Unemployment – UK Economy Under Labour

Unemployment is generally considered a good indicator of the economy’s strength; with a low percentage of the population unemployed, the UK is seen to be using its human resources fully, meaning they are being used efficiently and must be in demand.

It is described as being the number of people willing to work at the going wage but who are unable to find work. It is traditionally measured using the number of people claiming unemployment benefit, however the preferred measure is now the Labour Force Survey which can be compared internationally.

The government wants to have low unemployment, allowing the UK economy to produce the maximum volume of output, therefore raising economic growth. Also, when there is high unemployment, the government’s automatic stabilisers come into effect. They pay out increased benefits and take less through taxation, meaning there is more money in the Circular Flow of Income and the effects of unemployment are less severe. While this is good for the economy, it adds strain to government finances.

In addition, when people are employed they often feel wealthier, and are likely to have more disposable income. This should mean there is more aggregate demand in the economy, leading to higher levels of consumer spending and consumption (higher demand for businesses) – and a higher standard of living. Wealthier, higher standard lifestyles will generally mean that people are happy – hence are more likely to vote for the governing party at an election.

For these reasons, it is a key objective to achieve as near as possible to full employment. They have used a variety of supply-side factors to encourage people to work including introduction of the national minimum wage, better training and education, tax credits and tax bands, continued restrictions on trade unions and plans like the New Deal.

Successfulness

Since the Labour government came to power in 1997, unemployment in the UK has fallen, with a continued rise in employment over the past decade.

UK Unemployment rate – Labour Force Survey

Source: http://www.statistics.gov.uk/downloads/theme_labour/LMT_Dec06.pdf
GRAPH 8: UK Unemployment rate – Labour Force Survey

This data clearly shows that the level of unemployment in the UK, as a percentage of workers, has fallen over Labour’s time in power. Starting at around 8% it has fallen and by the end of 2006 is around 5.5%, a 31% fall. This has been a sustained and large fall and clearly means that a greater proportion of people are in work.

UK Unemployment, in actual figures

Source: http://news.bbc.co.uk/1/hi/business/7457886.stm
GRAPH 9: UK Unemployment, in actual figures

When looking at the trend in actual figures, as shown in Graph 9, the real decrease in numbers seems less significant. From around 1.8m people unemployed at the beginning of 1998, this has only fell by around 200 000 to 1.62m using the latest set of figures.

While this is a fall, and is a significant number of people, their achievement has perhaps been less than percentage values imply. Despite this, the government have clearly been successful in their aim, at least when the past decade is taken as a whole.

International Comparisons

With economic growth, the UK economy followed a very similar, if smoother, path to that of other nations. For unemployment, however, there are distinct differences between our economy and that of our closest competitors in Europe.

UK and Euro Zone Unemployment

Source: http://www.statistics.gov.uk/downloads/theme_labour/LMT_Dec06.pdf
GRAPH 10: UK and Euro Zone Unemployment

As shown in Graph 10, since the early 1990’s the UK’s unemployment rate has been consistently lower than that of Europe. At the time of Labour’s election that gap was already around 3%, and this is has been maintained since with even a wider separation in 2004/05.

It is likely that these differences are due to the way labour markets are in different countries. Countries, such as France, have very strict laws on employers, limiting their ability to change staff and staffing levels quickly. This has led to the country’s businesses investing in technology and their economy becoming one which has high productivity through capital intensive production – but also high levels of unemployment.

Restrictions make their labour market far less flexible than ours, and this opportunity is taken up by UK businesses, shown by the low levels of unemployment. Other government strategies, like the New Deal and other supply-side policies like training, have helped our labour force become even more flexible and able to adapt to changing demands and forces in the economy.

Over Time

UK Unemployment since 1988

Source: http://www.tutor2u.net/economics/presentations/aseconomics/macro/Unemployment/default.html
GRAPH 11: UK Unemployment since 1988

Looking back over the last 20 years, and more importantly the decade before this Labour government there seems to be a problem of cyclical unemployment.

When the pattern of boom and bust was prevalent, there were large swings in aggregate demand and these caused many businesses to quickly lay off staff in a slowdown before hiring again in a growth period. Also, as demand fuelled employment, skills shortages occurred and wages were bid up causing further inflation in the economy. This all meant that unemployment often followed with the economic cycle, with a slight delay in between. In Graph 11, the recession of the early 1990’s can be seen as a spike of high unemployment.

Since Labour’s election, however, there has been a stable economic climate and with growing aggregate demand and continued investment the number of unemployed has continued to fall.

In the years before Graph 11, the UK also experienced problems with structural unemployment, when heavy industries were closing down. This often caused pockets of very high unemployment caused by the geographical and/or occupational immobility of the workers there.

A change in the structure of the UK labour market, with a rise in tertiary sector working, plus increased flexibility through skills and training has meant that these problems have not been as severe or frequent in recent years.

Overall, the period of time in which this government has been in power has seen positive changes in unemployment compared to the preceding years.

Recent Changes

Unemployment has been down over the period of Labour’s time in power, however, in recent figures numbers being unemployed are rising.

UK Unemployment trend

Source: http://www.statistics.gov.uk/cci/nugget.asp?id=12
GRAPH 12: UK Unemployment trend

As Graph 12 shows, the percentage of the population that are unemployed appears to have levelled at the 5.2% rate for the three months to May of this year. However, the during the quarter to August 2008, another 164,000 people were made redundant, creating the largest single rise in 17 years and bringing unemployment to 1.79 million or 5.7%.

This is above many of rates which the government enjoyed during its early years in power and is a worry when the economy is faced with rising input costs, inflation and an economic slowdown.


Recession/slowdown effect on employment - Aggregate Demand/Aggregate supply diagram

DIAGRAM 4: Recession/slowdown effect on employment – Aggregate Demand/Aggregate supply diagram

Many businesses are cutting jobs or not taking on new staff in the face of higher fuel and energy prices along with a fall in demand, with retail sales for June 2008 down 0.4% on last year as people have less disposable income, meaning lower business confidence. This demand deficient unemployment (see Diagram 4) was a key part of the cyclical unemployment problems experienced before 1997.

The sudden fall in the value of property, and the demand for it, caused by the credit crunch, has seen a large number of building and construction firms create many more unemployed people. Employer confidence has now fallen to its lowest level for 12 years, which means many may not take on new staff.

For the government this has seen the end of unemployment falls, with an increase of 12 000 newly unemployed people in this quarter and the claimant count has currently had 5 consecutive monthly rises bringing it to its highest level for 16 years.

This is likely to continue into the near future, with no relief yet visible in the problems of less demand and reduced consumer spending. Many more people are continuing to lose their jobs and this will only serve to decrease money in the economy and reduce the spending power of family’s and an increasing reliance upon the state.

Evaluation

The government has successfully allowed unemployment to fall steadily over the past decade, with sustained falls over most of their time in office.

However, there have been large changes in the nature of employment, and also of unemployment.

GRAPH 13: Changing Pattern of Employment

Source: http://www.tutor2u.net/economics/presentations/unemploymentcharts/default.html
GRAPH 13: Changing Pattern of Employment

There has been a heavy decline in secondary industries like manufacturing (Graph 13), which the Labour government, many would say, has done little to prevent. This has caused depressed areas with immobility of labour problems and many people who are long term unemployed.

However, at the same time there has been significant growth in services, such as financial services and leisure activities. These have provided new jobs but often require very different skills to those the manufacturing workers have and the greatest number are in the south – far from the pockets of high unemployment.

The government has, however, very successfully tackled the problem of long term unemployment. When people have been without work for a long period they become less employable, with a loss of skills and work ethic.

Through strategies such as the New Deal and increased training and support, the number of long term unemployed has decreased significantly.

Unemployment by length of time unemployed

Source: http://www.tutor2u.net/economics/presentations/unemploymentcharts/default.html
GRAPH 14: Unemployment by length of time unemployed

Since 1997, both medium and long term unemployment fell for at least 8 successive years (Graph 14). But, transitory or frictional unemployment has maintained at roughly the same level at which the current government inherited it. While there has been less effort placed upon this, there are still significant numbers of people who are affected by it.

Policies and strategies on unemployment have helped in causing decreasing unemployment. We have also had far lower unemployment than that of other countries in Europe, who have tighter labour controls and as such encourage firms to invest in capital intensive production methods – though which have meant that their productivity levels have far exceeded our own.

A reduction in the volatility of the economic cycle has also helped to smooth the fall of unemployment. However, this has caused some trade-offs for decision makers. The structure of the economy has now changed hugely, with a far high number employed in tertiary industry and, perhaps, costly damage to areas hit by the demise of manufacturing. Also, while long term employment has fallen; short term has continued at a high level.

A buoyant economy with sustained growth has perhaps been a large contributing factor in the government’s, overall, success at lowering unemployment. In this they have also managed to achieve low unemployment combined with low inflation, something which was thought to be impossible using the theory of the Phillips Curve.

Phillips Curve

DIAGRAM 5: Phillips Curve

New initiatives which help to improve the Long Run Supply or Economic Potential of the UK, also means that demand pull inflation caused by a reaching of Full Capacity Output is perhaps further away and less likely.

But recent changes have meant demand deficiency unemployment has began increasing in the economy. This is another worry for the government, in addition to all those at risk of losing their jobs, and adds further stain to their impressive record over the past decade.

Please note that this was written during Summer 2008, before the worst of the economic problems of the following months