Unemployment is often a personal and family tragedy in a work-oriented society, and a problem for economists. It is a problem for economists because defining it, and differentiating the different types of unemployment, is somewhat tricky.
Unemployment is also a lagged
indicator of economic conditions. This means that the rate which is
apparent now refers in most societies back several months at least, and that
policy could be reacting to conditions which no longer apply. For instance,
growth and recovery can happen at the same time as rising unemployment; a
recession and downturn can start with unemployment static or falling. Unemployment is also (usually) seasonally
adjusted.
In the United Kingdom, the
Unemployed are defined as a group of people who are available for work, able to
do it, and willing to seek it, but who cannot find a job at the market wage.
Rather confusingly, there are different technical definitions however.
·
The claimant count is the number of all those
who are claiming unemployment related benefits.
·
The Labour Force Survey[1],
or ILO measure, is the number of all those who have been out of work for four
weeks and who are available for work in the next two weeks, as a percentage of
the workforce
·
The long
term unemployed are those who have been out of work for a year.
The claimant count is relatively
easy for the government to generate, because it is paying out benefits. It does
not cover everyone, however, and will significantly undercount unemployment in
the professions, amongst those who have savings, and for those who do not for
any reason claim universal credit.
There are also groups of people
who do not fall into the definitions, such as those who are voluntarily
unemployed, those who are discouraged workers, and those who are underemployed. The unemployment measure is also not so
useful when a significant proportion of the economy is made up of small
business people who are ‘working’ for themselves, even if no work is available.
The ‘work force’ or ‘Labour
force’ is the number of people who are able, available, and willing to work.
That is not the whole population; at any given time, there will be a number of
children and retired people, and people who are too ill to work, in a
population. Those in work have to support them with wages and taxes, as well as
supporting themselves. In economics, populations and workers are a form of resource.
Unemployment means that resources are being wasted, but also that those in
work have a burden of productivity placed upon them, because they have to
generate the income to support everyone else and the Government’s activities.
Therefore, demographics, the value of output, and wage costs matter. An
‘ageing’ society, for instance, will have different incomes and choices, and a
different burden on workers, from a young and booming one. These will not
necessarily be worse choices, but often are.
Some people are discouraged workers. Such people have
given up on job searches, because they have been unable over a long period of
time to secure employment. This may be because of their age, their lack of
attractive skills, or simply because of regional or structural unemployment.
They have effectively but not actually left the workforce.
Students are not counted in the unemployment figures.
The under-employed are those who are either not
working a full set of hours despite wanting to, in the context of their skills
and abilities, and also those who are working at levels below their skills and
usually expected wage.
The first group are sometimes known as the visibly
underemployed, and the second as the invisibly unemployed. If people are
working below the level at which they could work given their skills, they will
be less productive, the economy will not be fully utilising its resources, tax
revenues will be lower, and the repayment of debt (for former students, for
instance) will take longer and be more of a burden on the economy.
Some textbooks and notes refer to the under-employed as
those who are looking for additional jobs to supplement their income, or those
who wish to work longer hours. Both of these definitions are acceptable, but
not quite as precise as the ones above.x
Unemployment and the Wider Economy.
Economists tend to dislike unemployment because it
represents waste. It has negative externalities. It costs the government
money in terms of benefits, and it lowers tax revenues, which restrict the
choices and options available to the government and society. It is also
profoundly bad for most individuals, especially in societies which place an
emphasis on work, consumption, and which generate lots of debts which have to
be repaid.
There are two key observations about unemployment in general
and its links to the wider economy. One is found in the Phillips Curve,
which is dealt with later in these notes. Broadly, the PC suggests that there
is an inverse link between unemployment and inflation (which is much disputed.)
Okun’s Law suggests that there is a 2:1 link between GDP falls and
unemployment rises in percentage terms, though this is a very broad heuristic.
Types of Unemployment
There are various types of unemployment. These are often
listed but not fully explained. The list is, often, composed of the following:
·
Structural or natural unemployment
·
Frictional unemployment
·
Cyclical unemployment
·
Technological unemployment
·
Seasonal Unemployment
·
Classical or ‘real wage’ unemployment
·
Regional unemployment
·
Long term unemployment, often associated with
regional unemployment
·
Voluntary unemployment.
Structural Unemployment
Structural unemployment occurs
when there are fewer jobs in the economy than the workforce requires. This is
normal, but the bigger the structural ‘gap’ the more people will be either
permanently unemployed, or underemployed because work is shared amongst
part-time workers. For example, imaging a desert island with ten workers in the
workforce, but only seven jobs. Structural unemployment will be thirty per
cent.
Structural unemployment may exist
because there are barriers to workers finding jobs, in the form of geographical
or occupational immobility. Geographical immobility occurs because language,
transport, or housing barriers prevent workers from moving to where the jobs
exist. Occupational barriers exist because hiring rules, qualification
barriers, or rigidity within companies means that people who can do jobs are
not hired, and have no chance of being hired.
You may see natural
unemployment sometimes used instead of structural unemployment. The term is
essentially the same, and means the number unemployed because technological
change or a lack of skills in the workforce has eliminated some jobs or made
others impossible.
Frictional Unemployment
(‘Equilibrium unemployment’)
Frictional unemployment exists
because people move from job to job, and in between are unemployed. This is not
in itself a terrible problem, economically; workers will seek higher wages and
employers will seek to maximise their self interest by paying at the going rate.
There are always going to be employees switching between one job and another as
their skills, expectations, or needs change. Sometimes this sort of
unemployment is referred to as equilibrium because it is the rate at
which unemployment will exist if a market is clearing at the equilibrium wage,
with everyone supplying labour being paid what those paying for labour want. By
definition, those left out are out because they are demanding wages which that
market does not offer.
There are not too many policy implications
of this kind of unemployment. In it, people are exercising a free choice not to
work at a certain rate, and to hold out for a higher rate, or better
conditions. If they have savings, or personal circumstances which allow them to
do this, it would be counter-productive for a society to attempt to force them
into work. There may, however, be problems of imperfect or asymmetric
information which mean that people do not know the going wage or the real
availability of other jobs, which could be dealt with by the creation of job
information system (these days an easy, private sector matter online) or
recruitment consultancies. Authorities may also wish to avoid over-generous, or
no-question, welfare payments which incentivise resignations and that do not
encourage people to look for work.
Cyclical Unemployment
Cyclical unemployment, as the
name suggests, is the ‘additional’ unemployment associated with a downturn in
the economic cycle. It is associated with Keynesian theories and
policies.[2]
It is (sometimes) also called ‘demand deficient’ unemployment, and, very
rarely, ‘negative output gap’ unemployment. During a recession or
downturn, one would expect to see rises in cyclical unemployment; the worse the
downturn, the worse the unemployment.
Technological Unemployment
Technological unemployment is a
type wherein automation makes human jobs redundant. It represents a fall
in the opportunity cost of capital. The process was confined, largely, to
manual labour and ‘blue collar’ jobs in the last third of the twentieth century,
as machines became more productive and reliable than workers, but then
accelerated with the development of the internet and began to apply to
professional jobs at the start of the twenty-first century. It is now
extending, via the development of apps, artificial intelligence, and
algorithms, into all sectors of the economy. To keep up, societies have placed
an emphasis on continuing education, and the development of skills. In the long
run, new technologies usually create more jobs and give rise to new industries,
and so continue to add to growth rather than unemployment.
Seasonal Unemployment
Seasonal unemployment occurs in
industries or places where employment declines at certain times of the year,
such as, for instance, on ski slopes or tourist beaches. It is predominantly
associated with the tourism, sports, hospitality, agriculture, and
entertainment sectors. When the government presents unemployment statistics, it
makes sure that they are seasonally adjusted to account for temporary
dips or rises in unemployment.
‘Classical,’ ‘Real wage’
Unemployment
Economists sometimes see ‘sticky
wages’ or hysteresis as a problem in labour markets. This is also referred to
as the ‘classical view’ and, occasionally, as lock-out unemployment. It
occurs where workers in work require wages which are above the market
equilibrium for that sector, leading to lower demand for, and a greater supply
of, jobseekers. Essentially, the theory holds that those in work are being paid
too much and that this is encouraging others outside the jobs to want ‘in’. The
conditions for this form of unemployment are that workers are in control of
their wages (usually because of unions or labour laws) and can push up
or maintain high wages even after negative economic shocks to the economy.
There is not a great deal of
evidence that hysteresis is important in the UK private sector, as unions lack
power, and workers can be offered individual wage agreements so long as no
discrimination occurs. The job market is relatively flexible. This is not the
case for the public sector.
Regional Unemployment
Sometimes, whole areas or towns
have grown up in association with industries which have then declined. Those
areas or towns have found it difficult to switch to new industries or markets,
possibly because of geographical factors, and during the decline, have lost a
great many of their more skilled or driven youth. This has resulted in areas
where jobs are scarce, incomes are low, there are lots of inferior goods and
social externalities, and where there is a great deal of discouraged labour.
This can be characterised as regional unemployment and requires different
policy responses to cyclical unemployment, for instance.
Long Term Unemployment
This is a situation where people
are unemployed for over a year. During that period, their skills, motivation,
savings, and sense of society and social trust may all decline. If it persists,
people can effectively detach from the economy.
In the EU and UK, and in
economies as diverse as those of South Africa, Argentina, and the USA, the
long-term unemployment of youths, minority groups, or in regions, has posed and
does pose significant problems for growth. When added to structural
unemployment and under-employment, it leaves economies and governments
extremely vulnerable to high rates of unemployment and prolonged recessions or
depressions, as well as civil unrest and crime.
Voluntary Unemployment.
Voluntary unemployment occurs
where those who are able to work deliberately do not seek employment. This may
be because of a family or spousal decision to care for a relative, or to work
unpaid as a homemaker, or may be because of the ability to live from assets
rather than earnings. Most policies do not take it into account but, in the
case of carers, this may radically underestimate what is going on in an
economy, and discount the burden that carers lift from paid for social
facilities and programmes.
Policy Responses
There are, obviously, different
policies which would apply to different forms of unemployment. If one was faced
with a problem of structural unemployment made worse by ‘sticky wages’ for
instance, then making labour markets flexible, investing in skills, and
removing the ability of trade unions to strike or block the entry of cheaper
workers would be policies that governments could adopt. Governments could also
attempt to reduce barriers to progress based on certifications or
qualifications within particular industries. Growing LRAS by making investment
attractive, and lowering ‘job taxes’ on employers might also be adopted.
Alternatively, if the problem is
extended regional or long-term unemployment, Governments would be faced with
choices. Do they physically invest in roads, transport, and communications
infrastructure so that the unemployed can leave areas of low growth—so long as
they can find affordable housing in areas of high growth—or do they lower
regulations, taxes, and costs in areas of high unemployment to attract
companies in? Governments must also ask themselves what the welfare and
healthcare system should be doing to facilitate applications to jobs or
improvement of skills in areas of unemployment.
Governments might simply move
into such areas with government jobs, but these rarely generate much in the way
of new wealth or extended job opportunities (in fact, they may kill such
opportunities by ‘crowding out’ talent, deprioritising private investment, and
raising wages beyond the capacity of the private sector to compete.)
In the first two decades of the
twenty first century, and especially after the 2008 crisis, Governments also
shifted from worrying about skills to worrying about immigration
and global wage challenges. These were both in their way a response to the
productivity challenge offered by the rise of East Asia in global markets, and
the consequent need to raise productivity and to not waste resources.
Productivity is a matter of
dividing the value of output by the cost of factor input over time So
there are two ways to raise labour productivity. One is to have high value
output, so that workers can be paid higher wages but, with or without the aid
of capital, this is covered by what they produce and adds to growth. The other way is to have lower labour costs
than competitors, so that goods or services are cheaper than those of
competitors.
For most of the 1990s, British
and American governments encouraged and celebrated immigration. This
typically involved the importing of large numbers of workers who could either
produce high value output at lower wages than local workers, or large volumes
of goods and services at cheap wages. This ran alongside attempts to extend education
to develop skills, and to use financial instruments like credit to replace
lost incomes. Workers were also encouraged by tax and welfare systems to take
on extra jobs, which was facilitated by general growth, and to invest in
property, which delivered a return on investment and gave access to more credit
and a feeling of security.
A rise in debt,
the massive growth of low cost, high volume (and then high value) jobs and
services in East Asia, a decline in real wages, and a lack of supply in housing
was accompanied by the 2008 crash. This led to a general turn against
immigration in Britain and the USA, as well as to demands for government
intervention to prevent depression levels of unemployment. Governments
attempted to stimulate investment and the economy with ultra-low interest rates
and quantitative easing, as well as austerity policies that cut
government spending. The result was persistent unemployment, which was added to
by growing automation, but also low-level growth and cheaper borrowing
to cover over the difficulties. These were worsened by the tariff and trade
problems that saw the first reverses of globalisation, and, in the longer run,
by Brexit-related uncertainty (though Brexit might also have generated some
trade jobs.) Covid-19 has in effect created an employment crisis.
In the UK, the
government has responded to the covid crisis by attempting to ease or eliminate
unemployment pressures with furlough policies, the stimulation of the
economy by spending, low interest rates, Qe, a low exchange rate, and a
low-tariff global trade policy. Since 2019, the government has also targeted
areas of high unemployment with a freeport policy in which enterprise
zones will be created in a low-tax, low regulation environment. Real wage
declines have also made wages more competitive compared to other countries, and
this would in normal times encourage investment and cheaper exports relative to
competitors, and therefore growth. At the time of writing, it is not clear,
given the huge damage covid has caused across most sectors of the economy, but
especially to large numbers of people who relied on low wage ‘gig’ jobs and
short term employment, if these policies will work. The fate of the global
economy, given persistent problems of Aggregate Demand and Supply in
China and America, is also unclear. Stagflation in the absence of
technological change to vastly lower basic prices is highly likely by 2022.
[1]
The LFS is a quarterly survey of 44,000 households, 20% of which are replaced
every 3 months. Not all those in the survey respond, but enough do to make the
figures valid from a statistical point of view. A general breakdown of its
workings can be found at https://www.ons.gov.uk/surveys/informationforhouseholdsandindividuals/householdandindividualsurveys/labourforcesurvey
[2]
Named of course after John Maynard Keynes, Baron (Lord) Keynes, a British
economist in the first half of the twentieth century. Keynes believed that the
economy was principally driven by Aggregate Demand, and that unemployment
during an economic cycle guaranteed lower AD because people became unemployed,
lost incomes, and consumption therefore fell, pushing down AD. Keynes’ solution
was for Government spending to increase, and for exchange rates to be devalued
to increase exports, because AD=C+I+G+(X-M). For various theoretical reasons,
Keynes did not believe that inflation and distorted prices were as big a threat
to economies and societies as mass unemployment.
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