Employment and Unemployment

Employment
 Full employment (is not zero
unemployment) is defined in the UK as
occurring when 3% or less of the labour
force are without jobs.
Unemployment
 Unemployment exists when people who
are willing and able to work are without
jobs.
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 Unemployment Rate
Unemployment rate refers to the
percentage of people who are
willing, able and available to
work but are out of work.

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Measurement of Unemployment
There are two main ways of measuring the
number of people who are out of work but
seeking employment:

1. Claimant count – this includes those

people who are in receipt of
unemployment benefit ( Job Seeker’s
Allowance, JSA);

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 .
2. The Labour Force Survey Measure –
this is based on a household survey, which
collects information not only about
unemployment but also a range of other
labour market information such as
earnings and qualifications.
 It is conducted quarterly and projections
are used to calculate monthly
unemployment figures. It is also known
as International Labour Organisation
(ILO) measure.
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Methods used to obtain unemployment
measures of:
1. Claimant count
 the number of people claiming JSA/dole
or unemployment related benefit
 Age range – 18 – 65
 savings cap;
 must be able to prove they are
looking for work;
 Register at unemployment offices.

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 .

2. ILO/ Labour Force Survey

 out of work in last four weeks;
 ready to work in two weeks time;
 Questionnaire/interview
 Survey by phone call/paper
 Internationally recognised
 age 16-65;
 Sample, and related problems

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 Limitations of Measures of Unemployment

Claimant Count - limitations

 The number of people unemployed
can change significantly purely
because of administrative changes in
terms of eligibility for benefit.

For example, the decision not to pay

JSA to those aged over 55 years
removed a large number of people
from the unemployment count. 7
 .

 The claimant count does not provide

other labour market information and
has only limited use in making
international comparisons.

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 Labour Force Survey (LFS) – Limitations
 It is costly and time consuming to
compile data;

 It is also subject to sampling errors,

as the sample may not be
representative of the population as a
whole.

 Time lag

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 Benefits of Unemployment
 If there is a pool of unemployed workers,
firms can expand rapidly as it is easy to
recruit new workers;
 It keeps down wage claims;
 It discourages strike action

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 Costs of Unemployment
The main costs of unemployment
Economic Cost:
 the opportunity cost of lost output –
a potential output that is lost forever;
 Less revenue from indirect taxes
such as VAT since people out of work
spend less;
 Higher government expenditure –
more money is spent on job seeker’s
allowance;
https://www.youtube.com/watch?v=EdlJBb56eeQ 11
 Social Cost
 Unemployment also generates other
pressures on government spending eg
when people are out of work they are
more likely to suffer from poor physical
and mental health. This put upward
pressure on government spending on
health care;
 The personal costs are usually high for
those who are unemployed. They suffer
decreased income, loss of status,
frustration and in some cases ill-health.
In the long-term, they become rusty and
may lose confidence in their own
abilities. 12

https://www.youtube.com/watch?v=jzkElSu_nwc
 Government policies to reduce
unemployment
 Improve the human capital of the
workforce
 Improve incentives for people to
search and accept paid work
 Employment subsidies
 Achieve sustained growth

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 Recent trends in UK unemployment
Other factors that have helped bring down
the unemployment rate include:
 Expansion of further and higher
education
 "Discouraged worker effects" due to
structural unemployment
 Employment creation from foreign
investment
 Increased investment in worker
training
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Tasks: Class Exercise

 Videos
http://www.youtube.com/watch?v=qhKF7ot07jk

http://www.youtube.com/watch?v=w2tjZmZHvYM

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 Causes of Unemployment

There are four main types of

unemployment:
 Frictional Unemployment
 Structural Unemployment
 Cyclical Unemployment
 Classical Unemployment
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 Frictional Unemployment
This consists of those who are temporarily
unemployed as they move from one job to
another job.
Categories
 Search unemployment
 Seasonal unemployment
 Casual unemployment

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 Structural Unemployment
This arises due to changes in demand and
supply conditions facing industries.

 Categories
 Regional unemployment
 Technological unemployment
 International unemployment

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 Cyclical Unemployment
 It arises because of a lack of aggregate
demand, whereby the economy is
providing less than it is capable of
producing. This is limited to the business
cycle.

 Unemployment rate: The percentage of

people who are jobless, available to work
and actively seeking for work.
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 Classical Unemployment
 Classical unemployment occurs
when real wages are kept above the
market clearing wage rate, leading to
a surplus of labour supplied.

 Classicalunemployment is
sometimes known as real wage
unemployment because it refers to
real wages being too high. 20
 Hidden unemployment
 Undoubtedly there are thousands of people
who by any reasonable definition are
unemployed, but who are not picked up by
the official statistics. Many have become
discouraged workers and have stopped
actively searching for work.

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 Unemployment and the Production
Possibility Frontier
 If there are unemployed resources in the
economy, this means that an economy will
be operating within its production possibility
frontier.

 If the economy is successful in reducing

unemployment, then output of goods and
services can move closer to the frontier of
the PPF
Tasks: Class Exercises
22
 Task
 Identify two advantages of the Claimant count
and LFS measure of unemployment? (4)

 Why would improved training be expected to

reduce unemployment? (4)

 Use a PPC to explain the effect of a reduction in

unemployment on output? (4)

 Why would a rise in employment be likely to

raise government tax revenue? (5)

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 The Balance of Payments

 .

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 The Balance of Payments
Account (BOP)
The balance of payment is a financial record
of a country’s economic transactions with
the rest of the world over a period of time.

https://www.youtube.com/watch?v=ZnyPcOz6bqc

http://www.youtube.com/watch?v=qb8tClyrt6A

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 The Components of BOP
 The current accounts
 The capital accounts
 The financial accounts

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 The Current Account
The current account is divided into four
main sections:
1.Trade in goods: (eg food, cars). This
shows the relationship between the
revenue earned from exports of goods and
the expenditure on imports of goods.
UK’s trade in goods balance (export
revenue minus import expenditure) is
usually in deficits;
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 2.Trade in Services
 This shows the relationship between the
revenue earned from export of services
and the expenditure on imports on
services (eg Sea transport, banking). UK’s
trade in services balance is usually in
surplus;

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 3.investment income

This covers interest, profit and dividends.

For example, profits earned in a UK-
owned firm based in Germany and sent
back to the parent firm in the UK would
appear as a credit item.

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 4. Current transfers
 These involve payments and receipts
where there is no actual exchange of
goods and services. They include overseas
aid, payment to and receipts from the EU
and charitable donations.

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The Capital & Financial Accounts

 The capital and financial accounts show

the movement of direct investment e.g.
the purchase of a factory and portfolio
investment - purchase of shares.

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 A Current Account Deficit

A deficit on the current account occurs

when the country’s import expenditure
exceeds its export revenue from trade in
goods, trade in services and investment
income.
 (More money leaving through imports
than coming in through exports)

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 Causes of deficits:
 High inflation rate relative to competitor
countries
 Rise in domestic incomes
 A high exchange rate
 Exports growing less rapidly than imports
 Lack of price competitiveness
 Lack of quality competitiveness
 Low incomes abroad

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 The causes of the UK trade deficit
Short-term factors
 Strong consumer demand
 High income elasticity of demand for
imports
 The strong exchange rate
 Rising commodity prices

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 Medium to long-term factors
 UK trade balances have been affected by
big shifts in comparative advantage in
the world economy

 The UK manufacturing sector has been

in long-term decline for more than
twenty years.

 UK has switched from being a net oil

and gas exporter to being an importer
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 Current Account Surplus

 A surplus on the current account is

experienced when a country’s export
revenue from abroad is greater than its
import expenditure abroad from trade in
goods and services and investment
income.

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Causes of current account surplus:

 If products are internationally competitive

 If the country is in a recession (firms sell
abroad)
 Higher income abroad

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Video – Current Accounts Surplus
http://www.youtube.com/watch?v=ihq_TEgV3KU

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 Consequences of a Current
Account Deficit
 It reduces the money supply as more
money leaves the country than enters it –
can reduce inflationary pressure.
 Employment and economic growth may
decline;
 Government may have to borrow from
abroad if a country cannot attract direct
foreign investment
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 Why is the trade in goods
section always in deficit?
This is due to the following reasons:
 Cyclical change;
 De-industrialisation;
 The uncompetitiveness of the UK
businesses.

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 Why is the trade in services
section always in surplus?
This is due to the fact that UK is:
 strong in financial services (Banking;
Insurance and Management Consultancy)
 Good in ‘high-tech knowledge’ areas
 Strong in the Law

https://www.youtube.com/watch?v=o41umjDuNBc

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 Why is the Capital account
usually in surplus?
This is due to UK’s:
 Membership of the EU – which attracts
more FDI (foreign direct investment)
 Flexibility of the labour market
 Taxation – competitive tax rate attracts
FDI.

42
 Economic Policies to reduce a
large trade deficit
Demand management: Reductions in
government spending, higher interest rates
and higher taxes could all have the effect of
dampening consumer demand and reducing
the demand for import.
Natural effects of the economic cycle: If a
country‘s trade deficit worsens during a time
of strong economic growth, one would
expect to see the deficit fall during an
economic slowdown or recession 43
 .

 A lower exchange rate: The central bank

of a country might decide that a lower
exchange rate provides a suitable way of
improving competitiveness, reducing the
overseas price of exports and making
imports more expensive.

 Supply-side improvements: Policies to

raise productivity
 Protectionist measures such as import
quotas and tariffs
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Does a current account deficit matter?
Why deficits do matter
Deficits do matter due to:
1. Structural weaknesses: The current
account deficit may be a sign of a
wider structural problem i.e. a loss of
competitiveness, insufficient
investment in new capital

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 .

2. Loss of output and employment: A

widening trade deficit may result in
lower output and employment
because it represents a leakage from
the circular flow of income and
spending.

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 .

3. Potential problems in financing a

current account deficit: Countries
cannot always rely on inflows of
capital to finance a current account
deficit. Foreign investors may
eventually take fright, lose
confidence and take their money out.

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 Why deficits do not matter
Deficits do not matter due to the
following reasons:
 Importing for future growth;
 The growth of services and investment
income;
 The ease with which the UK attracts
foreign capital;
 The relative size of the deficit.

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 What is wrong with a current
account surplus?
A current account surplus may pose
the following problems:
 The lack of consumption
 One country’s surplus is another
country’s deficit
 Implications for high exchange rate

https://www.youtube.com/watch?v=ZUSJON0YtTM
Tasks: Class Exercise
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