Unemployment

Saturday, 13, Mar 2010 04:19

What is unemployment?

Unemployment is an economic indicator that refers to the number or proportion of people in an economy who are willing and able to work, but are unable to get a job. A person in this situation is said to be unemployed. People who are not willing or able to work, for whatever reason, are "economically inactive" and do not count towards unemployment figures.

High levels of unemployment are usually typical of a struggling economy, where labour supply is outstripping demand from employers. When an economy has high unemployment, it is not using its economic resources in the best possible way.

Unemployment also carries significant social costs. People who are unable to find work must frequently rely on benefits for income: if they have financial or family commitments, this can make life extremely difficult. Moreover, the sense of failure, boredom and rejection that being unemployed can generate has real social consequences. Studies have repeatedly linked unemployment to rising crime and suicide rates and the deterioration of health.

The causes of unemployment are manifold. Economists distinguish a number of types of unemployment, however: cyclical unemployment is brought about by the vagaries of the business cycle; structural unemployment is brought about by changes in the economy or the labour market, when the jobs available do not fit the workforce's skills; frictional unemployment is the phenomenon of people being "between jobs"; and seasonal unemployment is linked to certain types of seasonal jobs, such as farm work and construction.

Background

The history of unemployment in the UK is central to both the economic and social history of the country.

The 1950s and 1960s saw a very low rate of unemployment (around 3 per cent on average) as a result of the "postwar boom". Servicemen during the Second World War had been promised full employment after victory, and no government of the period was prepared to break this pledge. Technological advance, a stable international trade environment, the success of Keynesian economics and the stability of the Phillips Curve (which postulated a relationship between high inflation and low unemployment) created a situation which did approach full employment - although of course, at that time the majority of women remained in the category of the "economically inactive".

The economic orthodoxies of the boom years collapsed in the 1970s. The energy crises of 1973 and 1979 generated "stagflation", rising inflation and rising unemployment - something the Phillips Curve deemed impossible. In Europe, fixed exchange rates pegged to the German mark forced EU member states to deflate their economies to keep pace with low-inflation West Germany. The failure of Labour's "In Place of Strife" labour market reform proposals in the late 1960s had led to a situation where union power was increasingly stifling markets by keeping wages high. Unemployment topped one million for the first time in January 1972. During the 1979 "Winter of Discontent", when even gravediggers went on strike to protest against pay freezes, unemployment stood at 1.1 million, and the Conservatives swept to power on the message that "Labour isn't working".

However, during the early 1980s, unemployment rose further still - it topped three million in 1982. The January 1982 figure of 3,070,621 represented 12.5 per cent of the working population, and in some parts of the country it was even higher: in Northern Ireland, unemployment stood at 20 per cent, while in some areas dominated by declining industries such as coal mining, it was much higher still.

Unemployment did fall through most of the 1990s and fell below one million for the first time since 1975 in March 2001. The causes of this achievement are disputed. The Conservatives argued that the Labour government had been left a "golden economic legacy" by the outgoing Major administration, and that it had ridden an eight-year global boom, following Tory economic plans. Labour, by contrast, put the figures down to its successful economic management and reforms (particularly the independence given to the Bank of England), the extensive attention it paid to education and skills, and the impact of its New Deal programme for reducing joblessness.

Controversies

Throughout history, policy-makers have from time to time taken the view that the macroeconomic benefits of high unemployment outweigh its economic and social costs. This was the case during the early 1980s. Most of the time, however, governments are unwilling to permit high unemployment, due to the demonstrated social effects, the economic underperformance it reflects and the public cost in terms of benefit payments it demands.

Nevertheless, as an aggregate figure the "headline" unemployment figure and rate can only tell part of the story. Structural differences between the regions of the UK have often meant that a nationwide figure masks localised problems. For years, unemployment in the north of England, Scotland and Wales have been considerably higher than in the prosperous South East and London. Even within regions, there are local pockets of high unemployment. Many towns remain dominated by a small number of large employers: when a locally-significant business closes, such as the mines during the 1980s or Rover's Longbridge plant in Birmingham more recently, the effect can be devastating.

Headline figures can also disguise other complexities, such as the prevalence of unemployment amongst ethnic minorities, women, disabled people, young people, and people who have been unemployed for long periods of time.

At present, there are two principal measures of unemployment used by the Government: the International Labour Organisation (ILO) measure (the UK's version being known as the Labour Force Survey or LFS unemployment); and the Claimant Count. The former is based on a survey of 57,000 households, and classifies participants as employed, unemployed or economically inactive on the basis of work done in the previous week. The latter is based on the numbers claiming unemployment-related benefits. On its election in 1997, the Government proclaimed its preference for the ILO measure, because of its international recognition. However, it claimed that unemployment had fallen below one million in 2001 on the basis of the Claimant Count measure only: at that time, ILO unemployment stood at 1,535,000.

This is only the latest example of the problem of measuring unemployment. Most governments are keen to minimise the appearance of unemployment, not only for political reasons but also for the economic signals it sends out. Over the last 25 years, numerous revisions to the official definition of "unemployment" have been made, which have almost universally revised it downwards. Labour has frequently accused the Conservatives during the 1980s of moving unemployed people on to sickness benefits - classifying them as economically inactive rather than unemployed - as a strategy for cutting the unemployment figure.

In recent years, the problem of bringing more economically inactive people into the workforce has been rising on the political agenda across Europe. A 2000 study found that the economically active proportion of the population across the EU was just 69 per cent, around 77 million adults. The savings of the current workforce are increasingly believed to be insufficient to pay for the pensions of the soon-to-retire. The Government has pursued this agenda by a combination of incentives, such as training and childcare, and sanctions, principally tightening eligibility for benefits such as Incapacity Benefit.

Statistics

The unemployment rate was 5.5 per cent for the three months to July 2008, up 0.2 over both the previous quarter and over the year. The number of unemployed people increased by 81,000 over the quarter and by 72,000 over the year, to reach 1.72 million.

The claimant count was 904,900 in August 2008, up 32,500 over the previous month and up 56,300 over the year. The Claimant Count has increased over the month in all regions of the UK.

The redundancy level for the three months to July 2008 was 138,000, up 28,000 over the quarter and up 18,000 over the year.

The inactivity rate for people of working age was 20.8 per cent for the three months to July 2008, unchanged over the previous quarter but down 0.4 over the year. The number of economically inactive people of working age increased by 4,000 over the quarter but fell by 97,000 over the year to reach 7.86 million.

There were 613,200 job vacancies for the three months to August 2008, down 56,900 over the previous quarter and down 53,200 over the year. All sectors showed falls in vacancies over the quarter with the largest falls occurring in distribution, hotels and restaurants (down 18,200) and finance and business services (down 16,600).

Source: Office for National Statistics - September 2008

Quotes

"When you read the small print of Government statistics, you find a very different picture where youth unemployment is rising, the number of British people in work is falling fast and tens of thousands of unemployed people are deliberately excluded from the figures."

Shadow Work and Pensions Secretary Chris Grayling - September 2008

"I believe we are the only party that has the progressive ideas to tackle poverty; to help people back into work; and to make work pay."

Liberal Democrat Shadow Work and Pensions Secretary, Jenny Willott – September 2008