Economics Notes - Unemployment

Notes on basic economics concepts.

Economics Notes

Unemployment

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The Working Population

The working population is the number of individuals in the UK available to work. This produces a figure for the total number of people in employment in the UK. We can then give a figure for the employment rate. This is the proportion of the population of working age which is in employment.

At the time of writing (October 2006), the figures for these indicators were as follows:

  • Total number of individuals in employment is approximately 29 million
  • Working age employment rate is approximately 75%

A proportion of those in work are self-employed. The self-employed are those who, in their main job, work for themselves, whether or not they have employees.

At the time of writing, the figure for self-employment is as follows:

  • Number of self-employed is approximately 3.75 million
  • This means that around 13% of those in employment are self-employed

Floor fitter's van

The number of self-employed people in the UK now stands at 3.75 million! Copyright: Biz/ed team.

It is useful, also, to identify those who are economically active or inactive. The economically active population comprises all those in employment or who are unemployed. This gives us the economic activity rate for the UK, which is measured as the number of people in employment or unemployed as a percentage of the total population (age 16 or over). The economically inactive include those in full time education and those who are long-term sick.

At the time of writing, figures for economic inactivity are as follows:

  • Number of people economically inactive is approximately 7.8 million
  • The inactivity rate for males is around 16%; for females it is 26%
  • This is the lowest rate of female economic inactivity since 1971

Employment trends

In the UK, there has been a gradual shift in the number of people employed in the primary, secondary and tertiary sectors of the economy. This reflects a natural trend in employment patterns as an economy develops.

In developed economies, there is a tendency for business to source lower cost inputs to production (such as labour and raw materials). For example, the UK's coal-mining industry has shrunk in the past 50 years not because the coal has run out, but because it has become uneconomic to extract it from the ground. It is cheaper to source imports of coal from abroad.

Equally, as other countries have developed their economies, the UK has come to rely on them to supply the manufactured goods we demand. As the UK economy has developed, so we have come to demand more services in areas such as banking, finance, insurance, education, tourism, leisure and entertainment.

A headset left on a keyboard

The amount of primary, "heavy" industry is lessening in developed countries, to be replaced by high-tech business and service industries - such as call centres. Copyright: Richard Styles, from stock.xchng.

It should come as no surprise that employment in the different sectors of the UK economy has changed considerably in the past twenty years. The following table illustrates this well:

Employment in the UK Economy 1985-2005 (% employment levels)

Year/Sector Primary Secondary Tertiary
1985 4.5 32.5 63
 
2005 1.8 19.9 78.3

Source: National Statistics Labour Force Survey.

Measuring Unemployment

The Labour Force Survey (LFS) is used to measure employment and unemployment in the UK economy. The LFS takes a sample of 53,000 households every quarter. The LFS uses the international standard International Labour Organ,,isation (ILO) definition of unemployment. Employment is also measured through the Workforce Jobs survey of 28,000 service firms and 9,000 production companies.

Economic activity and inactivity is measured through the LFS and the number of unemployment benefit claimants is a count of those claiming Job Seekers Allowance (JSA).

Economically inactive people include the following groups:

  • Those who do not want paid jobs
  • Those who are unavailable for work
  • Those who are not looking for jobs

The total number of economically inactive people in the UK has remained steady over a long period of time, at a usual level of within 500,000 of 7,500,000 people. But the make-up of the economically inactive has been changing over time. In the past, the most likely reason for people being unavailable for work was due to family or home responsibility. The overwhelming majority of people in this group were women. But as female participation in the workforce has increased, so the number giving this reason has dropped.

The steady number of economically inactive is due to the rising number of sick or disabled people. In 2004 the top three groups of economically inactive people were as follows:

  • Looking after family/home: 30%
  • Long-term sick: 28%
  • Student: 21%

Source: Rounded data from TUC Economic and Social Affairs report 'Countering an Urban Legend - Sicknote Britain?' January 2005.

In the 1980s and 90s, there were more than 30 changes made to the rules for claiming unemployment benefit. Some of these changes diverted people from unemployment to being long-term sick. The advantage of this was that people being laid off from work in the UK's coalfields could be classed as being economically inactive rather than unemployed.

It is no coincidence that the UK districts with the highest levels of sickness claimants are those that experienced pit closures in the 1980s:

District % of total working age population
Easington 21.1
Merthyr Tydfil 20.7
Blaenau Gwent 19.1
Neath Port Talbot 17.2
Glasgow 17.2

Source: Beatty and Fothergill, quoted in TUC report ibid

The Impact of Unemployment

Economic cost:

On the one hand, there is the loss to the economy of the output that an unemployed person would be able to contribute. If we assume that the average output per person is £15,000, then a total unemployment level of two million means a loss to the economy of £30 billion worth of goods and services.

  • This productive loss to the economy is an example of the opportunity cost of unemployment. On top of this, there is the cost to the economy in terms of the benefits to which the unemployed are entitled.
  • In 2005-06, a total of nearly £130 billion was spent by the government on social security benefits. This figure includes all benefits in addition to JSA, but it gives an indication of the direct economic cost of unemployment and economic inactivity.
  • We also need to take account of another area of economic cost - the loss of tax receipts. When individuals are employed, they pay income tax and national insurance.

In 2006-07, the government expected to receive £144 billion in income tax and £90 billion in national insurance.

Source: HM Treasury 2006 budget data

Social cost:

There is a clear impact on individuals and society of unemployment. Some of these effects are listed below:

  • Social exclusion of the unemployed
  • Loss of self-reliance of the individual
  • Deterioration of self-confidence
  • Damage to the psychological well-being of the unemployed
  • Deterioration of physical well-being of the unemployed

These damaging effects are likely to result in an increased burden on the National Health Service (NHS), the disruption and break-up of families and increased levels of crime.

Crowds rush around one solitary man

Long-term unemployment can make people feel ignored and left behind by society - causing mental health problems, depression and illness. Copyright: Ben Lancaster, from stock.xchng.

Trends in Unemployment

Overview

Unemployment is a flow, not a stock: this means that there are always people entering the unemployment register, as they lose their jobs; and there are always people leaving the unemployment register, as they get jobs.

When inflows rise faster than outflows, then overall unemployment will increase. An important measure is the length of time that an individual remains unemployed. If the period of unemployment is short, then it is easier for an individual to gain a new job. This is because the individual's skills will not have been lost or degraded.

Average length of time spent unemployed is therefore a good indication of the overall health of the economy. Official statistics often point to the number of vacancies in the economy as another good indicator of economic health. These data are gathered from the Vacancy Survey, which counts on a monthly basis the number of vacancies in a sample of 6,000 businesses.

Historical view

The UK enjoyed very low levels of unemployment in the 1960s. These relatively low levels were maintained in the 1970s, despite troubles caused by big increases in the price of oil. But in the economic recessions of the 1980s and early 90s, unemployment rose rapidly, peaking at over 3 million in 1983-86, falling in the Lawson Boom of the late 1980s, before rising rapidly once again in the early 1990s.

Since then, unemployment has fallen steadily, although in 2005-06 jobless levels began to rise.

Graph showing unemployment levels 1971-2006

Source: National Statistics, based on LFS summary data

The main types of unemployment

Frictional unemployment:

  • This type of unemployment is defined as occurring when people are 'between jobs'
  • It may be due to delays in receiving invitations to interview or in issuing requests for references
  • Frictional unemployment can be reduced by improving communication between employers with vacancies and job applicants
  • Government can help this process by setting up a computerised job information service in Job Centres

Structural unemployment:

  • As the structure of the economy alters over time, people have to adapt to find new jobs in new parts of the economy
  • This may mean that they have to relocate or retrain, or both of these, in order to get a new job
  • Due to labour immobility, large pockets of unemployment can remain trapped in particular regions where the old industries were located
  • Government can help by providing subsidies to employers in regions with high levels of unemployment, or by improving labour mobility

Cyclical unemployment:

  • This is caused by low levels of demand and is seen when the economy is in recession
  • Falling demand in the overall economy leads to reduced demand for labour
  • Government can help by boosting the level of aggregate demand in the economy
  • This would involve increasing public expenditure and/or cutting taxation

Seasonal unemployment:

  • This is caused by the seasonal variation of demand in certain industries or sectors of the economy
  • It is seen at certain times of the year, in industries such as construction, tourism and in agriculture
  • Industries affected may be encouraged to diversify their products or services so attract demand throughout the year, such as tourism venues competing for income from the conference market
  • Employees in the affected sectors can be encouraged to retrain to compete for jobs in sectors unaffected by seasonal variation in demand

Technological unemployment:

  • This can be seen where firms use capital investment to reduce their reliance on unskilled or semi-skilled labour
  • Examples of it can be seen in car production where automation and computer-aided manufacture has been introduced or in administrative jobs where the use of information technology has become widespread
  • Workers affected by technological unemployment must retain to seek new jobs

Regional unemployment:

  • This is where there are high levels of unemployment located in specific areas
  • Where there has been concentration of industries which have declined as the structure of the economy has changed, this type of unemployment exists
  • Government can help by offering regional aid, including incentives for new industry to relocate to areas affected

International unemployment:

  • This is where UK producers have been replaced by firms based overseas
  • UK may be seen as uncompetitive in price or in terms of product build quality
  • Government may choose to use trade policies such as quotas or tariffs to avoid this, but will face pressure from the European Union or World Trade Organisation, if it does so
  • The exchange rate could also be used to artificially make UK goods less expensive to overseas' buyers

Voluntary unemployment:

  • Some of the economically inactive may be so through choice
  • Perhaps they may find it more attractive to live off social security benefits
  • Government can make working more attractive by using the tax system to allow low-paid workers to keep more of their income
  • At the same time, these people could have their benefit payments reduced if they refuse to accept suitable job opportunities

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