Unemployment In Macroeconomics

Macroeconomics Coursework assignment word count: 1802

Marco Lau

What are the main means by which unemployment can be controlled?

Unemployment, the state of being unemployed, especially involuntarily can cause big problems in our modern world. But how does one measure such an enormous prospect? When measuring unemployment it is first necessary to measure the working population, as not every person is able to work. Looking at the elderly and young children as labour resources would be a waste of time. Therefore the first step to controlling unemployment would be to first measure the size of the scale we are working with. We must also look at current unemployment problems, more specifically the costs of unemployment, what causes unemployment as well as examining the various types of unemployment including voluntary and in-voluntary unemployment. Would 100% employment benefit the economy? Overall we must discuss the consequences unemployment bring and the means by which it may be controlled.

In order to measure unemployment in the UK we have the claimant count, the claimant count includes those people who are eligible to claim the Job Seeker's Allowance (JSA). People eligible to receive the JSA do so for six months before moving onto special unemployment measures. Some people even though they are searching for work do not fit the criteria of the claimant count and are therefore not registered as part of the unemployed, the claimant count in the UK in 2003 averaged 3% of the labour force.

Alongside the claimant count there is the Labour Force Survey (LFS). The LFS covers those people who have looked for work in the past month and are able to start work in the next two weeks.

On average, the labour force survey measure has exceeded the claimant count total by about 400,000 in recent years. This is perhaps the most accurate way with which to measure a scale of unemployment.

In macroeconomics unemployment can be summed up as lost production for the economy and loss of income for the individual. In order to "cure" unemployment we must understand why unemployment occurs in the first place. As unemployment occurs on such a large scale we must categorize unemployment into types:

* Seasonal unemployment - Some industries thrive seasonally, leading to a fluctuation of unemployment between seasons e.g. fruit picking, people are only required for fruit picking when the fruit is in season.

* Frictional unemployment - This occurs when there is friction in the labour market usually due to labour immobility or people changing or searching for jobs. This can also be caused by people being unaware of the jobs available to them. Many people frictionally unemployed are unemployed temporarily while searching for a job.

* Structural unemployment - This form of unemployment arises when people lose their jobs due to capital-labour substitution when the demand for labour in a particular industry is decreased. These industries tend to be located in particular regions relying on a specific trade or workmanship, when their trade becomes no longer useful a regional decline could potentially occur, leading to a decrease in the strength of the economy in the region. E.g. the percentage change of manufacturing in the UK over 15 years is -53.8% which is 1,820,000 potentially unemployed people. Whereas in the same 15 year gap in the Banking, finance and insurance industries there was a 27.1% rise with 1.65 million more people being employed. The people who were made redundant will not have the necessary skills to compete for jobs in other sectors of the economy, therefore will become unemployed.

Employment change in the UK economy

Employment change in the UK economy 1990

employed 2005

employed % change

Construction 2357000 2099000 -12.3%

Manufacturing 5203000 3383000 -53.8%

Mining, electricity, gas & water 398000 171000 -132.7%

* Regional unemployment - This form of unemployment occurs when there are not enough jobs in a region to satisfy the labour force of the region.

* Cyclical unemployment - This is demand deficient unemployment when there is a general deficiency of aggregate demand in the economy. E.g. when there is a recession we see rising unemployment because of plant closures and worker lay-offs.

* Voluntary/involuntary unemployment - The difference between voluntary and involuntary unemployment is that with voluntary unemployment it is that the worker chooses not to accept a job at the going wage rate as opposed to involuntary unemployment when a worker accepts the wage but cannot get the offer of a job.

Now that we understand the types of unemployment and the issue regarding the scale of unemployment we can focus on some of the consequences of unemployment. Many economists regard persistent unemployment as a sign of market failure, this is because unemployment is regarded as a waste of resource in the labour force; this can mean a loss of output and shows a reduction in economic efficiency.

We measure unemployment using the output gap: unemployment - claimant count.

This is used to measure lost output, if a high amount of output is lost it means the economy is operating below full capacity.

How else can unemployment affect the economy? Apart from lost output there are several ways that unemployment affects the economy; a high rate of long term unemployment can result in a negative effect on a country's economic growth potential. This can also affect government finances due to falling revenues from income tax, national insurance and VAT.

Another argument of the problems of unemployment is with the hysteresis effect, this once again relates to the economic costs of unemployment, this is due to the damage unemployment does to the skills or tradecraft of the unemployed, with employers less inclined to hire people who have been unemployed for a prolonged period and therefore feel their skills would be rusty. This can result in structural unemployment and a consequent rise in the natural rate of unemployment. This is why