Unemployment is an economic indicator which depicts the ratio of individuals in an economy who have the will and capability of working but cannot secure a job (Trading Economics, 2010, para. 4). In determining the rate of unemployment, individuals who do not have the will or capability of working are not considered.
According to Holmes (2010, para. 1), high rates of unemployment indicate that a particular economy is struggling. This means that such an economy is characterized by a high supply of labor compared to demand. In addition, high rate of employment also indicates that a given economy is not utilizing its economic resources optimally. According to Office of National Statistics (2004, para. 4), unemployment is associated with a number of social costs.
For example, if such individuals have families, such families may experience challenges. In addition, unemployment results into a sense of failure, rejection and boredom amongst the affected individuals. This can lead into worse social consequences such as deterioration of health, suicide and crime.
Economists have classified the causes of unemployment into various categories (Trading Economics, 2010, para. 4). Some of these include frictional, structural, seasonal and cyclical unemployment. Frictional unemployment results from people moving from one job to another. This is mainly common amongst new entrants who leave one job to another in search of better wage rates.
On the other hand, structural unemployment arises from capital-labor substitution such as mismatch between the individual’s skills and requirements of the job. Globalization is one of the major causes of structural unemployment.
This arises from the fact that individuals have are required to have skills which match with changes in the technology and product demand (Trading Economics, 2010, para. 4). Seasonal unemployment arises from seasonal characteristics of various jobs such as the farming and construction industry. On the other hand, cyclical unemployment arises from economic movements.
For example, during recession, there is a tendency of the rate of unemployment increasing. This arises from a decline in demand forcing a large number of firm’s to close down or to implement downsizing strategies (Berentsen, Menzio & Wright, 2008, para. 3). As one of the countries in Europe, the United Kingdom economy has experienced unemployment. However, the rates of unemployment have been varying from one year to another.
The essay is aimed at attaining a number of objectives as outlined bellow.
- To evaluate the history of unemployment in UK.
- To analyze why unemployment is set to rise in the UK
- To illustrate the true level of unemployment in UK
- To evaluate how technology affects unemployment in UK
- To analyze how inflation affects UK unemployment
- To evaluate how unemployment affects UK economy
Brief history of Unemployment in UK
According to Pissarides (2003, p.1), UK has been successful despite the existence of unemployment. During 1950s and 1960s, UK had a relatively low rate of unemployment which averaged 3%. The main reason behind the low rate was the postwar boom. In addition, the country took advantage of technological boom. In addition, the country benefited from stable international relationship which improved international trade.
However, occurrence of energy crisis during 1970s resulted into stagflation. During this period, the increase in oil prices led into a rise in unemployment. The high rate of unemployment persisted to be relatively high until 1980s when it became worse after the occurrence of the manufacturing recession (Office of National Statistics, 2004, para. 4). From 1981 to 1986, approximately 3 million people were unemployed.
The rise in unemployment resulted from rise high interest rates and strict monetarist policies (O’Grady, 2009, para. 2). The occurrence of the economic boom led into a decline in the number of unemployed individuals to 1.6 million by 1989. The high rate of unemployment persisted to 1991 when the country experienced another recession. During this period, the economy was characterized by high rate of structural unemployment due to changes in work environment in various sectors.
Over the past two decades, there has been a reduction in the rate of unemployment. For example, during the period ranging from 1993 to 2002, the rate of unemployment reduced from 10.3% to 5.1%. The reduction in unemployment resulted from creation of employment opportunities. The population of individuals employed increased from 70.4% in 1993 to 74.7% in 2001(Office of National Statistics, 2004, para. 4).
The rate of unemployment continued to decline further to 4.8% in 2004. The reduction in unemployment is associated with the fact that the country experienced economic growth for a considerable duration of time. However, in 2005, there was an increment in the rate of unemployment. For example, by February 2006, the rate of unemployment was 5.2%. This increased further to 7.8% in October 2009. In August 2010, the rate stood at 7.7 %( Office of National Statistics, 2004, para. 4).
Reasons why unemployment is set to rise in UK
There are a number of reasons why unemployment in UK is set to rise in the future. Some of these reasons are explained below.
Contraction of credit
The UK economy has been affected by the economic crisis which began in the US. This arises from the high rate of globalization. The UK financial institutions were negatively affected. As a result, banks became reluctant to advance finance to investors inform of loans (Kollewe & Seager, 2008, para. 6).
One of the ways through which they implemented this was by increasing the rate of interest applicable to loans (O’Grady, 2009, para. 2). In addition, financial institutions such as banks increased their reserve ration. This led into a decline in the amount of credit available to be issued as loan. This negatively affected the rate of investment in the country. As a result of credit contraction, there was a reduction in consumer spending. The resultant effect was a decline in the country’s rate of economic growth.
Firms which had undertaken huge investment projects had to delay their investments until the lending rates declined (Kollewe & Seager, 2008, para. 4). Certain economic sectors in UK have been have been adversely affected by the financial crisis. Some of these sectors include the real estate and construction industry. In addition, the global economic downturn led into a decline in the volume of international trade conducted between UK and other trade partners.
According to Thompson and Billington (2010), UK has experienced a rise in the number of individuals claiming unemployment benefits. The UK government has formulated a policy aimed at reducing its public spending. According to Elliot (2010, para. 3), reduction in government spending will culminate into a loss of 1.3 million jobs within the next five year.
This will further increase the number of individuals under the unemployment benefits scheme. Reduction in public spending is aimed at bridging the gap in government’s budget deficit. During the period ranging from 2009 to 2010, UK had a relatively high budget deficit which amounted to approximately 160 billion pounds (Walayat, 2010, para. 4). Reduction in government spending will affect both the private and the public sector over the next 5 years.
For example, there will be a reduction in the number of contracts issued to private firms. This means that the operation of private firms will be negatively affected. In an effort to minimize their operation costs, these firms will consider laying-off some of their workforce. According to Elliot (2010), reduction in government spending will decline the country’s rate of economic recovery. It is estimated that spending cut will lead into an increment of unemployment rate to 2.95 million by 2012.
In an effort to bridge the deficit, the government also expects to increase its tax revenue with a margin of 113 billion pounds per year by 2015. This will culminate into an additional 700, 000 job loss within the private sector. The rise in unemployment will arise from a reduction in the number of private investors willing to invest in UK (Walayat, 2010, para. 6).
True level of unemployment in UK
The rate of unemployment in UK from 1971 to 2010 averaged 7.22%. However, the trend has changed. The total number of unemployed individuals aged between 16 and 64 years during the last quarter increased by a margin of 0.3% to settle at 70.8%.
On the other hand, there was an increase in the number of individuals aged between 16 years who were employed with a margin of 167,000 to settle at 29.19 million. On average there have been an increase total number of people employed during 2010. However, the current rate of employment in 2010 is less with 210,000 compared to the previous year. According to the latest reports, the rate of unemployment in UK for the last quarter of 2010 was 7.7%.
The total number of unemployed individuals reduced with a margin of 9,000 during the last quarter to settle at 2.45 million. It is estimated that the total number of unemployed males in 2010 were 1.43 million while the women were 1.02 million. From September 2010, there was a reduction in the number of individuals under the unemployment scheme.
How does technology affect UK unemployment?
Technological growth can stimulate a country’s rate of economic growth. The resultant effect is an improvement in the citizen’s living standards. According to Lane (n.d), technological advancement results into economic growth in the long term. However, in the short term, technological advancement can lead into a rise in unemployment. As a result of technological advancement, various firms are incorporating emerging technologies an effort to develop their competitive advantage.
Technological advancement requires employees to improve their skills in order to execute the existing jobs. In addition, new jobs emerging are requiring individuals to be having relevant skills. According to Lane (n.d), manufacturing firms are increasingly demanding skilled employment. The resultant effect is widening the gap between those who have relevant skills and those who do not have the skills (Georgiou, 2003, p. 5).
According to Atkinson (2010), the rise in the rate of unemployment in UK is associated with the growth in technology. Atkinson (2010) asserts that incorporation of machines in working environment has resulted into a large number of employees being displaced from their jobs. In an effort to improve service delivery, the government is incorporating the concept of e-government. This has led into an increase in the number of individuals being displaced.
How inflation affects UK unemployment
There is a strong correlation between inflation and unemployment (Berentsen, Menzio & Wright, 2008, p. 1). However, the relationship is indirect. However, it is believed that an increase in the rate of unemployment is accompanied by a reduction in the rate of inflation.
Increase in the rate of unemployment makes it challenging for employees to negotiate for wage increment. This arises from the high supply of labor within the labor market. A large number of individuals are willing to work for the same wage rate. This means that unemployment is reduced by wage inflation.
When the rate of inflation is high, prices of commodities remain to be high. In addition, reduction in wage inflation tends to reduced cost push and demand pull inflations (Berentsen, Menzio & Wright, 2008, p. 1). The resultant effect is a reduction in consumer spending. This means that firm’s tend to reduce their rate of production. One of the ways through which they attain this is by implementing downsizing strategy leading to an increment in the number of employees who lose their jobs hence the increase in the level of unemployment.
Over The past decade, UK has witnessed an increment in the rate of inflation. However, the rate of inflation has remained to be relatively low. By December 2003, the country’s rate of inflation was 1.3%. However, there has been a steady increase in the rate of inflation.
By October 2010, the rate of inflation was 3.1% (Price, 2010, para. 4). This explains the reason why UK is experiencing a high rate of inflation. As a result of the high rate of inflation, UK is experiencing a decline in the rate of economic output. The country’s rate of unemployment is also associated by rise oil prices.
How unemployment affects UK economy
The high rate of unemployment in UK has negatively affected the country’s economy (Liberal Democrats, 2010, para. 1). For example, the rise in the rate of unemployment has strained the country’s benefit scheme. This means that an increment in the amount of funds is required to cater for the scheme. In addition, increase in unemployment leads to a reduction in a countries taxable income.
One of the main sources of revenue which UK intends to utilize in an effort to bridge its budget deficit is taxes. This may be challenging to the government considering the fact that unemployment reduces the taxable income. This arises from the fact that only a small proportion of the entire proportion remains to be taxable.
Unemployment has resulted into a decline in the UK rate of economy growth (Liberal Democrats, 2010, para. 1). Consumption is one of the main ways through which a countries economy is stimulated. Rise in unemployment leads to a reduction in consumer spending.
Through consumption a country is able to increase its taxable income. In addition, spending on luxuries has reduced. Consumers are only considering purchasing necessities. This has led firms to consider implementing cost cutting strategies. The resultant effect is a rise job loss and hence unemployment.
Unemployment has a negative effect in the country’s economic growth. From the analysis, there are various factors which lead a country to experience changes in the rate of unemployment. Some of these causes relate to changes in the labor market such as the skills required to execute a certain task. However, countries should try to keep their rate of unemployment low. The resultant effect is that the country will be able to exploit all its resource.
Over the past years, UK’s economic performance has been superior. This is evident from the fact that the country has managed to keep its unemployment rate being relatively low. However, the rate of unemployment has been fluctuating over the years. During the period ranging from 1993 to 2002; the country experienced a low rate of unemployment. This trend did not persist for long. From 2005 to 2010, UK has experienced an increment in the rate of unemployment.
It is forecasted that the rate will increase in the future. Some of the causes of the increment include the government’s plan to cut its public spending so as to bridge the budget deficit. In addition, the rate is set to increase due to contraction in credit as a result of the current financial crisis. Financial institutions are increasing their lending rates. The resultant effect is a reduction in the volume of investment. This will culminate into reduction in the number of new jobs created.
Due technological innovation, both the private and public sectors are incorporating the emerging technologies in their operation. The resultant effect is that the new technology is replacing jobs hence increasing unemployment.
From 2003, UK has witnessed a low rate of inflation. However, the rate has been on an upward trend. Inflation has affected demand for products and services. Consumers are considering purchasing necessities compared to luxuries. Reduction in consumer demand has led firms to consider reducing the rate of their production. In addition, firms are downsizing in an effort to minimize their cost of operation. As a result of unemployment, UK’s rate of economic growth has been reduced.
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