2.1.3 Employment and unemployment

Question 1

Employment and unemployment

Answer 1

Unemployment represents a waste of resources and so the level of unemployment is a good indicator of a country’s economy. Employment tends to be linked to economic growth as fast economic growth will lead to more jobs being created.
- The level of unemployment can be stated as a number or as a percentage of the population of working age.

Question 2

Measures of unemployment

Answer 2

Claimant count
International Labour Organisation (ILO) and UK Labour Force Survey (LFS)

Question 3

Claimant counts: measures of unemployment

Answer 3

● The Claimant Count is the ​number of people receiving benefits for being unemployed​. It provides the number of claimants on a particular day each month and the numbers joining and leaving the count each month.

Question 4

International Labour Organisation and UK Labour Force Survey: measure of unemployment

Answer 4

ILO
● The Office of National Statistics (ONS) uses the International Labour Organisation (ILO) definition of unemployment and employment.
● Through the ILO, anyone over 16 can be classed as employed, unemployed or economically inactive.
LFS
● The Labour Force Survey (LFS) is a ​sample of people living in households and is a legal requirement for every country in the EU. It asks questions about personal circumstances and activity in the labour market to class people as employed, unemployed or inactive by the ILO definitions. The figures are only an ​estimate of the true level of unemployment as it is measured by a sample.

Question 5

Differences between the Claimant Count and LFS

Answer 5

● Some people may not be included in the LFS unemployment measure but would be in the Claimant Count. These may include people working in the ​hidden economy or those who ​fraudulently claim benefits.
● However, ​some people aren’t eligible for benefits but are classed as unemployed so would appear in the LFS but not the Claimant count. This can be if their partner is working, if they are looking for work along full-time study or if they are around State Pension Age. The ​LFS tends to be higher than the Claimant Count because of these reasons.
● Sometimes, the claimant count and LFS rates can be going in ​different directions​. This could be due to the fact that the LFS is only a sample and different types of people have been asked which can lead to short term changes in the rate. Also, there may be things happening in the labour market not covered by the Claimant Count, for example more students could look for work along their studies or more people above State Pension Age may look for work.

Question 6

Similarity between Claimant Count and LFS

Answer 6

It is argued that ​both underestimate​ ​the figure​ as they do not include those:
o working part time but would like to work full time (underemployment)
o on government training schemes who would prefer employment
o classed as sick or disabled
o who aren’t actively looking for jobs but would take a job if offered or are in education because they can’t get a job (these are the ​hidden unemployed.)

Question 7

Employment rates **

Answer 7

● The ​economically active ​are the employed and unemployed. They are engaged in labour market and are people employers can look to recruit. The ​workless are the unemployed and inactive.
● The ​employment rate ​is the percentage of the population of working age who are employed, and the ​unemployment rate ​is the percentage of the economically active who are unemployed.
● The ​activity/participation rate is the percentage of the population of working age who are economically active whilst the ​inactivity rate is percentage of the population of working age who are inactive.

Question 8

Employment vs Unemployment vs Inactivity

Answer 8

The Office of National Statistics (ONS) uses the International Labour Organisation (ILO) definition of unemployment and employed.
● Through the ILO, anyone over 16 can be classed as employed, unemployed or economically inactive.
o Employed: Those who do more than 1 hour of paid work a week or are temporarily away from work (e.g. on holiday), are on a government supported training scheme or do minimum 15 hours of unpaid work for their family business.
o Unemployed: Those of working age who are without work, able to work and seeking work and have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks.
o Inactive: Those who are neither employed nor unemployed; they are people of working age not seeking employment as well as those seeking employment but not able to start work e.g. those in study, looking after family, health related issues, discouraged workers (those who are fed up of applying), retirement and those who do not want or need a job.

Question 9

Under-employment

Answer 9

● The underemployed are those who are in ​part time or zero hour contracts when they would prefer to be full time and people who are ​self-employed but would rather be employees.
● It also includes those who are in jobs which ​do not reflect their skill level​, for example a university graduate that can’t find a graduate job so is working as a bartender.
● The underemployed aren’t included in any unemployment statistics.
● Underemployment tends to ​increase during recessions because firms will just reduce staff hours instead of making them redundant and having to pay expensive redundancies packages. It doesn’t have as many negative effects as official unemployment, but it does mean the underemployed have lower incomes and so will spend less, reducing aggregate demand and growth of the economy.

Question 10

Significance of changes in activity: employment

Answer 10

● Increases in inactivity will decrease the size of the labour force, therefore causing a fall in ​productive potential of the country​. There will be a lower GDP and lower tax revenues as less people are working.
● However, decreases in inactivity could just result in more people being unemployed if there are ​no jobs available​ to them.

Question 11

Causes/types of unemployment

Answer 11

Frictional unemployment
Structural unemployment
Seasonal unemployment
Cyclical unemployment
Real wage inlexibility

Question 12

Frictional unemployed: types of unemployment

Answer 12

● Frictional unemployment is due to ​people moving between jobs. This could be due to new workers entering the labour market or people who have chosen to leave their previous job. These people may take a while to locate and gain a job that they are willing to accept.
● This isn’t a serious problem as it is only ​short term.

Question 13

Structural unemployment: types of unemployment

Answer 13

● This is a much more ​serious form of unemployment as it is a ​long term decline in demand in an industry leading to reduction in employment perhaps because of increasing international competition or technology. It is where the demand for labour is lower than the supply in an individual labour market e.g. ship building.
● The lack of ​geographical and occupational mobility ​means that people will remain unemployed, so need to be retrained in order to gain a job.
● There are different types of structural unemployment: regional, sectoral, technological

Question 14

Types of structural unemployment

Answer 14

Regional: where certain areas of a country suffer from very low levels of employment due to industry closures; this is made even worse by the fact that the loss of jobs can mean a fall in demand for other businesses in the area, forcing more closures and job losses.
Sectoral: where one sector (primary, secondary and tertiary) suffers a dramatic fall in employment.
Technological: where an improvement in technology means that jobs are replaced.

Question 15

Seasonal unemployment: types of unemployment

Answer 15

● Some employment is ​strongly seasonal in demand​. Industries such tourism are only prominent during certain times of the year so only demand large numbers of workers at a specific time. Once that time of the year has passed then the labour force is drastically reduced.
● There is little that can be done to prevent this from occurring in a free market economy.

Question 16

Cyclical unemployment: types of unemployment

Answer 16

● This is unemployment due to a ​general lack of demand of goods and services within the country. This is also known a ​Keynesian ‘demand deficient’ unemployment.
● When there is a recession or severe slowdown in economic growth, we see a rising unemployment because of plant closures, business failures and an increase in worker layoffs and redundancies. This is due to a decrease in demand causing businesses to cut employment in order to control costs and restore some of their profitability.

Question 17

Real wage inflexibility: types of unemployment

Answer 17

● This is unemployment considered to be the result of ​real wages being above their market clearing level leading to an excess supply of labour. Some workers might be prepared to work for less than the minimum wage and companies may be prepared to take on more workers if they could pay them less than the minimum wage, but this is illegal and so unemployed workers cannot get a job.
● Some economists believe that the minimum wage risks creating unemployment in industries where ​international competition from low-labour cost producers is severe. As yet, there is ​relatively little evidence that the minimum wage has created rising unemployment on the scale that was feared.
● It can also be caused by unemployed workers refusing to take low paid jobs because they can receive more in welfare benefits.

Question 18

Significance of migration and skills for employment and unemployment: Migration

Answer 18

● An increase in net inward migration tends to lead to ​increased jobs​. Since the 1990s, the UK has seen a large increase in immigration from mainly Eastern European countries. Most of these people come to the UK to work, are of working age and often take lower skilled jobs; they are less likely to claim benefits than the existing population. Due to the ​circular flow of income, immigrants’ spending creates jobs and total employment increases without an increase in unemployment. This depends how much money immigrant workers send back home.
● However, it also leads to ​lower wages, particularly for lower-paid, low skilled jobs. UK firms are able to recruit foreign workers meaning that ​supply of labour ​is increased and so the price equilibrium of labour is reduced. There is more competition for jobs and UK workers who have low motivation to work and are ​low skilled are most affected as they are competing in the job market with hard working, more skilled workers prepared to take the same jobs as them. The impact of this is only small and middle and higher income wages are rarely affected.

Question 19

Significance of migration and skills for employment and unemployed: Skills

Answer 19

● Economies progress over time, and as a result, ​higher skills are needed to work in them. In the UK 50 years ago, many jobs were available for those who couldn’t read or write but now there are few.
● For the UK to maintain its employment levels, it needs to increase the skills of its workforce over time. Structural unemployment is caused by a ​lack of, or the wrong, skills​. ​For example, engineering companies struggles to recruit skilled workers even though there are unemployed workers in the local area.
● If firms will not train staff, the government has to step in to correct the market failure but this is costly. As a result, people become ​long-term unemployed as their skills don’t fit the jobs on offer.
● Migrant workers may fill these shortages​ if their skills fit.

Question 20

Effect of unemployment: on workers

Answer 20

● Those who are made unemployed normally have a ​loss of income which usually results in a decline in their living standards.
● They often suffer from the ​stigma ​of being unemployed and feel degraded by the process of signing on to receive benefits to support their family. This can lead to stress, marital breakdown, suicide, physical illness etc.
● The long-term unemployed (those unemployed for more than 12 months) often find it more difficult to get another job as they ​lose skills​.
● Those who are in jobs will suffer from ​lower job security and will fear being made redundant. They could also see a fall in wages because the firm can easily find someone to replace them if they complain about pay.

Question 21

Effect of unemployment: on firms

Answer 21

● There will tend to be a decrease in demand for their goods (but this depends on the YED) and so this could lead to a ​fall in profit​.
● Long term unemployment can lead to loss of skills and reduce employability of workers, so firms have a ​smaller pool of skilled people​ to employ.
● They can offer ​low wages as people will take the job anyway because they know there is a lack of jobs so have few options.

Question 22

Effect of unemployment: on consumers

Answer 22

● Consumers in areas of high unemployment lose out because local shopping centres tend to be run down and don’t offer the range of shops available to those in areas of low unemployment. They suffer from ​less choice​. The quality of goods may also decrease.
● The unemployed consumers lose out as they have less available to spend.
Eval: However, firms may lower prices and put on ​sales ​in order to increase demand for
their product.

Question 23

Effect of unemployment: on government

Answer 23

● The reduced income results in a ​fall in ​tax revenues and ​higher spending on welfare payments for families with people out of work, incurring an opportunity cost as the money could be better spent elsewhere.
● This will result in an increase in the ​budget deficit​. It will be likely that the government will have to raise taxation or scale back plans for public spending on public and merit goods, such as the NHS or education. They may need to increase borrowing.

Question 24

Effect of unemployment: on society as a whole

Answer 24

● Rising unemployment is linked to ​social deprivation​. There is a relationship with crime and social dislocation (increased divorce rates, worsening health and lower life expectancy).
● Areas of high unemployment often see a fall in demand for local goods and services, leading to a fall in income for those working in the services and sometimes further loss of jobs.
● It results in a ​loss of potential national output and represents an inefficient use of scarce resources. If people chose to leave the labour market permanently, then this will have a negative effect on LRAS and therefore damage the economy’s growth potential so the country is unable to achieve their desired PPF.
● Taxpayers paying money to the unemployed is not a loss for the economy as it is a transfer payment but the economy is affected because there is a fall in national output and the social costs of the unemployed e.g. violence and crime.

Question 25

Employment and unemployment synoptic point *

Answer 25

Unemployment has microeconomic impacts in terms of its impacts on individual groups such as consumers. This unit links in well with Labour markets in theme 3.
- Job losses are a microeconomic concept whilst unemployment is a macroeconomic concept.