Unemployment is concerned with people being out of work. The maintenance of full employment is a central policy aim of governments, but it has been accepted that there is some level of unemployment below which it is not possible to go without the return of inflationary pressure. Any attempt to control the level of employment is further complicated by changes in the size of the labour force.
It is possible to measure unemployment in various ways. In the UK, unemployment has been measured by the number of people claiming unemployment-related benefits. To claim benefits people must declare that they are out of work and be capable of, available for and actively seeking work during the week in which the claim is made. This is known as the claimant count measure. One problem with this measure is that it does not include people who are unemployed but who do not register.
In the late 1990s the UK government indicated that it wanted the main measure to be the International Labour Force (ILO) measure of unemployment. This is based on a survey of people. To be unemployed a person has to be out of work, have looked for work in the last four weeks and be able to start work in the next two weeks.
Types of unemployment
There is a number of different types of unemployment.
Seasonal unemployment: Some workers are employed on a seasonal basis. In the construction, holiday and agricultural industries, workers are less in demand in winter because of the climate. Seasonal unemployment can therefore be high. In summer it may fall, as these workers are hired. It is difficult in practice for governments to `solve’ this type of unemployment, which may always occur. In producing unemployment statistics, governments often adjust the figures to allow for seasonal factors.
Search and frictional unemployment: These two types of unemployment are very similar. FRICTIONAL unemployment occurs when people are moving between jobs. Usually it only lasts for a short amount of time. For example, an electrician who had been working in the North East may have a few weeks `off’ before starting a new job in London. It is not seen as a serious problem by government. SEARCH unemployment, however, can last longer. This type of unemployment occurs when people are searching for a new job. The greater the information on job opportunities, the lower search unemployment is likely to be.
Structural unemployment: STRUCTURAL unemployment is caused by changes in the structure of a country’s economy which affect particular industries and occupations. Examples include the decline of the coal and steel industries in the second half of the twentieth century. Between 1963 and the mid-1990s almost half a million jobs were lost in the coal mining industry. This indicates the size of the problem in the UK. Because certain industries have traditionally been located in particular parts of the country, their decline can have a dramatic effect upon those regions. As a result, structural unemployment is closely linked with regional unemployment. It may also result from changes in demand for the goods and services produced by particular sectors of the economy. For example, there has been a decline in demand for natural fibres such as jute as a result of the development of synthetic products.
Technological unemployment: This occurs when new technology replaces workers with machines. For example, new technology introduced to the newspaper industry has meant the loss of many print workers’ jobs.
Cyclical or demand-deficient unemployment: CYCLICAL unemployment results from the cycles which occur in most economies. These ups and downs in economic activity over a number of years are known as the business cycle. In a recession, at the `bottom’ of a business cycle, unemployment results from a lack of demand. It is argued that demand is not high enough to employ all labour, machines, land, offices in the economy.
Real wage unemployment: High real wages mean that workers will want to supply more labour than businesses want to employ. This results in unemployment. In other words, it is argued that workers price themselves out of jobs. There are vacancies, but businesses will only be willing to pay wages which are lower than workers are prepared to accept.
Voluntary and involuntary unemployment: Some suggest that unemployment can be voluntary or involuntary. Voluntary unemployment occurs when workers refuse to accept jobs at existing wage rates. Involuntary unemployment occurs when there are not enough jobs in the economy at existing wage rates. Economists sometimes talk about the natural rate of unemployment. This is the percentage of workers which are voluntarily unemployed. This is also referred to as the non-accelerating inflation rate of unemployment (NAIRU). This is because it is the rate of unemployment that can be sustained without an increase in inflation. Any attempt to reduce unemployment below this level will simply result in an increase in prices.
Unemployment due to obstructions to the labour market: Monetarist believe that this is the major cause of long term unemployment. They see the excessive bargaining power of trade unions as being especially important. They believe that workers are then priced out of work by excessive increases in real wages. They also see excessively high unemployment benefit as a cause of longer search time, thus increasing the number of unemployment at a given time.
Government responses to unemployment
- If it is believed that a deficiency in aggregate demand is the cause of unemployment, it is possible to increase demand by use of a package of measures, fiscal and monetary. Thus the government might lower taxation and/or increase public spending. It might increase effective demand (by removing restrictions on credit creation by the banking system and/or by lowering interest rates to induce both individuals and businesses to borrow for consumption or investment purposes).
- If it is believed that imperfections in the labour market are the cause of unemployment, the government might seek to break the power of the unions by legislation. More modest wage increases might help to ‘price’ people back into work. Alternatively, the government might reduce the real value of benefits in order to make jobs on low wages more attractive. It might also reduce the higher rates of taxes on income and profits to encourage entrepreneurial activity and so encourage job creation.
- Where specific industries or regions are worst affected, it might use a policy of direct subsidy and regional aid measures in order to maintain existing jobs in the short term whilst encouraging the creation of new job.