Unemployment

A-level Economics

Targeting Unemployment as an objective

Definition: the amount of those in the labour force who are not currently in employment.

Types of unemployment:

1)      Frictional: this type of unemployment occurs when people are in between jobs. Is this type of unemployment necessarily a problem? No. It just means there is a brief period of unemployment while the person is waiting for the new job to start.

2)      Seasonal: this type of unemployment occurs when certain industries experience spikes in demand at different times of the year. For instance, the holiday industry. The holiday industry is booming in school holidays and in the summer months. Throughout the rest of the year, there is less demand for labour in those industries. Another example would be the temporary increase in the demand for labour in the Christmas holidays.

3)      Structural: this is when the demand for skills and the supply of skills are not matched. When industries go into decline, the workers in those industries can have very specific skillsets that are non-transferable. If you are a coal miner, for instance, you cannot transfer your skills to the financial markets because your skills are not a match for the requirements of those jobs. This is a serious type of unemployment and the government can try to get around this by setting up training schemes for those who need specific skillsets. If a person is structurally unemployed for too long, it can even lead to long-term unemployment.

4)      Cyclical: this is when fluctuations in the economic cycle lead to periods of higher unemployment and periods of excess employment. When there is a recession, it means spending and confidence in the economy has decreased and therefore demand has decreased. When demand decreases, it leads to an increase in unemployment. Why? Because the demand for labour is a derived demand. Firms will employ more people when the demand for their products is high. When demand for their products is low, they will begin sacking people and increasing redundancies.

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What can the government do about unemployment?

Remember, low unemployment is one of the key macroeconomic objectives. It is in the government's interest to keep unemployment low as it is one of the areas the public assesses them by. People are directly affected by unemployment, and to most people it is the economic objective that matters most. Having a way of earning money is the way people survive and make their way.

So, we have established that the government needs to do something about it. The benefit of lowering unemployment is that GDP will also be positively affected. If there are more people producing things, then national output will go up won't it?

So how does the government target unemployment? Think of the 4 different types of unemployment above. What policies would you introduce to lower unemployment. You must first think of the reason why the unemployment is occuring.

Take for example, cyclical unemployment. Why is this unemployment occuring? It is because of a period of low aggregate demand. So what sort of policies do we use to reduce this unemployment? Surely, the best way to combat this problem is by increasing aggregate demand. Think of how the government can do that (think AD = C + I + G + (X-M).

Example policies

Expansionary Demand-Side Policy: This would be put in place to reduce cyclical unemployment. This would especially be needed in severe recessionary periods to keep firms employing people. So expansionary fiscal or monetary policy would work.

Job Training Schemes: This would try to improve the skills of the current labour force. It will mean that over time, our labour force becomes more productive and can therefore produce more. This will have an effect on reducing structural unemployment especially. It will give people the skills they need to sell themselves in the labour market. Employers will be more willing to take on labour because they will see them as more productive.

Reforms to the tax and welfare system: If you reduce taxes and make claiming welfare benefits less attractive, then you incentivise people to supply their labour. Some people who previously did not want to work (so, they were not in the labour force), will now be incentivised to go to work. This should increase the number of those employed.

Reducing the geographical immobility: In the UK, there is a regional divide between the north and the south (in other countries, I expect that there will also be some sort of regional divide). Those who are working in the south in the UK generally have better job opportunities than those in the north because of the City of London. Many people will not move to the south to seek more job opportunities because of family ties etc, so policies that improve transport to help more people get to work in less time will increase the number of those employed.

Apprenticeship Schemes: This will especially help the younger generation. It will provide them a specific skillset in which they can specialise and hence market themselves. At the end of their apprenticeship, they will be rewarded with a qualification of some sort, to certify that they are qualified to do a specific job. These schemes are starting to become more popular in the UK, especially after the huge rise in university fees.

Education: Reforms to the education system, making public money go further, building more schools, reducing classroom sizes, better teaching standards etc. All of these things lead to better educated people. Generally speaking, the more educated you are, the more skilled you are or the more skilled you can be.

What have we learned?

1. Definition of unemployment

2. Why unemployment occurs

3. Government objectives and unemployment reduction policies