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Intro: Definition and introduce essay.

Main body:
Measures of unemployment
Types and causes Equilibrium (Structural, Seasonal and Frictional) and Disequilibrium (Real
Wage/Classical and Demand Deficient/Cyclical)
Effects of unemployment economic on individual and Government.
Policies Supply side for equilibrium and Demand side for disequilibrium.
Conclusion depends on question.
SHOT TERM COSTS (less than 6 months) 1 paragraph.
Individual. Loss of income; Standard of living; Loss of status.
Economy. Lower output; Lower GDP and productive inefficiency because resources are
not fully utilized. This can be shown using the PPF.
Local economy effect. If there is lower consumption in the community, business may have
to close leading to more unemployment.
Government. Lower tax revenue: Direct (income tax) and indirect (consumption tax such
as VAT)
Increase payments / spending on welfare benefits such as Job Seekers Allowance.
Long term (more than 6 months)
Individual. Loss of skill makes individuals less employable and make it more difficult to
find work in the future.
Long term loss of income can lead to relative poverty, long term health problems and social
deprivation.
Economy.
Loss of productive potential because resources are not underemployed.
Hysteresis loss of human capital stock such as knowledge and skills*
Lower productivity lower output and slower economic growth. The UK might become
uncompetitive compared with other countries.
Lower investment in a particular area of the country.
Lower regional investment due to local lack of skills in the local labour force.
Government.
Long term loss of tax revenues may lead to lower government spending in the economy to
supply goods and services. This could affect the general standard of living of the whole
population.

Government may have to borrow to spend, which could be costly and increase the national
debt.
May need to reduce supply side policies to improve the skills of the unemployed. Reduce
welfare benefit to make work more attractive.

Economic costs of unemployment Tutor2u


Most economists agree that high levels of unemployment are costly not only to the individuals
and families directly affected, but also to local and regional economies and the economy as a
whole. We can make a distinction between the economic costs arising from people out of work
and the social costs that often result.
Lost output of goods and services
Unemployment causes a waste of scarce economic resources and reduces the long run growth
potential of the economy. An economy with high unemployment is producing within its
production possibility frontier. The hours that the unemployed do not work can never be
recovered.

But if unemployment can be reduced, total national output can rise leading to an improvement in
economic welfare.
Fiscal costs to the government
High unemployment has an impact on government expenditure, taxation and the level of
government borrowing each year

An increase in unemployment results in higher benefit payments and lower tax revenues. When
individuals are unemployed, not only do they receive benefits but also pay no income tax.
As they are spending less they contribute less to the government in indirect taxes.
This rise in government spending along with the fall in tax revenues may result in a higher
government borrowing requirement (known as a public sector net cash requirement)
Deadweight loss of investment in human capital
Unemployment wastes some of the scarce resources used in training workers. Furthermore,
workers who are unemployed for long periods become de-skilled as their skills become
increasingly dated in a rapidly changing job market. This reduces their chances of gaining
employment in the future, which in turn increases the economic burden on government and
society. See the revision page on long term unemployment
SOCIAL COSTS OF UNEMPLOYMENT
Rising unemployment is linked to social and economic deprivation - there is some relationship
between rising unemployment and rising crime and worsening social dislocation (increased
divorce, worsening health and lower life expectancy).
Areas of high unemployment will also see a decline in real income and spending together with a
rising scale of relative poverty and income inequality. As younger workers are more
geographically mobile than older employees, there is a risk that areas with above average
unemployment will suffer from an ageing potential workforce - making them less attractive as
investment locations for new businesses.
The duration of unemployment affects the economic and social costs
It is clear therefore that unemployment carries substantial economic and social costs. These
costs are greatest when long-term structural unemployment is high. Indeed many government
focus their labour market policies on improving the employment prospects of the long-term
unemployed.

Economic Costs of Unemployment (Economics Help)


The economic and social costs of unemployment, including personal costs, costs to government
and costs to society in general.

Economic Costs of Unemployment

Loss of earnings to the unemployed

Those who are unemployed will find it more difficult to get work in the future (this is
known as the hysteresis effect)

Stress and Health problems of being unemployed

Increased govt borrowing (PSNCR). Tax revenue will fall because there is less people
paying income tax and VAT. Also the govt will have to spend more on unemployment
benefits.

Lower GDP for the economy, the economy will be below full capacity this is inefficient
and will lead to lower output and incomes.
Increase in social problems. Areas of high unemployment (especially youth
unemployment) tend to have more crime and vandalism.

The costs of unemployment (s-cool.co.uk)


To a certain extent, these were covered in the topic called 'Macroeconomic objectives'. They are
reproduced here in a little more detail.
1. Implications for government spending and taxation. High unemployment is expensive
for the government and, therefore, for the taxpayer. For every unemployed person, there
are two costs to the government. First, the unemployed worker will be entitled to benefit,
and if he/she is young, or older but remains unemployed for a long period of time, he/she
will be offered training under the 'New Deal'. Secondly, there is the less obvious cost of
the loss of income tax revenues the worker would have paid in work. These workers
would have been paying VAT as well through their purchases. Put together, some
economists have estimated that the cost to taxpayers of each unemployed person is up to
9,000 a year.
2. Economic cost to the economy as a whole. There is the cost to the whole economy in
terms of wasted, unused resources. The existence of any idle resources means that the
economy will be at a point within its production possibility frontier (PPF).
3. Social costs of unemployment. Unemployed workers (young men, in particular) may
create other external costs in the economy, like crime for example. The governments of

the 80s always dismissed the coincidence of rising crime figures and rising
unemployment. Was it really a coincidence, given that many of the new unemployed
were young school leavers with no experience in work?
4. The cost of unemployment to the individual. In the short term the unemployed worker
has to put up with the loss of earnings, although this may be balanced by redundancy
payments. But in the long run, the long term unemployed will find it harder and harder to
find a job, as they find that the skills they have become less relevant and they have had
no new training.

Supply side policies for the Labour Market TUTOR2U

These policies are designed to improve the quality and quantity of the supply of labour
available to the economy
They seek to make the British labour market more flexible so that it is better able to
match the labour force to the demands placed upon it by employers in expanding sectors
thereby reducing the risk of structural unemployment.
An expansion in the labour supply increases the productive potential of an economy.
That expansion in the supply of people willing and able to work can come from several
sources for example: encouraging older people to stay in the workforce; a relaxed
approach to labour migration and measures to get non-working parents to actively look
for work.

Along with many other countries, the UK labour market is one that has to contend with a wide
range of problems many of which are related to persistently high rates of unemployment. Some
of these weaknesses are mentioned in the graphic below. Supply side labour market reforms
are designed to improve the employment prospects for workers of different ages, in different
occupations and industries and in different regions of the country.
Structural Weaknesses in the UK Labour Market

Skills gap is holding back UK economic growth

The UK faces a 10-year gap in its skills profile and damage to its future economic performance
unless it tackles the problem of youth unemployment, business leaders and recruiters have
warned. They say that failure to acquire work experience and skills at the outset of their careers
will not only damage young people prospects but leave deficiencies in the workforce for decades.
The UK has 1.02m jobless 16 to 24-year-olds, or 21.9 per cent of the workforce in that age
group just below the EU average
Adapted from news reports, 2012
Trade Union Reforms

Many of the traditional legal protections enjoyed by the trade unions have been taken
away including restrictions on their ability to take industrial action. The result has been
a decrease in strike action in virtually every industry and a significant improvement in
industrial relations in the UK
Improved partnerships between trade unions and employers can make a big contribution
to raising productivity and improving the flexibility of workers in their jobs

Increased Spending on Education and Training


Economists disagree about the scale of the likely economic and social returns to be earned from
higher spending on education but few of them deny that investment in education has the
potential to raise the skills within the work force and improve the employment prospects of
thousands of unemployed workers.

The economic returns from extra education spending vary according to the stage of
development that a country has achieved
Government spending on education and training improves workers human capital
Economies that have invested heavily in education are those that are well set for the
future. Most economists agree, with the move away from industries that required manual
skills to those that need mental skills, that investment in education, and the retraining of
previously manual workers, is vital.
Improved training, especially for those who lose their job in an old industry should
improve the occupational mobility of workers. This should help reduce the problem of
structural unemployment.
A well-educated workforce acts as a magnet for foreign investment in the economy.
Improved education increases opportunities which means that incentives can work more
effectively

Income Tax Reforms and the Incentive to Work

Economists who support supply-side policies believe that lower rates of income tax
provide a short-term boost to demand, and they improve incentives for people to work
longer hours or take a new job because they get to keep more of the money they earn.

Cutting tax rates for lower paid workers may help to reduce the extent of the
unemployment trap where people calculate that they may be no better off from
working than if they stay outside the labour force.
Do lower taxes always help to increase the active labour supply in the economy? It seems
obvious that lower taxes should boost the incentive to work because tax cuts increase the
reward from a job. But some people may choose to work the same number of hours and
simply take a rise in their post-tax income! Millions of other workers have little choice
over the hours that they work.

Supply Side Policies for Reducing Unemployment


Economics Help
Supply side policies are government attempts to improve productivity and efficiency in the
economy.

Suggested Supply Side Policies to Reduce Unemployment


1. Better job information to help reduce frictional unemployment.
2. Training for unemployed to help present better CVs and give themselves confidence in
job interviews.
3. Lower unemployment benefits to increase the incentive to get a job. It is argued
generous unemployment benefits create an unemployment trap, where those on benefits
would get only a small increase in after tax income if they decided to work.
4. Reduced Power of Trades Unions. Trades unions can cause real wage / classical
unemployment (where wages are pushed above the equilibrium. If you reduce the power
of unions, wages will fall to equilibrium levels leading to less unemployment. Also
reducing minimum wages should have similar effect. However, this could leave workers
without protection against monopsonist employers leading to lower wages.
5. Increased labour market flexibility. e.g. make it easier to hire and fire workers; this
should encourage firms to set up and hire workers in the first place. However, this may
make workers more fearful of losing their jobs. It may also lead to shorter term contracts
and increase inequality.
6. Better education and training. This provides skills which will help the long-term
unemployed to retrain and find jobs in a fast changing labour market. This can help
reduce structural unemployment. However, it depends whether the government can
provide skills that employers really need; there is no guarantee that government spending
will be able to solve the skills gap.
7. Employment subsidies. The government could give firms subsidies for taking on long
term unemployed. This could give the long term unemployed a new chance. However, it
will be costly and there is a danger firms could make current workers redundant to
benefit from the employment subsidies.

Policies for Reducing Unemployment


By Tejvan Pettinger on November 14, 2011 in economics
There are two main strategies for reducing unemployment

Demand side policies to reduce demand-deficient unemployment (unemployment caused


by recession)
Supply side policies to reduce structural unemployment / (the natural rate of
unemployment)

Demand Side Policies


Demand side policies are important when there is a recession and rise in cyclical unemployment.
(e.g. after 1991 recession and after 2008 recession)
1. Fiscal Policy
Fiscal policy can decrease unemployment by helping to increase aggregate demand and the rate
of economic growth. The government will need to pursue expansionary fiscal policy; this
involves cutting taxes and increasing government spending. Lower taxes increase disposable
income (e.g. VAT cut to 15% in 2008) and therefore help to increase consumption, leading to
higher aggregate demand (AD).
With an increase in AD, there will be an increase in Real GDP (as long as there is spare capacity
in the economy.) If firms produce more, there will be an increase in demand for workers and
therefore lower demand-deficient unemployment. Also, with higher aggregate demand and
strong economic growth, fewer firms will go bankrupt meaning fewer job losses.
Keynes was a strong advocate of expansionary fiscal policy during a prolonged recession. He
argue that in a recession, resources (both capital and labour) are idle, therefore the government
should intervene and create additional demand to reduce unemployment.
Impact of Higher AD on Economy

However,
1. It depends on other components of AD. e.g. if confidence is low, cutting taxes may not
increase consumer spending because people prefer to save. Also, people may not spend
tax cuts, if they will soon be reversed.
2. Fiscal policy may have time lags. E.g. a decision to increase government spending may
take a long time to have an effect on increasing AD.
3. If the economy is close to full capacity an increase in AD will only cause inflation.
Expansionary fiscal policy will only reduce unemployment if there is an output gap.
4. Expansionary fiscal policy will require higher government borrowing this may not be
possible for countries with high levels of debt, and rising bond yields.
5. In the long run expansionary fiscal policy may cause crowding out, i.e. the government
increase spending but because they borrow from private sector, they have less to spend
and therefore AD doesnt increase. However, Keynesians argue crowding out will not
occur in a liquidity trap.
2. Monetary Policy
Monetary policy would involve cutting interest rates. Lower rates decrease the cost of borrowing
and encourage people to spend and invest. This increases AD and should also help to increase
GDP and reduce demand deficient unemployment.
Also lower interest rates will reduce exchange rate and make exports more competitive.

In some cases, lower interest rates may be ineffective in boosting demand. In this case, Central
Banks may resort to Quantitative easing. This is an attempt to increase money supply and boost
aggregate demand. See: Quantitative easing.
Evaluation

Similar problems to fiscal policy. e.g. it depends on other components of AD.


Lower interest rates may not help boost spending, if banks are still reluctant to lend.
Demand side policies can help to reduce demand deficient unemployment e.g. in a
recession. However, they cannot reduce supply side unemployment. Therefore, their
effectiveness depends on the type of unemployment that occurs.

Supply Side Policies for Reducing Unemployment


Supply side policies deal with more micro-economic issues. They dont aim to boost overall
Aggregate Demand, but seek to overcome imperfections in the labour market and reduce
unemployment caused by supply side factors. Supply side unemployment includes:

Frictional
Structural
Classical (real wage)

Policies to Reduce Supply Side Unemployment


1. Education and Training. The aim is to give the long term unemployed new skills which
enable them to find jobs in developing industries, e.g. retrain unemployed steel workers to have
basic I.T. skills which helps them find work in service sector. However, despite providing
education and training schemes, the unemployed may be unable or unwilling to learn new skills.
At best it will take several years to reduce unemployment.
2. Reduce Power of trades unions. If unions are able to bargain for wages above the market
clearing level, they will cause real wage unemployment. In this case reducing influence of trades
unions (or reducing Minimum wages) will help solve this real wage unemployment.
3. Employment Subsidies. Firms could be given tax breaks or subsidies for taking on long term
unemployed. This helps give them new confidence and on the job training. However, it will be
quite expensive and it may encourage firms to simply replace current workers with the long term
unemployment in order to benefit from the tax breaks.
4. Improve Labour Market Flexibility. It is argued that higher structural rates of
unemployment in Europe is due to restrictive labour markets which discourages firms from
employing workers in the first place. For example, abolishing maximum working weeks and
making it easier to hire and fire workers may encourage more job creation. However, increased
labour market flexibility could cause a rise in temporary employment and greater job insecurity.

5. Stricter Benefit requirements. Governments could take a more pro-active role in making the
unemployed accept a job or risk losing benefits. After a certain time period the government could
guarantee some kind of public sector job (e.g. cleaning streets). This could significantly reduce
unemployment. However, it may mean the government end up employing thousands of people in
un-productive tasks which is very expensive. Also, if you make it difficult to claim benefits, you
may reduce the claimant count, but not the International Labour force survey. See: measures of
unemployment
6. Improved Geographical Mobility. Often unemployed is more concentrated in certain
regions. To overcome this geographical unemployment, the government could give tax breaks to
firms who set up in depressed areas. Alternatively, they can give financial assistance to
unemployed workers who move to areas with high employment. (e.g. help with renting in
London)

Supply side Economics in the UK


By Tejvan Pettinger on April 28, 2008 in economics
c) Evidence of governments who have used supply-side measures to reduce unemployment and a
discussion of what effects those measures have had
The UK has used various supply side policies to try and reduce unemployment. For a general
overview on supply side policies in the UK
The policies particularly useful for reducing unemployment include:

Benefits index linked. Unemployment benefits have increased slower than wages making
benefits less attractive. The aim is to increase the incentive for the unemployed to take a
job. However, this policy doesnt create jobs, only reduces incentive to stay on benefits.
In practise, the biggest disincentive for people working is if they receive a variety of
benefits (unemployment, income support and if going to work leads to higher costs (e.g.
transport and child care)
Reduced power of trades unions. T.unions in the UK are less powerful than in 70s and
80s. This is partly due to Thatcher reforms, but also long term structural economic
change reducing power of unions. Arguably this reduces real wage unemployment as
unions cant bargain for wages above the equilibrium. However, interesting that since
increasing the increase in the national minimum wage has not caused any real wage
unemployment
The new deal a combination of better information and training for the unemployed.
Also workers have to accept job if offered after 6 months.
More flexible labour markets. (e.g. you could make it easier to hire and fire workers,
abolish maximum working week (48 hours).
Lower income tax on high earners. Mrs Thatcher reduced highest rate of marginal income
tax from 83% to 40%, though this has since increased to 50%.

Evaluation

Difficult to know whether the fall in unemployment (1993-2007) is due to supply side
policies or long period of economic growth.
Government statistics suggest unemployment is lower than it actually is
More flexible labour markets have created more temporary and short term employment.