Unemployment in the United Kingdom - Essay Example

Unemployment in the United Kingdom Introduction According to Miller (1994, p the United Kingdom experiences three main types of unemployment, each having its own subset that must be independently examined in order to obtain a more detailed picture of unemployment that is felt. Frictional unemployment is transitional unemployment due to people moving between jobs (Tutor2u Limited 2005). An example of frictional unemployment is search unemployment which occurs when workers do not take the first job they are offered and thus are "needlessly unemployed" (Miller 1994, p.1). On the other hand, real wage unemployment occurs as "cyclical unemployment" wherein the general case exists due to the excess labour supply in the economy brought about by the real wage rate set above the market clearing level (Miller 1994, p.2). Miller cites that factors such as set minimum wage, high benefit levels and poverty trap existence are the most common contributors of real wage unemployment. The third type of unemployment that exists in UK is demand deficient unemployment (refined by Keynes), which in the general case occurs due to a deflationary gap that exists in the economy and thus aggregate supply outnumbers demand. It is an involuntary unemployment caused by the lack of aggregate demand for goods and services (Tutor2u Limited 2005). Keynesian unemployment, according to Miller, can be also be analysed in seasonal, structural and technological aspects. Seasonal unemployment varies with the time of the year, regional structural unemployment occurs when some geographic areas face higher unemployment rates than other areas while technological unemployment is simply a shortage of labour demand caused by advancements in technology (1994, p.4). Unemployment Sources and Possible Solutions in the UK According to Miller (1994, p.4), the presence of demand deficient unemployment in UK is caused by high interest rates and restraints on government spending. Higher interest rates leads to high exchange rates and cheap imports and hence, demand becomes elastic. Similarly, restraints on government spending, particularly on benefit payments, lead to curtailment on consumption. Other "minor" factors causing the presence of demand deficient unemployment include the large volume of "hot money" inflows from overseas as well as high levels of overseas investment. Also, the lack of proper training and skills is a crucial indicator of unemployment itself, particularly, the increased demand for skilled labour with relative to unskilled labour, coupled with the increase in the required flexibility on the part of the workforce. Adams et al cite that it continues to be a persistent feature of UK employer surveys on labour market issues that one of the major obstacles to increased production and/or expansion is the lack of skilled and experienced workers available to firms at any given time (2004, p.3). Apparently, increased production will require increased factors of production which may include labour. According to Miller, the main cause of real wage unemployment in UK is unwillingness on behalf of employers to take on the long-term unemployed, who would be willing to accept a slightly lower wage. To solve such, retraining schemes must be improved as well as the government keeping an alternative labour supply in order for firms to immediately replace those workers who ask for excessively high wages. Increasing the mobility of the workforce in the economy with the similar effect (1994, p.2). To rid the UK economy with real wage unemployment, the average real wage level must be lowered to the market-clearing wage. However, supposed "cures" for achieving this, Miller cautions, is to have a very small amount of inflation in the economy hoping workers will view that their wages are still the same when in reality their value is falling(1994, p.2). On the other hand, labour can be made to accept lower wages such as benefit levels can be lowered or benefits can be placed on top of low wages, thus decreasing the power of the poverty trap. However, an issues might arise leading to further negotiations with trade unions unless their power is reduced or by explaining to them the connection between high wages and labour unemployment. Finally, reduction of real wage unemployment can be achieved through the use of the market system to lower wages to the equilibrium level. Although supply side issues are important, local policy approaches towards unemployment in the UK have largely been supply-side inspired, ranging from a rapid succession of mass training schemes to liberalisation of the labour market and the introduction of stricter welfare and unemployment benefit rules (Adams et al. 2004, p.18). In their study on mismatch and unemployment in the UK labour market, Adams et al cite that unemployment has been consistently viewed by national and local agencies as fundamentally a supply-side problem which can only be properly addressed by long term investment in human capital. Hence, greater understanding of demand-side factors, such as the role of employer expectations and practices is necessary (2004, p.3). Adams et al suggest: "while supply side policies such as skills training and incentives to reduce welfare dependence remain important, these will be more effective if implemented in conjunction with complementary non-supply side policies. These should not be limited to measures designed to increase aggregate demand at the macro level, but should include more specific local and regional policies to ensure a qualitative match of the requirements of employers and jobseekers." (2004, p.19) Conclusion As we can see, unemployment in UK is brought about by a myriad of factors. However, it must be noted that across Europe, UK is now enjoying relatively lower levels of unemployment than before. However, policies targeted in reducing unemployment must not only involve consideration of factors in the supply side but on the demand side as well. Moreover, trimming unemployment into its equilibrium level will involve costs such as trade-off between the current wage level workers in UK enjoy and the interests of trade unions in order to for the economy to reach the desired market clearing wage level. Reference List Adams, J, Greig, M and McQuaid, R 2004, Mismatch and Unemployment in Local Labour Markets, Department of Economics, Napier University. Retrieved 19 May 2006 from http://www.ersa.org/ersaconfs/ersa99/Papers/a027.pdf. Barrell, R and Riley, R 1999, Equilibrium Unemployment and Labour Market Flows in the UK, EUI Working Paper ECO No.99/3, Department of Economics, European University Institute, Italy. Retrieved 17 May 2006 from http://www.iue.it/ECO/WP-Texts/ECO99-3.pdf. Miller, T 1994, The Causes of Unemployment in the UK, economic-truth. Retrieved 18 May 2006 from http://www.economic-truth.co.uk/alevel/unemploymentcauses.pdf. Miller, T 1994, Measures that Could Be Used to Reduce the Level of Unemployment in the UK, economic-truth. Retrieved 18 May 2006 from http://www.economic-truth.co.uk/alevel/ curingunemployment.pdf Read More