Macroeconomic Policies in the UK: Unemployment

Introduction

This economics essay will about unemployment in the UK. There exist numerous unexploited potential in the economy of the UK, and with the rising labor market, unemployment is still proving to be a problem. Unemployment has several causes and also adverse consequences to a country’s economy. In the past years or rather during the work of the previous government, the unemployment rate has been falling tremendously (Portes, 2012). However, recently- in the present government, several people are out of work causing high instances of unemployment in the UK.

Unemployment in the UK

Unemployment in the UK can be measured through claimant count, where people qualified to claim the job seeker’s allowances are included. Such people often receive the six months allowance before moving to certain employment measures. However, the claimant count excludes many people having the same interest in finding jobs just like the included people, but since they do not meet the criteria, are not incorporated in the unemployment count (Riley, 2006). In the year 2003, the average rate of claimant count was at 3,0% or about 933,000 labor forces. Labour force surveys can also be utilized in unemployment measurement, where job seekers in the past months and those who find work in the next two weeks are included. The unemployment rate through labor force survey in recent years was so high exceeding the claimant count by 400,000 labor forces. The trends in the two principle unemployment measures for the economy of the UK show high unemployment rates with labor force survey, but low rates with claimant count. However, the two measures show increased employment rates from 1990 to around 1992, but a persistent decrease in employment rates from then to the present (Portes, 2012).

Causes of Unemployment in the UK

There are numerous causes of unemployment in the UK, for instance, transitional or voluntary unemployment otherwise known as frictional unemployment, and involves people moving between different jobs. They tend to localize their job search in a given area making geographical mobility unexploited in the UK. The unemployment trap also causes frictional unemployment, where a person refuses to accept a job in a prevailing labor market due to wage rates. Capital labor substitution makes people in the UK remain unemployed, thus cause structural unemployment. Involuntary unemployment or cyclic unemployment comes in when there is a lack of demand, particularly during the recession (Sotiria, 2008). At this time, most plants, businesses, and industries often close down, and there are plenty of worker layoffs. This means that the country’s GDP is bound to fall below potential GDP, causing a massive contraction in the total employment rate in the country.

The Employment Structure in the UK

The employment structure in the UK has also changed incredibly; in such cases, people tend to shift to service-based employments. Most unemployed individuals from heavy engineering, steel, and coal fields find it hard to get re-employed without being re-trained, hence it describes the problem of occupational labor immobility. Deindustrialization has been experienced in the UK due to this large number of unemployment in industrial sectors. This attributed to the huge shift to employments involving servicing like insurance, finance, business, and banking. Persistent unemployment causes market failures since it wastes rare resources leading to reduced potential output and reduced allocative efficiency (Franzese, 2002). During increased unemployment, for instance, in times of recession, there is a contraction of the real national output making it hard for the country’s economy to function at full capacity. For example, during the depression in the early 1990s, the unemployment rate rose to around 10% as the output gap deviated to the negative side. During its recovery, there was decreased unemployment and the economy rose towards macroeconomic equilibrium. During this time, the UK economy was running close to its potential level as its real GDP grew higher than 2,5% yearly (Riley, 2006). However, by around 2005, there was a tremendous slowdown in the economy with the output gap becoming negative again. The unemployment rate, therefore, was increased. Unemployment also causes redundancy in skills and motivation to work; therefore, an immense effect on a country’s economic growth potential. Lowered government finances, hysteresis effects, and social deprivation, as well as dislocation, are also associated with unemployment in the UK (Carlin & Soskice, 2006).

Since unemployment has proved to be a formidable problem in the UK, the government has initiated a new deal program and policies to enable the reduction of long-term unemployment. This new deal aims at improving the human capital and in turn, increases the employability of job seekers in the eyes of employers. It also aims to bring back people who gave up the job search due to the bad economy. It involves encouraging the discouraged workers out of formal employment for long and finding something relevant for them in the labor market (Sotiria, 2008). In open economies, the outcome of labor market protection policies on wage-setting tendency and thereby, on the stability rate of unemployment, is influenced by the macro-institutional framework within which they function and within a given context. In open economies, liberal labor market safety policies can be compatible with reduced unemployment in the medium-run. However, if collective income bargaining is harmonized, the monetary policy is conservative, and fiscal policy is stable. This blend of macroeconomic policies deviates the trade-off between real wages and unemployment experienced by wage-setters (Riley, 2006). Through threatening to respond with a sharp policy compression, a conservative monetary policy makes any extreme increases in the negotiated real wage more exclusive.

Government Policies

Government policies aimed at reducing unemployment in the UK are expressed to enhance employment rates and open up ways for employment opportunities. There are demand-size and supply-size policies used in the enhancement of employment issues in the UK. The distinction between the two policies can be made to improve the labor market capabilities (Carlin & Soskice, 2006). However, inevitable limits exist for the government to enable the achievement of sustained unemployment reductions. The policies also come with certain costs and entail opportunity costs. Policies aimed at curbing labor immobility give the unemployed the chance to get relevant skills to get employed. In the past government, occupational immobility of labor policy shows relative reluctance in the workplace training as both employees and employers underestimate its value. Today, workplace pieces of training are used widely throughout the UK (Sotiria, 2008).

Benefits and tax reforms policy act by reducing welfare benefits value and increasing the likelihood of the unemployed to get work. The recent implementation of this policy in the UK shows that absolute cutting of the state welfare payment makes no much difference in solving the unemployment problem. Through the macroeconomic policy of reflating the aggregate demand, high national income can be generated by mitigation of the effects of economic recession in the UK (Portes, 2012). However, the use of both monetary and fiscal policies to boost demand in case of low output is risky. Regional policies used today in the UK encourage the inflow of foreign investments, but unemployment cannot be solved by straightforward injection of cash into the national circular flow. The UK’s current strategy to run the labor market relies on fiscal and monetary policies. This enhances the maintenance of stable economic growth, hence stimulus to a high rate of employment (Riley, 2006). Macroeconomic stability creates a favorable environment for employment.