exchange may substantially decline or put to a halt, allowing lesser healthy economic activity. Thus, a higher excess supply is prevalent in the economy, because people are looking forward to saving their money, and this eventually happens in the bigger scale especially among firms. Less spending is necessary. For this reason, there will be also less spending in the hiring process. As based on the NAIRU unemployment theory, the level of inflation is a remarkable indicator of unemployment. Lately, the Euro zone inflation drops back to rate-cut level (Santa, 2014). The consumer price index fell from 2 percent before the month of January down to 1.9 percent in January (BBC News Business, 2014). This leads to the assumption that unemployment must be higher than the NAIRU. This is backed by the information that the prevailing unemployment in the UK is 7.2 percent for now, though it has substantially improved based on the previous years’ data. Conclusion The analysis showed that using the three models of unemployment, the Classical and Real Wage Unemployment, Keynesian, and NAIRU, one can substantially explain that the unemployment in the UK is so real, that the policy makers will have to look for better alternatives in order to provide jobs for job seekers prior to the healthy flow of the economy, particularly for the real value of Euro in the economy. The three models provide key economic indicators as to where the policy makers should start giving solution for this problem, and one ultimate point is look closely in the unemployment. Although unemployment is not a key economic indicator, but it has a contributing factor in the long run as implied by the concepts of the unemployment models. References Anderton, A. (2006) Economics. London: Pearson Education. BBC News Business (2014) Economy tracker: Unemployment [online] available from [18 March 2014]. BBC News Business (2014) UK unemployment falls by 125,000 to 2.34 million [online] available from [18 March 2014]. BBC News Business (2014) Economy Tracker: Inflation [online] available from [18 March 2014]. Friedman, B. M., and Woodford, M. (2010) Handbook of Monetary Economics. Amsterdam: Newnes. Grant, S., and Vidler, C. (2004) Heinemann Economics for OCR. Oxford: Heinemann. Handa, J. (2000) Monetary Economics. London: Psychology Press. Hussmanns, R., Mehran, F., and Varma, V. (1990) Surveys of Economically Active Population, Employment, Unemployment, and Underemployment: An ILO Manual on Concepts and Methods. International Labour Organization. Knight, K. G. 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