Unemployment

According to Gillespie (2011)1, “unemployment is a measure of the number of jobless people who want to work, are available to work, and are actively seeking employment.” However, unemployment does not include underemployed workers and part time workers. Since 2008, the global unemployment rate has grown. However, in normal situations or even boom times, the unemployment rate never equals to zero. Hence, the main purpose of this essay will demonstrate the situation of unemployment. It will first describe how to measure unemployment. Then, the causes and effects of unemployment will be outlined. Finally, it will examine government policies and evaluate their effectiveness.

Gillespie (2011)1 points out that the ways, the claimant count and the labour force survey (LFS), could measure unemployment in the UK. The former is individuals who are actually claiming unemployment-related benefits at any moment; the latter is based on interviews with people to determine those who are not employed, but who want to work. Nowadays, the LFS is the official way, which measures unemployment in the UK.

In different situations, there are different causes, and then the causes will be analysed. For a country, the most common determinant of living standard is natural rate of unemployment which is normal experiences, and the average rate of unemployment in the UK from 1900 to 2010 was 5.4 per cent. (Economic Review, 2010)2 There are a number of causes, such as frictional unemployment, structural unemployment, seasonal unemployment and technological unemployment that always result in natural rate of unemployment. Frictional unemployment and structural unemployment play important roles in normal situations. Frictional unemployment has always existed in a short term because employees need time to find suitable jobs. In addition, structural unemployment occurs when the structure of markets alter that could explain why some employees often involves in long-term unemployment. There are some situations, such as the minimum wage, trade union and efficiency wages that could increase the wages of workers. There is structural unemployment when the equilibrium level is exceeded.

However, “the economy often goes through cycles of booms, recessions, slumps, and recoveries” that is claimed by Gillespie (2002)3. Therefore, the cycle of the economy may produce cyclical unemployment, which is a cause in unstable situations. In the 1930s, the Financial Crisis resulted in high unemployment, with around 22 per cent in the UK which was the highest point in the last 110 years. Moreover, due to the OPEC oil price going up, the unemployment rate rose between 1970 and 1990. Additionally, for the banking crisis, this rate attained to 12 per cent in the early 1990s. Recently, high unemployment has been caused by the recession again. In February 2012, the rate of unemployment reached 8.4% that was the highest percentage for 16 years. (BBC, 2012)4 It can be seen that the high rates of unemployment are normally caused by recessions. By contrast, when the economy is stable, it always creates low unemployment. In addition, war usually promotes demand of governments and people. Thus, in the Second World War, the unemployment rate was the lowest level in the UK, with approximately 1 per cent.

The effects of these causes will be considered. There are increasing health risks for unemployed people, especially long term unemployed, such as stress, reduction in quality of diet, increased risk of divorce, social exclusion, premature death and chronic illnesses. (tutor2u, 2012)5 While, Mankiw (2011)6 states a positive effect of unemployment that “job search is the process of matching workers with appropriate jobs.”

In addition, unemployment, especially high unemployment, is likely to affect businesses. High unemployment means that businesses do not employ many workers, and hence the sales of products could decrease. In addition, falling quantities of productions may lead to widespread redundancy among workers, and this could result in excess capacity because machines may be idle, office and factory space may be underutilised. Although excess capacity does not increase the average costs because fixed costs would not change, less will be produced. Thus, firms usually face pressure when unemployment exists in high level.

Tutor2u (2012)7 points out that long term unemployment tends to create areas of poverty where the unemployed tend to live. Vandalism, crime and other types of antisocial behaviour could occur in those societies. Furthermore, labour, unlike some raw materials, cannot be stored for future use. Therefore, to society, resources of unemployed people are lost for all times. Also, the gap of living standards between the rich and the poor could be enlarged that is produced by high unemployment, and hence the polarisation may be aggravated. In general, the higher unemployment rates exist in, the worse social situations are occurred, such as riots, protest and demonstration.

Equally, from government aspect, the effect of high unemployment is an increase of spending, by raising the social welfare payments to unemployed. In the UK, for instance, with the unemployment rate increases, income tax and VAT may be reduced because unemployed individuals do not earn to pay income tax and their consumption levels often fall. However, income tax and VAT are the main receipts of the government’s revenue. Therefore, governments not only spend money on providing benefits, but also reduce their receipts.

Governments always plan policies that solve unemployment problems, and policies in normal situations will be outlined. In the normal situations, governments always adopt different policies, which base on different causes. For frictional unemployment, governments could provide information about job vacancies through government-run job centres, such as Jobcentre Plus in the UK. In addition, public training schemes could “ease the transition of workers from declining to growing industries and to help disadvantaged groups escape poverty.” (Mankiw, 2011)8 However, these policies could rise the spending of governments, and hence governments may increase tax, maintaining revenue. Also, the provision of benefits to unemployed people could improve the living standard of them, while this often causes that people abandon to find jobs. Therefore, there is a policy that may increase the amount of frictional unemployment. In addition, for structural unemployment, a higher level of initial education could be applied, so that workers are more flexible and able to adjust when conditions change. (tutor2u, 2012)9 Also, an emphasis on lifelong-learning is a great function to governments. While any plan has to invest in money, and usually spends long time. Therefore, governments always face dilemmatic choices.

Every government wants to implement efficiency policies, to reduce the unemployment rate. Different situations, however, tend to include different policies. Thereby, the policies in the 2008 recession will be analysed.

America was the first country that appeared in economic depression in this global recession. The government of the USA may focus on demand side. Americans were keen on consumption, but they have saved money into their bank accounts since the recession. Therefore, there is a challenge that boosts the economy, and then the government has to invest much more money in development. In addition, it implements some policies on supply side, such as investing in rebuilding and building infrastructure which create jobs. The government, for example, proposes to invest $350 billion in job creation. Furthermore, one way to reduce the unemployment rate is for the government to encourage the ‘green job’. By investing in more than $100 billion, not only could more jobs be created, but also carbon emission may be reduced. However, the government should train workers, which increase their skills. Although it has been paid much money for this programme, but the long-term advantages should follow. Moreover, people who unemployed can gain more benefits from the government, such as increasing alms and cutting the tax.

Since the 2008 recession, the UK government has been faced high pressure in the unemployment rate. More than 2 million employees have become unemployed and there are 2.67 million in this year (2012). (BBC, 2012)10 As the crisis continues to spread and job losses mount, the government policies, which have attempted to ease the high unemployment rate are playing an essential role.

To reduce the high unemployment rate in the recession, it is important to stimulate demand side. The plan of the tax reduction could reduce costs of businesses and hence they may include more incentive to hire employees. Moreover, the government bonds of 50 billion pounds were issued, these loaned to businesses. This policy has the same function as cutting the tax. However, a part of the government revenue is tax, and hence the finance of the government could be exacerbated. In addition, when the economy becomes better and the government may increase tax to offset the losses from the recession. Perhaps, initial benefits may emerge but long-term drawbacks should follow. Thus, the long-term benefits may be sacrificed because of developing in the short run. Therefore, the policy is not worth implementing. On the other hand, John Maynard Keynes claims that “the long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past, the ocean will be flat.” (Mankiw, 2011)11 Therefore, the government should tackle the relationship between the short-term and the long-term. In addition, for promoting consumption and investment, the rates of interest and loan have been reduced in recent years. For instance, the interest rate reaches 0.5 per cent. However, this could result in devaluation. In February 16th 2012, the exchange rate is one Pound equalled to 1.5802 Dollars. (dollars2pounds, 2012)12 Although devaluation may produce inflation, it might simulate exports, increase the opportunities of employment and reduce the unemployment rate.

It has frequently been argued that policies should focus on demand side, at the same time, supply is an essential side that needs to be attended to. By infrastructure, construction and housing projects, it could increase to approximately 0.1 million jobs to the unemployed. This policy has the short-term as well as the long-term benefits. In the short run, it tends to reduce the unemployment rate and promote facilities to become better. In the long term, the economy may be boosted, citizens are usually satisfied with the government and the society could be stable. By contrast, enormous expenses usually result in dissatisfaction of citizens and turbulence of the society. Furthermore, housewives can gain the subsidies that are at most 500 pounds when they decide to restart their work. This could improve the passion of them to work and maintain the balance between male and female workers. Also, in the UK, the unemployment rate of young people (16-24 years old) is 22.2 per cent. (BBC, 2012)13 Thus, the government regularly supports young workers in education and training, such as National Internship Programme, which could improve the qualities of them and could lead them to involving in skilled work. Therefore, the society could be stable. Nevertheless, some limitations of these two policies are that the competition may be increased, and the situation of employment could become worse. Also, since October 2008, the immigration policy in the UK has been difficult because migrants may lead to the high unemployment rate for local people. However, a significant number of foreigners were aiming to join the British nationality by investing money, and hence this policy may reduce the investment from foreigners.

To conclude, there are a number of reasons that could cause unemployment, such as frictional unemployment, structural unemployment and cyclical unemployment and people, businesses, societies and governments are always affected by these causes. Governments adopt numerous policies, which further employment. Faced with the current Financial Crisis, governments try to simulate the economy and reduce the rate of unemployment by cutting the tax, reducing the interest rate and providing subsidies. Both America and Britain have similar policies of employment in the recession. Although various policies include positive aspects, there are too difficult to have the best policy in the recession because there are some inevitable negative features. Thus, there are devastatingly high of the unemployment rates. Moreover, according to distinct situations of the economy, the UK government should adjust its policies, and lessen the harmful impacts for the recession. Hence, the UK will tend towards stability and development.

Reference:

1. Gillespie, A. (2011) Foundations of Economics (2nd edition). Oxford: Oxford University Press (P.423)

2. Smith, P. (2010) Unemployment and the recession. Economics Review, volume 27 (P.12)

3. Gillespie, A. (2002) AS & A Level Economics. Oxford: Oxford University Press (P.25)

4. [Online] <http://www.bbc.co.uk/news/10604117> [Date accessed: 17/02/2012]

5. [Online] <http://www.slideshare.net/mattbentley34/causes-effects-of-unemployment> [Date accessed: 15/02/2012]

6. Mankiw, N. G. and Taylor, M. P. (2011) Economics (2nd edition). Kentucky: Cengage Learning (P.601)

7. [Online] <http://www.slideshare.net/umar4599/unemployment-6805342> [Date accessed: 15/02/2012]

8. Mankiw, N. G. and Taylor, M. P. (2011) Economics (2nd edition). Kentucky: Cengage Learning (P.602)

9. [Online] <http://www.slideshare.net/umar4599/unemployment-6805342> [Date accessed: 15/02/2012]

10. [Online] <http://www.bbc.co.uk/news/10604117> [Date accessed: 17/02/2012]

11. Mankiw, N. G. and Taylor, M. P. (2011) Economics (2nd edition). Kentucky: Cengage Learning (P.706)

12. [Online] <http://www.dollars2pounds.com/> [Date accessed: 16/02/2012]

13. [Online] <http://www.bbc.co.uk/news/10604117> [Date accessed: 17/02/2012]

Bibliography:

1. Anderton, A. (2008) Economics (5th edition). Essex: Pearson Education

2. Bailey, S. (2011) Academic Writing for International Students of Business. Oxon: Routledge

3. Begg, D. (2009) Foundations of Economics (4th edition). New York: McGraw-Hill Education

4. Gillespie, A. (2002) AS & A Level Economics. Oxford: Oxford University Press

5. Gillespie, A. (2011) Foundations of Economics (2nd edition). Oxford: Oxford University Press

6. Mankiw, N. G. and Taylor, M. P. (2011) Economics (2nd edition). Kentucky: Cengage Learning

7. Smith, P. (2010) Unemployment and the recession. Economics Review, volume 27

Bibliography: 1. Anderton, A. (2008) Economics (5th edition). Essex: Pearson Education 2. Bailey, S. (2011) Academic Writing for International Students of Business. Oxon: Routledge 3. Begg, D. (2009) Foundations of Economics (4th edition). New York: McGraw-Hill Education 4. Gillespie, A. (2002) AS &amp; A Level Economics. Oxford: Oxford University Press 5. Gillespie, A. (2011) Foundations of Economics (2nd edition). Oxford: Oxford University Press 6. Mankiw, N. G. and Taylor, M. P. (2011) Economics (2nd edition). Kentucky: Cengage Learning 7. Smith, P. (2010) Unemployment and the recession. Economics Review, volume 27