Unemployment is defined as those without a job but who are actively seeking work at current wage rates. In the UK, there are two ways in which unemployment is calculated: the claimant count and the Labour Force Survey (LFS). The claimant count measures unemployment by counting the number of people claiming benefits for being unemployed (Jobseekers’ allowance). The claimant count is not an international measure so it cannot be used to compare UK unemployment levels with those in other countries. The labour force survey is an internationally agreed measure of unemployment, conducted by the International Labour Organisation (ILO). It is the number of people who have actively sought work in the last four weeks and are available to start work in the next two weeks.
Unemployment occurs for a variety of reasons:
o Frictional unemployment is when workers are unemployed for short lengths of time between jobs.
o Cyclical (or demand-deficient) unemployment is when a fall in AD, leads to a fall in economic output, therefore firms employ less workers. It is the idea that unemployment rises and falls with changes in the economic cycle.
o Seasonal unemployment is when workers are unemployed at certain times of the year, such as building workers in the winter.
o Real wage or classical unemployment is when workers are unemployed because real wages are too high and inflexible downwards, leading to insufficient demand for workers from employers.
o Structural unemployment is when the pattern of demand and production changes leaving workers unemployed in labour markets where demand has shrunk.
There are different policies which can be put into place by the government to reduce unemployment.
The fiscal policy can decrease unemployment. The expansionary fiscal policy must be put into action, this involves increasing government spending and decreasing taxes. This will increase aggregate demand and the rate of economic growth. Lower taxes mean an increase in disposable income and it will help to increase consumption, resulting in higher aggregate demand. As AD increases, real GDP also increases. So, firms produce more and so there will be an increase in demand for workers and therefore there will be lower cyclical unemployment. Furthermore, there will be stronger economic growth so there will be fewer job losses as fewer firms will go bankrupt.
Monetary policy would also reduce unemployment by cutting interest rates. This would involve cutting interest rates. Interest rates are the cost of borrowing so lower rates encourage people to spend and invest. This increases AD and so increases GDP. This is because there is an increase in demand for workers to help produce higher amounts of goods and services so reduces unemployment.
The policies states above are examples of demand-side policies. However, there are also supply-side policies which help reduce unemployment. These are:
Education and training can provide the long-term unemployed with new skills which enable them to find jobs in new industries. Although the unemployed may be unable or unwilling to learn new skills and this policy may take several years to affect unemployment.
Trade unions are organisations of workers that exist to promote the welfare of their members. By reducing the power of trade unions, it will help to reduce real wage unemployment because unions will not be able to bargain for wages above the market clearing level.
Furthermore, the government can provide employment subsidies. Firms could be given subsidies for employing those who have been unemployed for a long time. This helps give them new confidence and job training for them to increase their skills. However, it will be quite expensive and may encourage employers to replace their current employees with the long-term unemployed.