Policies to Reduce Unemployment

AS and A2 Macro Revision – May 2013

Defining unemployment

The number of people able, available and willing to find work and actively seeking work – but not

employed

Some Key TermsDe-industrialization A decline in the share of national income from manufacturing industries

Discouraged workers

People often out of work for a long time who give up on job search

Full employment When there enough job vacancies for all the unemployed to take work

Hysteresis A problem caused by high levels of unemployment. An unemployed worker loses skills and motivation and so finds it hard to re-enter the labour force

Keynesian unemployment

Unemployment caused by a lack of aggregate demand – a deficiency of private sector spending causes output and employment to contract

Labour shedding Cut backs in employment often seen in a slowdown or a recession

Labour shortages When businesses find it difficult to recruit the workers they need

Under-employment When people want to work full time but find that they can only get part-time work – the result is a loss of hours that the economy can use

Unemployment trap

When the prospect of the loss of unemployment benefits dissuades those without work from taking a new job

Two measures of unemployment

• Claimant Count Measure– The number of people claiming the Jobseekers’

Allowance– Monthly head count of unemployed

• Labour Force Survey– An internationally agreed measure of unemployment– Must have actively sought work in the previous four

weeks and be available to start work immediately– Higher figure than the claimant count partly because

there are limits on who can claim unemployment benefit

Unemployment RatesSpring 2013:LFS unemployment: 8.1%Claimant count: 4.7%

Flows in the Labour Market

EmployedLabour force Unemployed

Out of the labour forceTaking

a job

RetiringTemporarily

leaving

New hiresRecalls

Job-losersLay-offs

Quits

Re-entrantsNew entrants

Discouragedworkers

Main Types of Unemployment

SeasonalRegular seasonal

changes in employment / labour demand e.g. Tourism,

retail, agriculture

StructuralArises from the

mismatch of skills and job opportunities as the pattern of labour demand changes –

linked to labour immobility

FrictionalTransitional

unemployment due to people moving

between jobs

CyclicalCaused by a fall in

or persistent weakness of

aggregate demand leading to a decline

in GDP and jobs

Reducing Unemployment - ThemesBoosting human

capital

Improving flexibility

Lower taxes to increase labour

demand

Stimulus to demand from

public and private sector

Improved export competitiveness

Improving work incentives

Cutting Unemployment – Labour Demand Policies

Macro Stimulus Policies (+ Multiplier Effects)• Low interest rates and policies to increase business lending• Depreciation in the exchange rate (to help exports)• Infrastructure investment projects (fiscal policy)

Cutting the cost of employing workers• Reductions in national insurance contributions (tax)• Financial support for apprenticeship programmes• Extra funding for regional policy – business grants

Competitiveness Policies• Reductions in corporation tax (to increase investment)• Tax incentives for research / innovation spending• Enterprise policies to lift the rate of new business start-ups

AD-AS Diagram – Rising GDPPrice Level

Real National Output (Y)

LRAS

Y1

SRAS

AD = C+I+G+X-M

Ye

AD2 (higher demand)

Y2

Rising AD causes expansion of SRAS, helping to close a negative output gap

Stimulus policies helped if there is a sufficiently large multiplier effect causing further boost to output and jobs

Cutting Unemployment – Labour Supply Policies

Reducing occupational mobility• Better funding for and more effective training• Teaching new skills e.g. Coding for gaming

Improving geographical mobility• Rise in house-building, more affordable rents• Active regional policy to create new jobs

Stimulate work incentives• Higher minimum wage or a living wage• Reductions in income tax, welfare reforms

Long term unemploymentSpring 2013:Over 1.3 million people in UK have been out of work for at last one year

Regional UnemploymentSpring 2013:Large spread in regional unemployment rates – persistently high in some areas

Unfilled Vacancies in Jobs MarketSpring 2013:LFS unemployment = 2.5million There are 500,000 unfilled vacanciesWhy are so many jobs left unfilled?

Evaluation Points:

• Fiscal and Monetary Policy policies:– Limits to effectiveness of policies in current times

• E.g. Slow growth despite low interest rates• Competitive exchange rate but exports remain flat

– Impact of Coalition fiscal austerity• Deep cuts in public sector jobs• Cancellation / cutting of infrastructure spending

• Supply-side policies:– Take a long time to have a major impact– Jobs market is always changing – some deep-rooted social and

economic problems • Poverty trap for families on low incomes• Unemployment trap for those looking for new work

Further evaluation points

• Unemployment rate of 8% is lower than many forecast at the start of the recession

• Employment levels are at record highs although the employment rate is lower than at the end of the last upswing

• UK labour market has become more flexible in recent years

• But there are some deep structural barriers to getting unemployment down to 5% or less

Structural Barriers to Getting Unemployment Down in the UK

• High levels of long term unemployment• Pockets of exceptionally high unemployment and low economic activity

rates, high youth unemployment• Persistent productivity gap with leading OECD countries• Disincentive effects of

– Complex welfare and tax system– Unaffordable housing sector– Many low-paid jobs that keep families in relative poverty

• High rates of public sector dependency in some areas• Many people are under-employed, stuck in part-time jobs• Skills shortages, creaking infrastructure, huge variations in educational

performance and opportunity• Weak demand in domestic & overseas markets

OECD Data on UK Jobs Market

Key Data on the EconomyIndicator (* is a forecast) 2011 2012 2013*

Real GDP (% change) 0.9 -0.1 0.9

Consumer spending (% change) -0.9 1.1 1.6

Capital investment (% change) -2.4 1.8 2.5

Exports of goods and services (% change) 4.5 -0.2 2.4

Unemployment rate - % of labour force 8.1 8.0 8.3

Consumer price inflation - per cent 4.5 2.6 1.9

For unemployment to fall by a considerable amount, the economy needs to achieve stronger growth and for new businesses and industries to scale up and generate sufficient new jobs

Causes of Weak Growth / RecoveryDomestic demand-side factors:Weak consumer demand, low business capital investment, cuts in real level of government spending

Domestic supply-side factors:Low supply of bank credit, falling productivity, high energy prices

External demand-side factors:Weak growth in key overseas markets, hitting UK export sales e.g. Euro Area, too few exports to Asia Rising region

External supply-side factors:Rising world food and energy prices, keeping UK inflation high and squeezing real disposable incomes

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Implications of unemployment for business

High unemployment

• Lower consumer spending = lower demand for income-elastic products

• Demand for inferior goods (lower price, quality) may increase

• Greater supply of labour – potentially lower wage/salary levels

• Danger of lost skills for industries as a whole

Low unemployment

• Consumers have more income = higher demand for income elastic goods

• Labour market “tightens” – increased upward pressure on wages / salaries

• Harder to recruit or expand without offering better worker packages

Possible business responses to unemployment

Low Unemployment High Unemployment

A chance to expand capacity to take advantage of higher demand

Reduced production capacity if demand falls

Adjust remuneration packages to remain competitive to attract staff

Headcount reductions (redundancy, recruitment freeze)

Invest in training to meet skills gap and help retain key staff

Reduce working capital (particularly inventories)

Offer more flexible working options to attract larger labour pool

Postpone or cancel investment projects

Consider outsourcing to access specialist skills where recruitment is tough

Potentially diversify into new markets

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