Unemployment - Introduction

Author: Geoff Riley Last updated: Sunday 23 September, 2012

Introduction
Measuring unemployment in the UK

Claimant Count

The claimant count includes those people who are eligible to claim the Job Seeker's
Allowance (JSA). Claimants who satisfy the criteria receive the JSA for six months
before moving onto special employment measures.

Labour Force Survey

The labour force survey (LFS) measure of unemployment covers people who have looked
for work in the past month and are able to start work in the next two weeks. On average,

the labour force survey measure has exceeded the claimant count total by over 600,000 in
recent years.
Some key labour market definitions
Unemployment rate: =
the percentage of the workforce that is registered as
unemployed
The labour force:
=
the number of people in employment + the registered
unemployed
Working population:
=
the population of working age (estimated in 2002 to be 36.5
million)
Participation rate:
=
the percentage of working population who are in the labour
force
Long term unemployed
=
the number of people out of work for at least one year
Vacancies
=
the number of registered jobs available but as yet unfilled
Employment rate
=
the percentage of population of working age that is in a job
Causes of Unemployment
Frictional Unemployment: This is voluntary or transitional unemployment due to people
moving between jobs and who are engaged in job search
Structural Unemployment: Structural unemployment occurs when people are made jobless
because of capital-labour substitution that reduces demand for labour in an industry, or when
there is a long run decline in demand that causes redundancies and worker lay-offs
Cyclical Unemployment: Cyclical unemployment is involuntary or "demand deficient"
unemployment due to a lack of aggregate demand
Classical unemployment: Classical unemployment is the result of real wages remaining above
their market clearing level leading to an excess supply of labour
Consequences of Unemployment
Persistent unemployment is a sign of market failure because it is a waste of scarce resources
and leads to a loss of potential output and a reduction in allocative efficiency. Making use of a
PPF or using the concept of the output gap can illustrate this.

There are further costs associated with high or rising unemployment besides simply the lost
output.
Redundancies waste resources invested in training and educating workers and the longer each
persons period of time out of work, the greater the loss of skill and motivation
A high rate of unemployment can therefore have a negative effect on a countrys growth
potential
High unemployment affects government finances with higher spending on unemployment
benefits and other welfare payments plus falling revenues from income tax, national insurance
and VAT
There is also a strong link between unemployment and consumer spending. As consumers
confidence falls, so the willingness of people to spend declines and people build up their
precautionary savings.
Hysteresis effects
Hysteresis means refers to the damage that unemployment does to the skills and employability of
people out of work. The longer someone remains out of a paid job, the less attractive they are to
an employer. Technical and social skills can decline leading to higher structural unemployment

and a rise in the natural rate of unemployment. The key concept here is occupational
immobility.
Social Costs of Unemployment
Rising unemployment is linked to social deprivation leading to negative externalities. There is
some relationship between increasing unemployment and rising crime, and other aspects
associated with social dislocation (e.g. increased divorce rates, worsening health and lower life
expectancy)
Areas of persistently high unemployment see falling real incomes and a worsening in
inequalities of income and wealth

Disguised unemployment
When some of the long-term unemployed give up the active search for work and leave the labour
market, they are no longer counted in the unemployment statistics and become part of an army of
discouraged workers creating a problem of hidden unemployment.
Possible benefits from rising unemployment

Dampening inflationary pressures: One effect of rising unemployment is that it helps to

keep the rate of inflation down since high unemployment can lower the bargaining power
of workers to bid for higher pay. There might also be an environmental gain if

unemployment is linked to a slower rate of growth of consumption and production,

reducing the pressures on scarce non-renewable environmental resources.

Pool of available workers: Having some people unemployed in a frictional sense might
also be regarded as beneficial in that it means that there is a pool of unemployed workers
who can take up new jobs as they become available. But this depends on these workers
having enough geographical and occupational mobility.

Entrepreneurship opportunities: Another possible positive from higher unemployment

is that a downturn frees up labour resources to find alternative and possibly more
productive uses. Some of the newly unemployed may decide to change career path and
perhaps start a business, so a recession might act as a catalyst for a burst of new
entrepreneurial activity. Much depends on whether would-be entrepreneurs can find
enough finance to turn business ideas into reality.

Government Policies to Reduce Unemployment

Distinction can be made between demand-side and supply-side policies to improve the working
of the labour market in matching people to the available jobs and to the changing demands and
requirements of different industries.
1. Reducing occupational immobility of labour: Immobility of labour is a cause of
labour market failure and structural unemployment. Policies such as the modern
apprenticeship scheme aim to provide the unemployed with the skills they need to find
employment and to improve the incentives to find work. For many years the paucity of
work-place training has been seen as a weakness in the labour market, with evidence of a
persistent skills-gap in the UK economy.
2. Benefit and tax reforms: To some economists, a policy that reduces the value of welfare
benefits might increase the incentive for the unemployed to take a job. It is rare that the
root cause of someone staying out of work is the prospect of out of work welfare
handouts. Instead, targeted measures to improve peoples incentives, including the
linking of welfare benefits to participation in genuine work experience programmes
which is part of the New Deal programme or the introduction of lower marginal tax
rates for people on low incomes might by contrast have a noticeable impact
3. Boosting aggregate demand: Deliberate Keynesian-style fiscal stimulus to demand is an
active labour market policy during a deep recession. This might include increases in
government capital spending or lower direct taxes to boost disposable income. Both are
described as a fiscal stimulus. Many governments during the downturn have turned to
fiscal policy as a way of creating new jobs; some economists refer to such programmes as
providing shovel-ready jobs, typically involving construction projects that are labour
intensive. But a move towards fiscal austerity has brought fears of a severe cut back in
public sector investment and job creation.
4. Employment subsidies (demand-side policy): Government subsidies for businesses that
take on the long-term unemployed will create an incentive to increase the size of their

workforce. During the recession, the German government ran a successful policy
subsidising the continued employment of over a million workers employed in smaller
businesses. This helped to keep down their unemployment rate even during a severe
slump in national output.