1. AS Macro Revision
Unemployment in the Labour Market
Spring 2014

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3. Unemployment
The unemployed are those people able, available and willing to
work but cannot find a job despite an active search for work
• Unemployment means that scarce human resources are
not being used to produce goods and services to meet
people’s changing needs and wants
• Persistently high levels of joblessness have damaging
scarring consequences for an economy causing
economic and social costs
• Problems caused by unemployment are often deeprooted in local and regional communities and within
particular groups of society – for example in the
UK, more than one in six young people are out of work

4. Measuring Unemployment – Key Terms
Claimant Count
The number of people claiming unemploymentrelated benefits
Labour Force Survey (LFS)
All those actively seeking and available for work,
whether or not they are claiming benefit
Long-Term Unemployed
People unemployed for at least one year
Labour force
The number of people of working age able,
available and willing to work
Full employment
When there enough job vacancies for all the
unemployed to take work
Discouraged workers
People often out of work for a long time who
give up on job search
Economically inactive
Those who are of working age but are neither in
work nor actively seeking work
Employment rate
The percentage of the population of working
age that is in paid employment

5. UK Unemployment Rates in Recent Years
A fall in the unemployment rate
does not necessarily mean more
people are employed
The LFS unemployment
rate peaked at 8.5% in
2011 – lower than in the
previous recession

6. Are the Unemployment Figures Accurate / Reliable?
Strength of Unemployment Data
Problems / Limitations of Data
Timely figures
new each month
Much hidden
unemployment
Large sample size
for LFS measure
Sample errors are
inevitable
Local data aids
policy decisions
High level of
under employment
In UK, a low level
of benefit fraud
Hard to measure
scale of inactivity

7. Main Types of Unemployment
Seasonal
Structural
Frictional
Cyclical
Regular seasonal
changes in
employment /
labour demand
e.g. tourism,
retail, agriculture
and construction
sectors
Arises from the
mismatch of
skills and job
opportunities as
the pattern of
labour demand
changes – linked
to labour
immobility
Transitional
unemployment
due to people
moving between
jobs e.g. New
entrants to the
labour market
Caused by a fall
in or persistent
weakness of
aggregate
demand leading
to a decline in
GDP and jobs

8. Cyclical Unemployment – Falling Aggregate Demand
Cyclical unemployment is
due to a lack of demand for
goods and services.
In a recession, firms are likely
to reduce employment to cut
costs – this is called “labour
shedding” or “down-sizing”
Cyclical unemployment has
been a major problem for a
number of European Union
economies. In 2012, Spanish
unemployment rose above 6
million for the first
time, with over 25% of the
workforce unemployed
GPL
AD2
AS
GPL1
GPL2
AD1
Y2
Y1 Real GDP

9. Structural Unemployment
Structural unemployment occurs when the demand for labour is
less than the supply of labour in an individual labour market
Decline of
manufacturing
Occupational
immobility
Geographical
immobility
Robotics
replacing jobs
Foreign
competition –
rising imports
Long term
regional decline
Disincentives
e.g. Poverty Trap
Outsourcing of
production
overseas

10. Economic and Social Effects of High Unemployment
Economic costs
• Lost output, the economy is inside the PPF – lost efficiency
• Fall in real incomes and lower living standards
• Drop in tax revenues and higher welfare – budget deficit
• Possible decline in labour supply as unemployed move overseas
Social costs
• Increase in relative poverty and welfare dependency
• Extra demands on national health service (stress-related illness)
• Link between persistent unemployment and social problems
Are there any beneficial effects?
• Reduced risk of inflation – lower wage claims and price discounts
• Pool of unemployed labour available for growing businesses
• Rise in self employment start-ups as alternative to being unemployed

11. Long Term Unemployment in the UK Economy
The long term unemployed have been
out of work for at least one year

12. “Labour Scarring Effects” from high Unemployment
Loss of work experience
• Reduced employability from a depreciation of skills
• Gaps in CVs may influence potential employers
• Decline in quality of human capital
Loss of current and future income
• Vulnerability to consumer debt at high interest rates
• Decline in physical health and increase in psychological
stress – less likely that someone will find work again
Changing pattern of jobs in the economy
• New jobs in recovery stage are different from lost ones
• Structural unemployment – occupational immobility –
makes it much harder to get people into the new jobs

13. Policies to Reduce Unemployment – Labour Demand
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

14. Policies to Reduce Unemployment – Labour Supply
Reducing occupational mobility
• Better funding for and more effective training
• Teaching new skills e.g. Coding for gaming, languages
• An expansion of apprenticeship / internship programmes
Improving geographical mobility
• Rise in house-building will help to keep property prices
lower and encourage more affordable rents
• Active regional policy to create new jobs and businesses
Stimulate stronger work incentives
• Higher minimum wage or a living wage
• Reductions in income tax / national insurance
• Welfare reforms to reduce the risk of the poverty trap

15. The Problem of Youth Unemployment
• In October 2013, 941,000
young people aged 16-24
were unemployed
• The unemployment rate
for 16-24 year olds was
20.5%
• High rates of youth
unemployment have
serious economic and
social consequences
• Young people out of work
risk a permanent fall in
their expected lifetime
earnings from work
Some of the causes of high youth
unemployment are shown below
Skills Gaps Employers may
not be willing to
employ people
who lack the
ability to read
and write
Reluctant
Employers –
they may prefer
older, more
experienced
workers
Falling
Retirement
Rates caused by
declining
pension incomes
= fewer jobs for
younger people
Weak Macro
Fundamentals –
i.e. low real GDP
growth and low
business
confidence

16. Evaluation: Barriers to Lowering Unemployment
• High levels of long term structural unemployment in the UK
• There are pockets of exceptionally high unemployment and
low economic activity rates, high youth unemployment
• Hard to overcome the disincentive effects of
• A complex welfare benefits and tax system
• Unaffordable housing sector (both to buy and to rent)
• 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 e.g. the EU

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