Economics: Employment
Key Terms
Employed: In a job.
Economically Inactive: Refers to the people who are of working age, however they are not looking for work due to numerous reasons.
Discouraged Workers: This refers to people who are unemployed and have been searching for employment for such a long duration of time, that they no longer look for work.
Workforce: The total population of a country or region that is employed or employable.
Unemployed: Having no job despite being able and willing to work.
Full Employment: A policy goal state in which all those wanting employment at the prevailing wages can find it.
Claimant Count: Claimant count is a measure of unemployment measured by looking at the number of people claiming job seekers allowance.
Frictional Unemployment: A type of unemployment explained by people being temporarily between jobs, searching for new ones. A labour market is regarded as being in the state of full employment if frictional unemployment is the only kind of unemployment present.
Structural Unemployment: A type of unemployment explained by a mismatch between the requirements of the employers and the properties (such as skills, age, gender, or location) of the unemployed.
Cyclical Unemployment: A type of unemployment explained by the demand for labour going up and down with the business cycle.
Demand-Deficient Unemployment: Unemployment that arises due their being an insufficient aggregate demand in the economy, leading to a lower level of output, hence unemployment occurs.
Seasonal Unemployment: A type of unemployment explained by a seasonal variation in the structure of jobs and/or labour offered. Seasonal unemployment typically repeats the same pattern annually.
Voluntary Unemployment: Choosing to not accept a job at the going wage rate.
Involuntary Unemployment: Occurs when a person is unemployed despite being willing to work at the prevailing wage.
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Employment and The Workforce
As we know full employment (or as near as we can get) is one of the government objectives. Employment is very important when it comes to our economy as it affects the production capacity and hence ties in with economic growth.
The government has a criteria for those considered of working age which is between 16-64 years of age (you can work under the age of 16 and over 64 (as 66 is the retirement age in the UK) however the economy only considers in between these brackets). The people of working age can be divided into 3 sections:
In-Employment – These are people who are employed in any context, i.e., employed by the private sector and public as well as self-employed.
Economically Inactive – This includes students, people who have retired and those looking after family members or are sick. Discouraged workers are also included in this category these are people who have failed to find jobs and have given up.
Unemployed – The unemployed are people who are in the workforce but are without a job temporarily.
The workforce is made up of employed and unemployed members as the economically inactive are not considered to be active in the workforce.
Full Employment
As was mentioned earlier ‘full employment’ is considered a macroeconomic objective, and all governments should aim to get as close to it as possible. However, in a dynamic economy their will always be unemployment due to frictional unemployment with people between jobs.
The more workers in employment the better the use a government has of its labour resources, and we make better use of our position on the PPC driving economics growth. However, as we near full employment (from a Keynesian perspective) we see and upward pressure on wages and hence inflation. Hence governments should aim to find a correct balance in order to ensure that there is not a policy conflict (price stability vs. full employment).
How is Unemployment Measured?
Unemployment tends to be measured in two main ways in the UK:
The Claimant Count - This involves measuring the amount of people claiming Jobseekers allowance (JSA). People that claim JSA must declare that they are out of employment but are actively seeking work.
A problem with the claimant count is that it includes people who claim benefits but are not actively looking for work and it excludes people who are looking for work but are not eligible to claim benefits.
A strength on the other hand is that unlike the ILO Unemployment Rate (will come up next) it is not just based on a sample but rather actual figures.
ILO Unemployment Rate (Labour Force Unemployment Survey – This is a measure based on the UK Labour Force Survey, it looks at the amount of people available for work, seeking work but don’t have a job and extrapolates it to give a bigger picture of the UK unemployment rate.
A problem with this, however, is that it is based on a sample which is not guaranteed to be representative of the wider population.
A strength on the other hand is that it comes closer to what economists would consider unemployment rate as it measures the correct criteria.
Causes and Type of Unemployment
There are several types of unemployment:
Frictional Unemployment – This is when people are transferring between jobs. This often happens due to changing patterns in consumer demands which leads to certain sectors booming and other reducing. In a dynamic economy workers should be able to move over to the booming economy hence there will always be frictional unemployment.
Structural Unemployment – This occurs when certain sectors may fall, and workers need to transfer over to other sectors (as happened in the UK with the steel industry). It may be difficult for people to switch sectors especially if they became specialised in that industry. They may find it even more difficult to change sectors if they are not able to adapt or have the required transferable skills (technological unemployment) or the jobs are in a different location (geographical unemployment).
Cyclical Unemployment – This arises in times of recession where demand for labour decreases.
Seasonal Unemployment – This occurs certain times a year when the seasons are over, for example certain people may only be employed for the Christmas season at a ski resort.
Demand-Deficient Unemployment – This may occur when the economy is at an equilibrium below full employment (hence a deficiency in aggregate demand).
Voluntary Unemployment – Voluntary unemployment occurs when benefits are relatively high hence there is no incentive for people to enter the low paying jobs, this causes voluntary unemployment.
Wage Inflexibility – Wage inflexibility causes unemployment as wages are not in equilibrium, hence there will be a mismatch between desired wages and people employed as can be seen below:
Wages may of have been pushed up (by a trade union for example) which causes a mismatch between labour demanded (Ld) and labour supplied (Ls).
Consequences of Unemployment
Unemployment without a doubt brings significant consequences to the entire economy we can look at it in terms of economics agents:
Households: Households suffer from a fall in available expenditure, which may lead to a decrease in standard of living as they have a smaller budget for their needs and wants.
Government: Government has to give out more benefits (job seekers allowance) to households as unemployment rises which causes an increase in expenditure and fall in tax revenue if there is significant unemployment (as households no longer have high enough incomes). There is also an opportunity cost for the money given to benefits which could be used for other schemes such as healthcare and education.
Firms: Firms also generate lower revenues and may have to lay off people as they are not making enough due to the fall in aggregate demand as more people are unemployed and cannot afford to buy as much.
The Wider Economy and Social Welfare: The wider economy would shrink as there may be an element of the accelerator (negative) with firms laying off more people and unemployment increasing, further, reducing aggregate demand. Welfare may also suffer with increases in crime and vandalism.
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References/ Further Reading:
Unemployment – Wikipedia - https://en.wikipedia.org/wiki/Unemployment