Economic Growth and Unemployment - Dissertation Example

A Dissertation Proposal On Economic Growth and Unemployment: Is there a Relationship in the UK? Table of Contents 0 Introduction or ment of the Problem 3 1.1 Problem Identification 3 1.2 Nature and Purpose of the Study 4 1.3 Research Questions 4 2.0 Review of the Literature and Research Questions 5 2.1 Theories of Economic Growth in UK 5 2.2 Theories Related to the Economic Growth and Employment in UK 7 2.3 Theories on the Factors Affecting the Natural Rate of Unemployment in UK 8 2.4 Evidence of Previous Research 11 3.0 Empirical/Contextual Literature Review 12 Explanation of the Relationship by Evidences 12 4.0 Methodology 19 19 References 20 Bibliography 24 1.0 Introduction or Statement of the Problem 1.1 Problem Identification The period of economic recession has created a traumatic situation of unemployment in the United Kingdom (UK). According to the Office of National Statistics, unemployment has increased to 2.5 million during October, 2010. Considering this figure, the claims of the UK government that the economy is no longer in the realm of danger has raised certain doubts (BBC News Business, 2010). During the economic distress, the UK had experienced tremendous fall in the consumer demand and this situation has affected the prospect of the country’s economic growth. As a result of such condition in the UK, business houses have focussed on the policy of cutting down the number of employees as a means to cope up with the situation. These factors have created an uncertainty on the possibilities of economic growth in the country (Economy Watch, 2010). The research study will focus on the relationship of economic growth and problem of unemployment in the UK Economy. According to the predictors of economic growth, the UK economy is expected to retrieve growth from the year 2010 (Economy Watch, 2010). Thus, considering the current situation of unemployment and predictions related to economic factors, the study has been proposed. 1.2 Nature and Purpose of the Study The purpose of the research study is to analyse and seek the relationship between economic growth and unemployment of the current economic condition in the UK. The research will focus on the effect of economic growth on rate of unemployment for finding out the relationship. The proposal will, however, mainly focus on the literature review of the concerned topic with the aim to find out the future intricacies. 1.3 Research Questions The research questions based on which the research study will be conducted are as follows: What are the factors that mostly affect the rate of unemployment in the UK? What is the relationship between economic growth and unemployment in the UK? Is the relationship (whether positive or negative) stable for all economic conditions? What is the relationship of rate of employment to that of employment? 2.0 Review of the Literature and Research Questions Development of a Theoretical Framework Literature Review 2.1 Theories of Economic Growth in UK For several years, economists have debated on the drivers of economic growth of a country. In this section of the research proposal, certain ideas of economists will be reviewed to present a concrete idea about the driving factors. According to articles released by Tutor2u (2010), the best definition for economic growth would be to determine it as a “long term expansion of the productive potential of the economy”. The theory suggests that for measuring the economic growth trend, at least data of past 20 years is required. This is essential for calculating the average rate of growth and identifying different cycles of economic growth. This trend calculation also allows for estimating the future rate of growth sustainability without creating any increase in the pressure of inflation (Tutor2u, 2010). (Tutor2u, 2010). The chart above demonstrates the potential level of national income for the UK economy over the last 30 years. The trend shows that the UK’s national income is expected to rise every year except certain uncertainties. Another essential factor of the chart is the long run average potential for growth. 2.2 Theories Related to the Economic Growth and Employment in UK The focus of the literature review is to measure the relationship between the rate of growth and level of employment in the UK economy. Data released by Department for Business Innovation and Skills (2010) shows the co-movement of UK’s GDP and employment since the last 30 years. (Department for Business Innovation and Skills, 2010). The article suggests that though an exact relationship between GDP and employment is dependent on several other factors like the regulation of labour market and benefit system, the figure makes it clear that a close relationship exists between the economic growth and employment (Department for Business Innovation and Skills, 2010). An article published by the Trade Union Congress (2010) states that it is due to the better regulation of the UK economy that the job market became more flexible during recession. The Red Tape Delusion says that the UK has performed better in this recession than any downturns of earlier times. This is due to the fact that employers have followed the policy of consulting their staff members over major changes. The report also states that the UK has been ranked among the least regulated markets in the world by OECD (Trade Union Congress, 2010). According to an article published by Employee Benefits, in order to cope up with the recession with employee benefits playing a role, it is better to adjust the existing policies rather than removing those. These benefits are an instrument of reviewing cost. During recession, employers prefer not to save on these costs in order to remain competitive with their retained employees (Employee Benefits, 2008). 2.3 Theories on the Factors Affecting the Natural Rate of Unemployment in UK It is essential to discuss certain factors that affect the natural unemployment rate and due to which the rate changes over a period of time. This is because of the fact that the factors are also essential aspects of an economy and thus studying these factors will help to access the relationship between economic growth and unemployment. According to a statement in the Economic Help (2010), frictional unemployment can be affected by the level of benefits provided to the unemployed. If the ratio is high, then the intuition to search for a job and acquire it reduces among the people. For example, if the wages are made to be index linked (increase with inflation), then they will be seen to be increasing at a faster rate than that of the inflation. This initiative of the economy will lead to an increased incentive to get a job and thus the natural rate of unemployment will decrease simultaneously (Economics Help, n.d.). During the year 2009, the UK government had increased the national minimum wage rate from £3.60 to £5.80. This move of the government following the economic recovery has urged the masses to search for jobs rather than remain on benefits. The New Deal had been prepared to encourage the unemployed masses to get them back into the job (Economics Help, n.d.). Reduction of occupational immobility is also a significant factor affecting the rate of unemployment in an economy like the UK. On the basis of economic growth, if the level of skill of workers can be enhanced by the process of education and retraining, then it will lead to reduction of occupational immobility. The economy’s newer moves towards this initiative have helped in retraining the workers and making them more efficient in the labour market. This factor of the economy helps in reducing the structural unemployment (Economics Help, n.d.). The regulatory flexibility in the labour market, as stated earlier, also enhances the relationship between the economic growth and unemployment in the UK. For example, if the restrictive practices of the trade unions could be eradicated along with the removal of minimum labour wages, then it would have led to more flexibility in the labour market of the UK. As a result of this move of the government, the firms would have to hire workers. The article mentioned that the UK labour market has become more flexible in the recent years and this has helped in decreasing the natural rate in unemployment (Economics Help, n.d.). 2.4 Evidence of Previous Research Walterskirchen (1999) had conducted a research on the relationship between growth, employment and unemployment in the European Union in which he had presented the relationship in the form of two different aspects: the relationship between the growth and changes in employment and the correlation between the rates of changes in employment and unemployment. The writer says that the first relationship is affected by various economic factors and the second relationship is due to the influences of demographic factors and policies of the labour market (Walterskirchen, 1999). The results of the research depicted that there were still a strong positive relationship between the GDP growth and rate of employment changes. The research also found a negative relationship between the rate of changes in employment and unemployment. The writer assumed that this relationship may be due to various social and political factors. The relationship has also been mentioned by the writer to be affected by changes in the labour market policies. The writer had arrived at the conclusions by analysing data by time series analysis and by analysis of cross country from 1988 to 1998 (Walterskirchen, 1999). 3.0 Empirical/Contextual Literature Review Explanation of the Relationship by Evidences Klein (2010) in an article at The New Millenial has explained the fact that it is not necessarily certain that rate of unemployment would fall with retention of economic growth in the economy. According to the writer, with the fall of real economic output below potential, it gears up to a significant rate for catching up the track. (Klein, 2010). Thus, in the graph, the writer explains that even when the economy will grow at a rate of 3% in the next ten years, the rate of unemployment will reach 5% in the year 2020. The it can be gathered from the discussion of the writer that the scariest part of the graph is that if the rate of growth of economy is 2% during the coming ten years, then by the year 2020, the rate of unemployment would reach to a rate of 11.9% which is a massive destructive figure for an economy (Klein, 2010). Oner (2010) has mentioned economic growth and unemployment to be the two sides of a same coin. According to the author, with the rise in the economic growth, the amount of production also increases. Thus, more people are required in the economy for producing the output and to satisfy demands in the economy. On the other hand, when the activities in economy are low, jobs are cut by firms for reducing costs and as a result the rate of unemployment rises. The writer has also mentioned unemployment to be ‘countercyclical’ (Oner, 2010). The writer has explained the relationship in a clear and genuine manner considering the past data. She raised a question “if economies kept expanding, would one expect to see unemployment disappear?” On answering this question, the writer has presented the behaviour of the rate of unemployment during the year 2000 when economy was prospering and stated that even then, though the rate of unemployment was declining, it never reached zero (Oner, 2010). (Oner, 2010). According to Smith (2010), the present labour market in the UK is flat. The unemployment rate stands at 7.7% during the period from July 2010 to September 2010. This figure is 0.1% lower than the figure of the last quarter (Smith, 2010). Whereas, revealed from the thisismoney (2010), the GDP growth in the third quarter has decreased by 0.5% from the first quarter (thisismoney, 2010). Considering this short term comparison, it can be said that the relation is inverse as the unemployment rate is high during the fall in economic growth. According to the author, what matters the most is the result. He is interested in finding out whether the growth could be converted into employment or not, which is the major problem in the UK economy at present (Smith, 2010). According to an article published by Good by Debt (2010), if the forecast for unemployment in the year 2011 is correct which predicts to be 2%, then the demand for debt will rise substantially by the middle of the year 2011. This has been warned by a new report as evident in the article. According to a report by Dr John Gathergood, during the period from 2008-2009, individuals seeking free debt service was 350,000. Also in the year 2010, the number of people who have received advice from National Debtline, CCCS and Citizens Advice (charities proving free debt advice) is 1.4 million. It seems that the figure is going to increase in the coming financial year (Good by Debt, 2010). The release of Economics help (2009) enumerates the impact of debt increase on the economic growth of the UK. Increased debt of the individuals, in the long run, will affect the national debt amount of the economy as the perfect mechanism of economy will get deviated and become uncontrollable by the government. Thus, it indicates that the government will have to face deficit budget which is not a good symptom of economic growth. Hence, the relationship that rate of unemployment and economic growth of an economy is inverse is justified (Economics Help, 2009). According to an article in the Robparker (2010), the strength of an economy is generally indicated by unemployment. With a low rate of total population employed, the UK economy is depicting an underutilisation of their labour force. (RobParker, 2010). The above figure illustrates the rate of unemployment during the last ten years up to the year 2008. The trend can be mentioned to be favourable because over these years the rate has decreased. The purpose here is to depict the firmness in the relationship between the economic growth and rate unemployment (RobParker, 2010). If the above figure is related to the one depicted before (Department for Business Innovation and Skills, 2010), it will be seen that they are inversely related. The figures up to the year 2008 have been compared separately because this period is before the effect of recession and thus depicts a stronger relationship. The effect of other factors like regulations and benefits were less during that period. Knowles (2010) in an article depicts the fact that a drop in the rate of unemployment does not essentially signify prosperity of the economy. The author states that during the quarter September 2009 to November 2009, the number of unemployed has fallen by 7,000 that brought the total unemployed to a figure of 2.46 million. But the author remarks that this number can be deceptive to the economic people because this is just the one part of the story. This is because the author revealed that the rate of employment also fell during the same period. The number of employed people reduced by 14, 000. This means that employed number reduced more than the unemployed number (Knowles, 2010). The major aim to include this article in the research proposal is that rate of unemployment does not always depict the rate of economic growth. For this reason, another research question has been included in the proposal that will seek the relationship between rate of employment and rate of unemployment in the UK economy. According to the findings of Migration Watch UK (2009), in order to sort out the relationship between employment and unemployment in the UK, the figures of immigration has to be incorporated in the result. The findings suggest that rate of unemployment is higher in the UK where the level of immigration is also high. On the other hand, the rate of employment in these areas is lower in comparison to those areas where immigration is less (Migration Watch UK, 2009). (Migration Watch UK, 2009) The above figure depicts the relationship of rate of employment and rate of unemployment with the rate of immigration or the areas where migration has taken place. 4.0 Methodology The research questions that have been identified through literature review and presented in the earlier section will be addressed by the use of existing records. The data will be collected from various statistics available from secondary sources. Data availability of the concerned research will not be a problem because various previous researches have been performed on the same topic and are likely to be performed in the future too. The method of analysing the existing records has been chosen for broadening the scope of research and analysis of findings. The data collected through the secondary sources will be analysed by the correlation coefficient method. Correlation coefficient is the most appropriate analysis technique in this type of research as analysis of existing records will have to be performed. At times, time series analysis will also be performed to predict the trend of rate of unemployment in the future years. With the help of time series analysis, prediction of the coming financial year will be performed. Finding the results from literature review, it has been established that there is an inverse relationship between the economic growth and rate of unemployment. In the analysis section of the research study this relationship will be evaluated by the use of two techniques of analysis: time series analysis and correlation coefficient. References BBC News Busienss, 2010. UK Unemployment Total Increases to 2.5m. News. [Online] Available at: http://www.bbc.co.uk/news/business-11998364 [Accessed December 27, 2010]. Economy Watch, 2010. UK Economic Growth. Economic-Growth. [Online] Available at: http://www.economywatch.com/economic-growth/uk.html [Accessed December 27, 2010]. Economics Help, 2010. Discuss Some of the Factors that Might Cause the Natural Rate of Unemployment to Change Over Time. Macroeconomics. [Online] Available at: http://www.economicshelp.org/macroeconomics/macroessays/what-causes-naturalrate-change.html [Accessed December 27, 2010]. Economics Help, 2009. Impact of National Debt on Economic Growth. Economics. 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