policies to reduce unemployment
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Revision presentation for AS and A2 studentsTRANSCRIPT
Policies to Reduce Unemployment
AS and A2 Macro Revision – May 2013
Defining unemployment
The number of people able, available and willing to find work and actively seeking work – but not
employed
Some Key TermsDe-industrialization A decline in the share of national income from manufacturing industries
Discouraged workers
People often out of work for a long time who give up on job search
Full employment When there enough job vacancies for all the unemployed to take work
Hysteresis A problem caused by high levels of unemployment. An unemployed worker loses skills and motivation and so finds it hard to re-enter the labour force
Keynesian unemployment
Unemployment caused by a lack of aggregate demand – a deficiency of private sector spending causes output and employment to contract
Labour shedding Cut backs in employment often seen in a slowdown or a recession
Labour shortages When businesses find it difficult to recruit the workers they need
Under-employment When people want to work full time but find that they can only get part-time work – the result is a loss of hours that the economy can use
Unemployment trap
When the prospect of the loss of unemployment benefits dissuades those without work from taking a new job
Two measures of unemployment
• Claimant Count Measure– The number of people claiming the Jobseekers’
Allowance– Monthly head count of unemployed
• Labour Force Survey– An internationally agreed measure of unemployment– Must have actively sought work in the previous four
weeks and be available to start work immediately– Higher figure than the claimant count partly because
there are limits on who can claim unemployment benefit
Unemployment RatesSpring 2013:LFS unemployment: 8.1%Claimant count: 4.7%
Flows in the Labour Market
EmployedLabour force Unemployed
Out of the labour forceTaking
a job
RetiringTemporarily
leaving
New hiresRecalls
Job-losersLay-offs
Quits
Re-entrantsNew entrants
Discouragedworkers
Main Types of Unemployment
SeasonalRegular seasonal
changes in employment / labour demand e.g. Tourism,
retail, agriculture
StructuralArises from the
mismatch of skills and job opportunities as the pattern of labour demand changes –
linked to labour immobility
FrictionalTransitional
unemployment due to people moving
between jobs
CyclicalCaused by a fall in
or persistent weakness of
aggregate demand leading to a decline
in GDP and jobs
Reducing Unemployment - ThemesBoosting human
capital
Improving flexibility
Lower taxes to increase labour
demand
Stimulus to demand from
public and private sector
Improved export competitiveness
Improving work incentives
Cutting Unemployment – Labour Demand Policies
Macro Stimulus Policies (+ Multiplier Effects)• Low interest rates and policies to increase business lending• Depreciation in the exchange rate (to help exports)• Infrastructure investment projects (fiscal policy)
Cutting the cost of employing workers• Reductions in national insurance contributions (tax)• Financial support for apprenticeship programmes• Extra funding for regional policy – business grants
Competitiveness Policies• Reductions in corporation tax (to increase investment)• Tax incentives for research / innovation spending• Enterprise policies to lift the rate of new business start-ups
AD-AS Diagram – Rising GDPPrice Level
Real National Output (Y)
LRAS
Y1
SRAS
AD = C+I+G+X-M
Ye
AD2 (higher demand)
Y2
Rising AD causes expansion of SRAS, helping to close a negative output gap
Stimulus policies helped if there is a sufficiently large multiplier effect causing further boost to output and jobs
Cutting Unemployment – Labour Supply Policies
Reducing occupational mobility• Better funding for and more effective training• Teaching new skills e.g. Coding for gaming
Improving geographical mobility• Rise in house-building, more affordable rents• Active regional policy to create new jobs
Stimulate work incentives• Higher minimum wage or a living wage• Reductions in income tax, welfare reforms
Long term unemploymentSpring 2013:Over 1.3 million people in UK have been out of work for at last one year
Regional UnemploymentSpring 2013:Large spread in regional unemployment rates – persistently high in some areas
Unfilled Vacancies in Jobs MarketSpring 2013:LFS unemployment = 2.5million There are 500,000 unfilled vacanciesWhy are so many jobs left unfilled?
Evaluation Points:
• Fiscal and Monetary Policy policies:– Limits to effectiveness of policies in current times
• E.g. Slow growth despite low interest rates• Competitive exchange rate but exports remain flat
– Impact of Coalition fiscal austerity• Deep cuts in public sector jobs• Cancellation / cutting of infrastructure spending
• Supply-side policies:– Take a long time to have a major impact– Jobs market is always changing – some deep-rooted social and
economic problems • Poverty trap for families on low incomes• Unemployment trap for those looking for new work
Further evaluation points
• Unemployment rate of 8% is lower than many forecast at the start of the recession
• Employment levels are at record highs although the employment rate is lower than at the end of the last upswing
• UK labour market has become more flexible in recent years
• But there are some deep structural barriers to getting unemployment down to 5% or less
Structural Barriers to Getting Unemployment Down in the UK
• High levels of long term unemployment• Pockets of exceptionally high unemployment and low economic activity
rates, high youth unemployment• Persistent productivity gap with leading OECD countries• Disincentive effects of
– Complex welfare and tax system– Unaffordable housing sector– Many low-paid jobs that keep families in relative poverty
• High rates of public sector dependency in some areas• Many people are under-employed, stuck in part-time jobs• Skills shortages, creaking infrastructure, huge variations in educational
performance and opportunity• Weak demand in domestic & overseas markets
OECD Data on UK Jobs Market
Key Data on the EconomyIndicator (* is a forecast) 2011 2012 2013*
Real GDP (% change) 0.9 -0.1 0.9
Consumer spending (% change) -0.9 1.1 1.6
Capital investment (% change) -2.4 1.8 2.5
Exports of goods and services (% change) 4.5 -0.2 2.4
Unemployment rate - % of labour force 8.1 8.0 8.3
Consumer price inflation - per cent 4.5 2.6 1.9
For unemployment to fall by a considerable amount, the economy needs to achieve stronger growth and for new businesses and industries to scale up and generate sufficient new jobs
Causes of Weak Growth / RecoveryDomestic demand-side factors:Weak consumer demand, low business capital investment, cuts in real level of government spending
Domestic supply-side factors:Low supply of bank credit, falling productivity, high energy prices
External demand-side factors:Weak growth in key overseas markets, hitting UK export sales e.g. Euro Area, too few exports to Asia Rising region
External supply-side factors:Rising world food and energy prices, keeping UK inflation high and squeezing real disposable incomes
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Implications of unemployment for business
High unemployment
• Lower consumer spending = lower demand for income-elastic products
• Demand for inferior goods (lower price, quality) may increase
• Greater supply of labour – potentially lower wage/salary levels
• Danger of lost skills for industries as a whole
Low unemployment
• Consumers have more income = higher demand for income elastic goods
• Labour market “tightens” – increased upward pressure on wages / salaries
• Harder to recruit or expand without offering better worker packages
Possible business responses to unemployment
Low Unemployment High Unemployment
A chance to expand capacity to take advantage of higher demand
Reduced production capacity if demand falls
Adjust remuneration packages to remain competitive to attract staff
Headcount reductions (redundancy, recruitment freeze)
Invest in training to meet skills gap and help retain key staff
Reduce working capital (particularly inventories)
Offer more flexible working options to attract larger labour pool
Postpone or cancel investment projects
Consider outsourcing to access specialist skills where recruitment is tough
Potentially diversify into new markets
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