Addressing Unemployment in the United Kingdom - Report Example

Addressing Unemployment in the United Kingdom Economists are apprehensive worldwide that a global economic crisis would emerge soon when the US becomes unable to manager her economy better. Although the situation has improved since about one or two years ago, economic authorities worldwide are keeping their fingers crossed. A worsening unemployment rate in the United Kingdom is likely one of the effects should a global economic crisis erupt a few months or years down the road. In measuring unemployment, the United Kingdom Office for National Statistics (UK-ONS 2009, p. 7) gives emphasis on the unemployment rate. The UK-ONS measure is on a residence basis (p. 7). According to the UK-ONS, the unemployment rate is the proportion of the economically active who are unemployed (2009, p. 7). The economically active are either employed or unemployed (UK-ONS 2009, p. 7). The ILO concept of unemployed people requires that a person has been looking for work in the last 4 weeks and is able to start work in the next two weeks (UK ONS 2009, 16). Thus, the ILO definition of unemployment would exclude those in the unemployed who were not looking for work in the last 4 weeks and who are not immediately ready to work in the next 2 weeks. Nevertheless, the UK adopted in 1984 the International Labour Organisation definition of unemployment based on labour force surveys (UK ONS 2009, p. 7). The survey interviews a sample and not by interviewing everybody. Inferences based on a sample use a confidence interval. One issue with regard to unemployment measures based on surveys is that the estimate is actually a range of values (UK ONS 2009, p. 7). For November 2008 to January 2009, for example, the unemployment level based on the survey at the 95% confidence level is between 1,958,000 to 2,100,000 (UK ONS 2009, p. 7). Another issue that can emerge pertains to sampling variability and this matter, according to the UK ONS viewpoint (2009, p. 8) can effect estimates. Especially when sample size is small, the estimate may fail to find out whether unemployment really increased or decreased (UK ONS 2009, p. 8). Another alternative to unemployment rate in measuring unemployment is the claimant count. Established since 1996, the claimant count is the number of people claiming jobseeker’s allowance or JSA (UK ONS 2009, p. 9). To qualify under the program, applicants must be out “of work, capable of, available for and actively seeking work during the week in which their claim is made” (UK ONS 2009, p. 9). Those qualified under their national insurance contribution are eligible to receive allowance for a maximum of six months. The presence of the JSA can distort the percentage of the UK population who would be looking for work. At the same time, it can e argued that the JSA applicant or beneficiary count can be a good substitute measure for measuring unemployment. One perspective that can be upheld in viewing unemployment is that there are several types of unemployment and that the appropriate policy for unemployment would depend on the nature of the unemployment that we are looking at. One type of unemployment is the so-called frictional unemployment. According to Dornbusch et al. (2008, p. 593), this is the “unemployment associated with the movement of workers in and out of jobs in ‘normal’ times”. The view is associated with the classical perspective (Dornbusch et al. 2008, p. 103). Literally taken, the classical view holds that there is no unemployment (Dornbusch et al. 2008, p. 103). This is because “in equilibrium, everyone who wants to work is working” (Dornbusch et al. 2008, p. 103). Thus, the employment that takes place is accounted by labour market frictions that occur because the market is always in a state of movement (Dornbusch et al. 2008, p. 103-104). The frictional unemployment takes place as people shifts from one job to another (Dornbusch et al. 2008, p. 104). Frictional unemployment takes place because it takes time for people to find the right job appropriate to them (Dornbusch et al. 2009, p. 104). At the same time, markets close down and open businesses and labour has to circulate to find their appropriate jobs. The concept of frictional unemployment is also related with the concept of the natural rate of unemployment (Dornbusch et al. 208, p. 104). The natural rate of unemployment corresponds to the rate of unemployment resulting from the normal functioning of the market (Dornbusch et al., 2008, p. 104). Thus, when unemployment is frictional, the appropriate course of action is to do nothing or just keep the markets functioning. Doing nothing means doing everything to keep markets functioning, prices fully flexible, and goods and factors free to adjust to the market signals. A second type of unemployment that may be considered for validity is the so-called unemployment that arises from a deficient demand. We can associate the view with the Keynesian perspective. In Figure 1, for example, that was taken from Baumol and Blinder (2009, p.2), aggregate demand is C+I+G+(X-M). However, aggregate demand is only able to put the economy at GDP=6,000 that is far from the full employment level or potential GDP. The difference between 6,000 to 7,000 corresponds to an unemployment figure corresponding to the so-called Okun’s law applicable to the economy. Figure 1. Demand deficient unemployment (Baumol and Blinder 2009, 182) Raising aggregate demand through G can put the economy in Figure 1 at the full employment level or potential GDP of 7,000. This would result to the elimination of the so-called demand deficient unemployment. Thus, assuming that the unemployment arose from a deficient demand, one can consider to use government spending or G to boost aggregate demand and push the economy towards full employment or potential GDP. A third type of unemployment is that which Baumol and Blinder identified as structural unemployment. According to Baumol and Blinder (2009, p. 114), structural unemployment “arises when jobs are eliminated by changes in the economy, such as automation or permanent changes in demand.” According to Baumol and Blinder (2009, p. 114), unlike the frictionally unemployed workers, the structurally unemployed workers are not between jobs when they were unemployed: instead, the structurally unemployed workers are out of work because their skills and experience became unmarketable with the changes in the economy. This can happen, for instance, as markets open themselves to the world and as the world adjusts based on the laws of comparative advantage. Thus, when unemployment is structural, a possible solution to the unemployment would be to boost skills training and the adjustment of the labour force to the market signals. The education market can be re-engineered to respond better to the market signals implied in the demand for goods and skills of the labour force. Another option, of course, in responding to the permanent change in the demand pattern is for government to facilitate education and skills training program consistent with those implied by international and local market conditions. Finally, the fourth type is the seasonal or cyclical unemployment. Baumol and Blinder (2009, p. 114) describes cyclical or seasonal unemployment to be increasing when economic activity declines as in a recessionary period or decreasing when economic activity is at its high in a boom or recovery period. The Baumol and Blinder perspective (2009, p. 114) is consistent with the Dornbusch et al. (2008, p. 105) articulation. According to Dornbusch (2008, p. 105), “if output is above potential output, prices will rise and be higher next period; if prices are below potential output, prices will rises will fall and be lower next period.” This also implies output and employment movements around the full employment level. As in the case of frictional unemployment, what appears to be appropriate in this situation is to let the market adjust fully and flexibly to the seasonal or cyclical fluctuations. Intervening in the market may be counter-productive because fall signals regarding on to produce, how much to produce, and when to produce will be only distorted. This will only make it more difficult for the market to put itself at the equilibrium level. In the United Kingdom, unemployment from 1980 to 2005 or for 25 years moved according to the depiction by the OECD (2007b, p. 19). As indicated by Figure 2, UK unemployment rates prior to 1997 are generally higher compared to the unemployment rate for the Euro area and the rest of the OECD. The same finding is indicated in Begg et al. (2002, p. 359). Figure 2. Unemployment as % of labour force in UK (OECD 2007b, p. 19) Legend: Beginning sometime 1997, however, the unemployment rates of the United Kingdom are lower compared to the unemployment rates for the Euro area and the rest of the OECD. This may imply that the UK economy has been managed better during the period 1997-2005. However, a competing hypotheses that we cannot rule out pending empirical or another types of analysis is that it is possible that the Euro area and the rest of the OECD may have been vulnerable to the Asian Currency Crisis of mid-1997, the terrorist attacks in September 11, and the pandemics that took place during the early 2000s. It is possible that the UK’s shining performance from mid-1997 to 2005 was not the result of an extraordinary prudence in economic management but was the result of a UK economy that is more resilient to external shocks. Table 1. UK unemployment rate compared with OECD, EU, and US (OECD 2010, p. 2) Looking at Table 1 covering the period 2007-2009, the UK performed better than the US, European Union, and the OECD in keeping unemployment figures low. As shown by Table 1, unemployment in the UK was 5.3, 5.6, and 7.6% from 2007 to 2009. For the US, the figures are generally higher at 4.6, 5.8, and 9.3% except for 2007. The figures for the European Union are 7.1, 7.0, and 8.9%. Finally, the figures for the OECD are 5.8, 6.1, and 8.3%. Before jumping into a conclusion that the UK economy was managed better, we must take a look at Table 2. While Figure 2 and Table 1 may be showing that the UK is performing better than the US in reducing unemployment, Table 2 shows that the US is performing better than the UK in increasing output. Table 2. Growth of real GDP of UK compared with Europe and US (OECD 2007, p. 19) Nevertheless, there are two fundamental approaches in addressing the unemployment problem. One approach is associated with the Keynesian perspective. This approach basically uses fiscal and monetary policy to affect aggregate demand. Expansionary fiscal policies and expansionary monetary policies, for instance, can shift up the aggregate demand and move the economy to full employment. Whether output will be affected or not, however, would depend on the shape of aggregate supply. If aggregate supply is upward sloping or at least upward sloping in the short-run, output will increase and employment following the Okun’s law (originally devised for the American economy but believed by some to applicable also to other economies). The second fundamental approach to the employment problem is described as supply-side policies (Dornbusch et al. 2008, p. 112-114). These can consist in tax cuts and other measures designed to encourage producers to produce. Succeeding developments of supply-side economics, however, identifies the role of education and other social variables in affecting the aggregate supply curve and, thus, some of the supply-side models can be described in terms of short-term or long-term supply curve models. It is difficult to assess which of the two fundamental perspectives is better because this is an ongoing debate in macroeconomics. Nevertheless, it is generally safer to use the classical perspective except when political costs are involved. Other than the economic costs of unemployment associated with the Okun’s law, there are social costs as a portion of the population are unable to buy food, medicines, clothing, and shelter. Reference List Baumol, W. and Blinder, A., 2009. Macroeconomics: Principles and policy. 11th ed. United Kingdom & other countries: South-Western Cengage Learning. Begg, D., Fischer, S., and Dornbusch, R., 2002. Economics. 8th ed. London: McGraw-Hill. Dornbusch, R., Fischer, F., and Startz, R., 2008. Macroeconomics. 10th International ed. London & other cities: McGraw Hill. OECD, 2007. OECD employment outlook. Paris: Organisation for Economic Cooperation and Development. OECD, 2007b. OECD economic surveys: United Kingdom. Paris: Organisation for Economic Cooperation and Development. OECD, 2010 (July). OECD employment rate edges down slightly to 8.6% in May. OECD Harmonised Unemployment Rates May 2010. Paris: Organisation for Economic Cooperation and Development. UK-ONS, 2009. How is unemployment measured. United Kingdom: Office for National Statistics. Read More