Nature_of_Unemployement

UNEMPLOYMENT IN UK For any economy there are four major objectives. Full employment, price stability, high but sustainable rate of economic growth and keeping the balance of payments in equilibrium. Here we are only interested in unemployment objective regards to UK economy. Unemployment is a state of an individual actively seeking for job but not having one. The unemployment rate is the proportion of the total labour force – the total of those employed and unemployed – currently out of work. Cost or effect of unemployment to the economy Unemployment is a serious policy problem for both economic and social reason. A human is classed as a resource and its important that how this resource is being used otherwise it will be wasted. They should be deployed effectively in order to get maximum output. Waste of this resource can be expensive in regards to benefit system, loss of tax revenue and lesser contribution to GDP. Unemployment and GDP are interconnected. Greater employment result in to more people producing more out and adding to real GDP, at the same time lower employment means lesser people producing less output thereby reducing real GDP. As we mentioned before it could also have social problem too. Long term unemployment particular is also recognized to have significant psychological consequences, such as increased stress and low self-esteem. * Full employment is a situation in which all unemployment is frictional and structural, and cannot be reduced by increasing aggregate demand. Structural unemployment is that arises from a mismatch between the skills or location of existing job vacancies and the present skills or location of the unemployed; also known as mismatch unemployment. Frictional unemployment that arises because it takes time for workers to search for suitable jobs.also known as search unemployment. Since mid-1970s UK has experience a significant rise in the level of Unemployment. See graph Below: * * Causes of the unemployment are found inside or outside the Labour market. Weather its is inside or outside cause, the government should aim to reduce those problems to improve the economy. Many economist have used terms to define unemployment like natural rate of unemployment or (NAIRU) non-accelerating inflation rate of unemployment. Lets have a look at how economist from 19th century thru the present day have indentified the causes of the unemployment and how their theories are still somewhere connected to the prevailing problem of unemployment. Five main approaches regards to the unemployment applicable to UK unemployment. Classical approach is that so long as money wages and prices were flexible, and free to adjust, the labour market would always tend to clear at full employment equilibrium. The Orthodox Keynesian Approach has targeted frictional, structural, and demand-deficient unemployment. Frictional unemployment occurs because it will take time for a newly unemployed person to obtain information on job vacancies and find a new job. It is sometimes referred as search employment as a person changing a job and searching or a new one. One way to reduce search time is to improve the provision of information about employment opportunities. In the UK this is done through job centers. Structural unemployment is that workers without jobs whose skills are no longer suitable for or do not match the types of jobs available. For example new technology of email and internet have reduced the usage of letters or post resulting in to redundancies of postmen and also loss of income in postal sector. Government can introduce retraining programs or financing labour mobility cost to reduce this type of unemployment. Also policy measures which encourage firms to invest in areas of high unemployment will help to reduce structural unemployment. Demand deficient occurs when there is insufficient demand in the economy to maintain full employment. If demand falls, firms sell less and so reduce production. If they are producing less, this leads to lower demand for workers. Either workers are fired or a firm  cuts back on employing new workers. In the worst case scenarios the fall in demand may be so great a firm goes bankrupt and everyone is made redundant (e.g. Woolworths, Borders e.t.c). Cyclical unemployment is related to demand deficient unemployment and often used interchangeably. It refers to how unemployment changes with the economic cycle. When the economy is booming, jobs are created and unemployment falls. When the economy slows down and goes into recession, firms will lay off workers creating the demand deficient unemployment. Keynes argued that demand deficient unemployment could persist in the long term. Demand deficient unemployment can be improved by increasing aggregate demand for money keeping inflation cause in mind. The principal ways to do this are to reduce interest rates and tax, Increase the availability of goods and advertising. These are all known to increase consumption. Other way to increase the consumption is by allowing loans to be taken more easily. The monetarist approach to unemployment derives from the highly influential work of the late American economist Milton Friedman. He referred the term Natural rate of unemployment. It depends on both the structure of the economy and the institutions within it. Factors such as market imperfections in the labour and goods markets, the cost of gathering information on job vacancies and labour availability , and the costs of mobility as determinant of the natural rate of unemployment. The natural rate of unemployment is associated with equilibrium in the labour market at the market clearing real wage rate. Government can reduce the natural rate of unemployment in order to achieve higher output and employment by pursuing microeconomic (supply-management) policies designed to improve the structure and functioning of the labour market. Within the labour market any policy which leads to either an increase in the supply of labour (i.e. shifting the supply curve to the right) or the demand for labour will increase the equilibrium level of employment and reduce the natural rate of unemployment. Among the wide range of policy measures which have been advocated are policies designed to increase the incentive to work through tax and social security reforms, flexibility of wages and working practices, also by geographical mobility of labour. new classical approach to unemployment emerged in the United States in 1970’s. , the assumption underlying the new classical approach to unemployment is that the labour market continuously clears. In other words, in line with the classical approach , new classical economists assume that anyone wishing to find work can do so at the market clearing equilibrium real wage rate. new classical economists argue that those who are unemployed could find jobs if only they were prepared to lower their sights and accept inferior or less well paid jobs. Regards to the government policies In the new classical view, any policy measure which increases the microeconomic incentive for workers to supply more labour will reduce unemployment. Reducing the real value of unemployment benefits unemployment will fall as: (i) unemployed workers spend less time looking for the ‘right’ job, and (ii) certain low-paid jobs become more attractive, compared to the reduced benefits which can be obtained when out of work, ensuring that less job vacancies remain unfilled. During the 1980s, a new Keynesian approach to unemployment was developed to challenge the new classical view that unemployment is entirely a voluntary phenomenon. Within the extensive new Keynesian literature a number of models have been put forward to explain why an ‘equilibrium’ real wage rate can emerge which is above the market clearing real wage rate. Such models are therefore capable of generating involuntary unemployment in long-run equilibrium. To Keynes, the determination of wages is more complicated. First, he argued that it is not real but nominal wages that are set in negotiations between employers and workers, as opposed to a barter relationship. Second, nominal wage cuts would be difficult to put into effect because of laws and wage contracts. Even classical economists admitted that these exist; unlike Keynes, they advocated abolishing minimum wages, unions, and long-term contracts, increasing labor-market flexibility. However, to Keynes, people will resist nominal wage reductions, even without unions, until they see other wages falling and a general fall of prices. He also argued that to boost employment, real wages had to go down: nominal wages would have to fall more than prices. However, doing so would reduce consumer demand, so that the aggregate demand for goods would drop. This would in turn reduce business sales revenues and expected profits. From Above discussion it can be outlined that to reduce unemployment in UK the government should take the following measures .An improvement in job centers, and an incentives for the unemployed to either study or aim for part time or informal labour. Further schemes to reduce the number of long term unemployedby community service or working trails. Stricter legislation concerning trade unions, Preventing them from keeping wages artificially high, A decrease in benefit levels for unemployed, with slightly higher benefits for those who have either a low paid or a new job, Interest rates should be lowered to encourage investment, amongst other effects, Encourage performance related pay , which will help the self-curing process of technological unemployment.