Unemployment in the United Kingdom - Report Example

Unemployment in the United Kingdom: costs, and policy measures Last year, the Centre for Economic and Policy Research (CEPR) estimatedthat unemployment in the United Kingdom, measured in terms of the “harmonized unemployment rate”, was at 6.6% or up from 5.3% in 2007 (Schmitt et al. 2009, p. 2). The unemployment rate of the United Kingdom was the ninth lowest unemployment rate among the 21 countries sampled by the CEPR. According to the CEPR, the highest unemployment rate in the 21-country sample was 17.4% in terms of the harmonized unemployment rate while the lowest unemployment rate was 3.1% In short, while unemployment is something to be concerned about in the United Kingdom, the situation in the United Kingdom is far from the worst. The United Kingdom unemployment rate was far lower than the United States that got an employment rate of 4.6% in 2007 and 8.5% in 2009 as per the figures obtained by the CEPR from the OECD. Figure 1. Trend in unemployment in the UK compared with Europe Area and Source: OECD 2007, p. 19 Figure 1 above indicates that the unemployment rate of the UK is getting a lot better compared to the unemployment figures of both the Euro Area and the OECD countries. This is indicative of a better macroeconomic management of the UK compared to the US, Euro Area, and the rest of the OECD countries. Figure 2. OECD data on UK output gap compared with other countries Source: Begg et al. (2002, p. 359) Compared with her neighbours, UK’s management of her economy seems to be better because the gap between actual and potential output has been generally closing historically since 1995 as indicated by Begg et al. (2002, p. 359). A lower output gap means that the economy approaches the full employment level. Full employment, however, does not mean that all have work. Whether one is classified employed or unemployed largely depends on whether one is actively looking for work. For instance, based on the definition of the International Labour Organization to which the international community refer to in defining their own national concept of unemployment, the unemployed are those “without a job, want a job, have actively sought work in the last 4 weeks and are available to start work in the next 2 weeks” or “out of work, have found a job and are waiting to start in the next 2 weeks” (United Kingdom Office for National Statistics 2009, p. 4). Thus, based on this definition, one may argue that the official unemployment figures are much lower than the actual figures because some may have quit looking for work because they had consistently failed to find one. Citing OECD studies, Miles and Scott (2005, p. 143) pointed out that the natural rate of unemployment of the United Kingdom is about 5.5% recently. The 5.5% estimate is consistent with Figure 1 of page 1. A number of economists hold that there is a natural rate of unemployment in which the employment rate fluctuates over a business cycle (Miles and Scott 2005, p. 142). Further, at the natural rate of unemployment, inflation can be stead (Miles and Scott 2005, p. 592). According to Miles and Scott, constraints on price movements or interventions in the market can lead to a higher natural rate of employment. For instance, according to Miles and Scott, if trade unions are strong and push real wages up, then the natural rate of employment will be higher as workers become more willing to supply a higher volume of labour and users of labour scale down on their demand for labour (Miles and Scott 2005, p. 144). The concept of a natural rate of unemployment mirrors the classical economic assertion that the involuntary unemployment does not exist (Dornbusch et al. 2008, p. 103-104) even as there is always some unemployment. This seems at first to be contradictory and is better understood when closely associated with the notion of frictional unemployment. This means that the unemployment that takes place in the full employment level or state of natural rate of employment/unemployment is frictional or that “which occur because the labour market is always in a state of flux” (Dornbusch et al. 2008, p. 104). The “frictional” or “natural” rate of unemployment happens as people move and change jobs (Dornbusch 2008, p. 104). Unemployment can also be seasonal or cyclical. In a cyclical or seasonal unemployment, the unemployment fluctuates according to a pattern or season: decreasing when economic activity is higher and increasing when economic activity is lower (Baumol and Blinder 2009, p. 114). Structural unemployment emerges when certain jobs are lost with an economic restructuring (Baumol and Binder 2009, p. 114). For example, with globalization, countries can lose certain jobs because they do not have a comparative advantage for the job. Following the Keynesian perspective, unemployment can result from a deficiency in demand or when aggregate demand or expenditures are inadequate in putting the economy at the at the full employment level. However, new classical economists point out that demand-side policies can only lead to crowding out without affecting output. According to the Trade Union Congress (TUC) of the United Kingdom (2010, p. 2), one important social cost of unemployment is poverty. In the UK, the TUC considers that around 12.8 million people or 23% of the UK population can be classified as “poor” and vulnerable to poverty even if the unemployment figure for the UK is less than 10%. Further, they claim that the proportion of houses that are in good repair has dropped from 54% to 44% and that 60% of families in the UK have been eating less often in 2007 and 2008. Another social costs is that 21% of men and 19% of men are borrowing money during recession or when unemployment is high (TUC 2010, p. 5). Further, according to the TUC, another social cost is that during 2008/09, 2.5% of UK families were considered homeless by government authorities (2010, p. 5). According to the TUC, UK’s unemployment rate is also to blame for the increase in the number of repossession of mortgages from 26,200 in 2007 to 40,000 in 2008 (p. 5). The figure is an increase from 0.22% to 0.34% of all mortgages. Another social cost is on health. According to the TUC of UK, citing studies conducted by the London School of Hygiene and Tropical Medicine, poverty is also the one to blame why children of the unemployed are shorter by 1.2 centimeter compared to the children of the employed at age 2 (p. 6). Further, citing several studies, the TUC also blame unemployment as the explanation why children from the unemployed have a death rate that is 13 times higher than the employed (p. 6). As per the TUC’s reckoning, the other social costs of unemployment are criminality, alcoholism, drug abuse, ill health, unhappiness, and depression (2010, p. 8-15). While proof for the TUC’s assertion may be inadequate, the likelihood that the TUC is correct cannot be ruled out. The economic cost of unemployment is indicated by the so-called Okun’s law that relates the unemployment rate with a reduction in the GDP (Dornbusch et al. 2008, p. 148). The Okuns law states that an additional one percent of unemployment translates to a two percent decrease in the GDP. However, the actual relationship between unemployment and its cost to the GDP could vary across time but is important is the relationship to stress is that the Oakum’s law relates the two variables. Unemployment is a waste of scarce resources because it means that factors become idle. It implies operating below the production possibility frontier thereby implying opportunity costs. It can also imply fiscal costs as government applies Keynesian solution to the problem. It can mean higher welfare payments as the poor are protected from vulnerabilities given an unemployment. Meanwhile, using econometric techniques to draw inferences that are believed to be consistent with data, Vassilis (2006, p. 30) found that “productivity growth, monetary expansion (accelerating inflation) and capital growth (accumulation) significantly reduce unemployment”. Among these, Vassilis found (2006, p. 30) that it is accumulation that is most significant in reducing unemployment. Consistent with this, Vassilis pointed out that promoting investments rather than factor price flexibility in the labour market would be more effective in reducing unemployment (2006, 31). In addressing UK’s unemployment rate, some of the key measures that were proposed by the OECD Economic and Development Review Committee include the following (2007, p. 91-104): 1. Slow down the pace of increase in the minimum wage because the UK has one of the highest home pay worldwide. 2. Ensure a balance between poverty alleviation and incentives for work. 3. Devise measures to reduce child-care costs in order to promote work among couples and lone parents. Miles and Scott (2005, p. 149) pointed out that if there are regional skills mismatch, the natural rate of employment will be high. This implies that education and training can help much in decreasing the natural rate of unemployment and boosting employment. Towards decreasing unemployment, Miles & Scott (2005, p. 151) said that governments can also assist the unemployed in their search through information flows on job availabilities. The role of information will also be useful so that expected inflation equals actual inflation. According to Miles and Scott (2005, p. 416), when this is the case, actual unemployment equals the natural rate of unemployment. This is shown in Figure 3. Figure 3. Unemployment equals natural rate when expected inflation equals actual Source: Miles and Scott 2005, p. 416 In addition to those already pointed out, the opinion of this writer is that it is important to find out whether the unemployment is cyclical, frictional, or structural. Cyclical and frictional unemployment would just have to be recognized while structural unemployment can be addressed through education and training. Certain jobs are not worth pursuing because we have lost comparative advantage but some jobs may emerge in which we have a comparative advantage potential and where education and training may have a role. In addition, price volatilities should be minimized to avoid employment volatilities that would result from the price volatilities. The price volatilities can be minimized through prudent fiscal and monetary policies, like following rules instead of discretion in fiscal and monetary policies. At the same time, as we try to minimize price volatilities, markets must have highly flexible prices so market agents can produce or consume consistent with the price signals and promote equilibrium in the markets. The solutions involving government spending and monetary policy are sometimes called demand-side policies. Those that pertain to reducing taxes, promoting entrepreneurship, and increasing spending for education are sometimes called supply-side policies. These may be considered but what may be most important are the policies that enable the markets to work better. Reference List Baumol, W. and Blinder, A., 2009. Macroeconomics: Principles and policy. 11th ed. United Kingdom & other countries: South-Western Cengage Learning. Begg, D., Fischer, S., and Dornbusch, R., 2002. Economics. 8th ed. London: McGraw-Hill. Dornbusch, R., Fischer, F., and Startz, R., 2008. Macroeconomics. 10th International ed. London & other cities: McGraw Hill. Miles, D. and Scott, A., 2005. Macroeconomics: Understanding the wealth of nations. West Sussex: John Wiley & Sons, Ltd. Organisation for Economic Cooperation and Development (OECD), 2007. Economic survey: United Kingdom. Paris: OECD Economic and Development Review Committee. Schmitt, J., Rho, H., and Fremstad, S. 2009. U.S. unemployment now as high as Europe. Issue Brief, May 2009. Washington: Centre for Economic and Policy Research. Trade Union Congress of the United Kingdom (TUC-UK), 2010. The cost of unemployment. Available from: http://www.tuc.org.uk/extras/costsofunemployment.pdf [Accessed 24 July 2010]. Vassilis, M., 2006. Macro-determinants of UK regional unemployment and the role of employment flexibility. Munich Personal RePEc Archive, 44 (7), 1-39. Read More