Unemployment is one of the major macro-economic performance indicators. The more unemployed people in our economy the more we are producing below our potential, less income is earned (reducing saving, consumption and tax revenue) and there is a negative impact on the welfare of society.

2. The Labour Market
Unemployment is one of the
major macro-economic
performance indicators.
Keeping unemployment
as low as possible is a
major policy objective
of the government.
WHY?
Fed – “Dual
Mandate”
U.K
Forward
Guidance 1

3. Economic
Costs
• Lost output
• Inefficiencies
Fiscal Costs
• Less tax revenue
• Higher welfare payments
External
Costs
• Anti-social behaviour
• Demands on NHS
Why high unemployment matters
Inside PPF;
Allocatively and
productively
inefficient
Negative output
gap
Automatic stabilisers – less tax
revenue means less leakages
Automatic
stabilisers – G
rises, helping
AD
Youth unemployment rising, more
crime, more stress
Effect of unemployment
depends on the type e.g.
Structural more significant
than frictional
Hysteresis and
permanent
effects could
cause PPF to
shift in
Income tax + N.I + VAT : >50% of
UK tax revenue
Workless households more likely to
be in poverty… intergenerational
issues…

4. Don’t confuse unemployment with inactivity
Unemployed are
looking for a job;
whilst Inactive are not
in the labour market
Retired
The inactivity rate in the UK for those
aged from 16 to 64 was 22 per cent
The unemployment rate is 7.2 per cent of
the economically active population
Students
Prisoners
Disabled
Stay-at-home parents

5. As many people unemployed
in UK as there are long-term
sick

7. What are the causes of
unemployment?
Look at the case studies on page 15.
You have 2 minutes to work out which type of
unemployment applies to the three people
You have 2 minutes

8. What are the causes of
unemployment?
Hidden FrictionalCyclical

9. Types of unemployment (1)
• Unemployment related to
the process of changing
jobs, which may involve a
period out of work.
Frictional
• The category of
unemployed whose number
varies according to the
business or economic cycle.
Cyclical
Improve by: increasing flow
of information – job centres
NB: Not just in a recession
(e.g. in a boom, bankruptcy
lawyers have no business!)
Demand-deficient /
Keynesian

10. Types of unemployment (2)
• When there is a mis-match
between the skills of those
unemployed and the skills
that new jobs require.
Structural
• Unemployment which is
known to exist but is not
included in the official
government figures
Hidden
Improve by: supply-side
policies such as retraining
Especially amongst illegal
immigrants – evaluation on
official figures

11. Types of unemployment (3)
• This type of unemployment
occurs when trade unions
bargain for higher wages,
which leads to fall in the
demand for labour.
Classical /
real-wage
• A type of unemployment
that occurs due to the
seasonal nature of the job is
known as seasonal
unemployment.
Seasonal
The more they push wages
up, depending on the
elasticity of labour supply
and demand, the more
unemployment
E.g. tourism

12. Key Facts about unemployment
Task : Using the chart, identify two significant points of
comparison between UK unemployment and economic
growth over the period shown.
Demand-
deficient
(Keynesian)
unemployment
Unemployment
tends to LAG
real GDP…
Why?

13. Key Facts about unemployment
Remember, if the question
asks for a comparison then
don’t just describe. What is
the same? What is different?
Is the level of change different
for the two statistics? What’s
the overall change over the
course of the time period?You have 2 minutes

14. Key Facts about unemployment
Task : Using the chart above, identify two significant
points of comparison between UK unemployment and
economic growth over the period shown.
Comparison
1
Unemployment has grown throughout the
period, economic growth has been variable
(add figures!)
Comparison
2
Largest increase in unemployment
occurred during 2008-2009, during the
same period economic growth was
negative (add figures).
ADD UNITS!
%, £, levels, et
c

15. What do you think are the current rates and
levels (March 2014) for the categories below?
Statistic Real
statistic
Unemployment rate (as a % of the economically active population, Labour
Force Survey)
Unemployment total (no. of people registered unemployed, Labour Force
Survey)
Economically inactive (i.e. people without a job who have not actively
sought work in the last four weeks)
Unfilled Vacancies (where employers are actively seeking additional workers)
Employment Total (the number of people over 16 in employment)
Youth Unemployment (the number of people aged 16 – 24 who are registered
unemployed)
7.2%
2.34 m
8.94 m
144 k
30 m
950k

16. Key Facts about unemployment
In an evaluative question relating to
unemployment you need to be able to
DISAGGREGATE: demonstrate the
importance of youth unemployment,
long-term unemployment and the
availability of jobs.
You will not be asked to state a macro-economic
performance statistic. However, the ability to
state a current trend may be a useful way of
demonstrating knowledge to an examiner.

17. 25% of ALL Eurozone youth
unemployed are in Spain!

18. Youth unemployment: Fears of a ‘lost generation
Around a million young people are now unemployed across the UK.
Demographic of unemployment

19. Hysteresis Permanent effects
Atrophy of skills

20. c.25% of UK’s youth unemployed
have been unemployed are LONG
TERM unemployment

21. Unemployment during the Recession
Analysis: Suggest three reasons
why unemployment has not been
as high during the economic
downturn since 2008.
You have 2 minutes

22. Unemployment during the Recession
Period Peak Unemployment Rate
1979 - 84 12%
1990 - 94 10.8%
2008 - present 8.4%
Reason 1
Higher proportion of part-time jobs /
Zero hours contracts…
Reason 2
Employers less willing to make workers redundant
(holding out for improvement in demand); Labour
hoarding
Reason 3
Less available benefits/more robust
benefit claim system

23. Unemployment during the Recession
Period Peak Unemployment Rate
1979 - 84 12%
1990 - 94 10.8%
2008 - present 8.4%
Analysis: Suggest two possible consequences of
this different pattern of unemployment.
Consequence
1
Employers keeping less effective
workers
Consequence
2
Employers have a higher proportion of
part-time workers
Productivity impact?

24. Unemployment during the Recession
Keeping less effective workers
Point: Faced with falling output, firms are more willing to keep workers
employed which suggests that they have been keeping some less
productive workers.
Evidence for
this:
Productivity levels in the UK have remained stagnant and have not
improved (unlike during other recessions).
Explanation of
why this is a
problem:
Lower productivity leads to higher possible costs and potentially
higher prices compared to competition (from abroad).
It depends
upon…… (an
evaluative
point):
Other factors leading to lower productivity such as quality (and
age) of machinery
leads to a lower levels of output

25. How much of their shortfall in income is
compensated by any potential state benefits
Part-time jobs attract a pro-rata level of wages,
meaning that people earn less than if they
worked full-time.
Unemployment during the Recession
Having a higher proportion of part-time workers
Point:
Evidence for
this:
Explanation of
why this is a
problem:
It depends
upon…… (an
evaluative
point):
leads to lower levels of consumption
Employers have seen an increase in the
proportion of their workers who are part-time.
Statistics show an increase in the number of
people who work part-time even though they
wish to work full-time.

26. Source: ONS
UK labour productivity (2010=100)
Source: Labour Force Survey - ONS
Part-time employees who could not find full-time work
Underemployment…

27. Exam question: Evaluate the policies that
might be most effective in reducing youth
unemployment in the UK.
Definition: Young people aged between 18 and 24 who are
actively seeking work but are unable to find a job.

28. TWEEP Evaluation

29. Analysis: Explaining high youth
unemployment – 16-24yrs
Human
Capital
Problems
Reluctant
Employers
Reduced
retirement
rates
Weakness
of training
schemes
17
Both demand-side AND
supply-side causes
Tax?
Supply side
issue?
RULC?
Competition?

30. Exam question: Evaluate the policies that might be most
effective in reducing youth unemployment in the UK.
Policy Example
Targeted macro stimulus
policies to boost growth
Expansion of
apprenticeship schemes
Improving geographical
mobility of labour
Measures to stimulate
business start-ups
Active regional
development policies
Reduce corporation tax
To include new skills such as brick-
laying
Expansion of EU
New Employment Allowance to reduce NI
contributions for new small businesses
Regional employment funds
No guarantee of success – quality not
quantity of policy matters
Time lags
Short term vs
long term
Effects of unemployment depends on
government’s response
Policy depends on
cause of
unemployment

31. Policy Impact
Targeted macro stimulus
policies to boost growth T
Expansion of apprenticeship
schemes W
Improving geographical
mobility of labour E
Measures to stimulate
business start-ups E
Active regional development
policies P
Using TWEEP
Reduce corporation tax
To include new skills such as brick-laying
Expansion of EU
New Employment Allowance
Regional employment funds
No guarantee of success – quality not
quantity of policy matters
Time lags
Immediate
or delayed
impact?
Productivity
impact?
Efficiency –
new skilled
workers Improve
female
employment
Regional
unemployment
priority

32. 10/04/2014
Twitter: @tutor2u_econ