Unemployment Problem the UK
For developed countries, unemployment also poses a challenge even when economic activity is high because of the intricate and interrelated workings of various factors which will be discussed herein.
Such a type of unemployment situation really badgered OECD countries in the aftermath of the first oil shock in 1973 and of the second in 1979 as well. By 1983 going into 1988, many of these countries were experiencing double-digit unemployment rates for the first time in two decades.
But the real story lies in how these countries met the challenge head-on and succeeded in overcoming it. On that basis, Austria and Norway are considered the best performers for keeping their unemployment rates below 5 per cent until 1999. From 3.6 per cent in 1983-88, unemployment in Austria rose slightly to 3.7 per cent in 1989-94, 4.2 percent in 1995-97, 4.7 per cent in 1998 and 4.5 per cent in 199. In Norway, the figure was 2.7 per cent in 1983-88, 5.5 pre cent in 1989-94, 4.7 per cent in 1995-97, 3.3 per cent in 1998 and leveling off at 2.9 per cent in 1999.
In terms of pulling a rabbit out of the hat, however, the handling of the problem in the Netherlands and UK was found the most impressive. From a high of 10.9 per cent in 1983-88, for example, UK brought down the unemployment figure to 8.9 per cent in 1989-94, 8.0 per cent in 1995-97, 6.3 per cent in 1998 and 6.2 per cent in 1999. The Netherlands achieved the same feat in more or less the same dramatic fashion.
Theoretical and Empirical Background
The level of unemployment is determined by the aggregate demand and the equilibrium rate, the relative unemployment rate of particular groups, and non-employment. Nickell, S. & Van Ours, J. (1999) Unemployment drops when the economy's output expands faster than its growth potential and shoots up when the economy contracts. When unemployment falls, the government concerned can easily stop it in its tracks by expanding or loosening up its fiscal and monetary policy. Such a policy expansion is induced by a situation in which unemployment gets too high and inflation falls, while a tightened up policy is needed when unemployment gets too low to pull up inflation.
Any government facing an unemployment problem has to perform a balancing act to find the equilibrium unemployment rate, the baseline level of unemployment which is neither too low nor too high but has a stabilizing effect on inflation. Equilibrium unemployment is also the level consistent with stable inflation and a zero balance of payments deficit, which no monetary, fiscal or exchange rate policy can alter. The rate of this baseline level of unemployment may rise because of factors that systematically put inflationary pressure on the labour market