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Measuring Unemployment


The unemployed are those registered as able, available and willing to work at the going wage rate in any suitable job who cannot find employment.  The annual average rate of unemployment for the UK since 1971 using the claimant count figures are shown in the chart below.




In April 1998, the Government introduced a new monthly Labour Force Survey using a different measure of unemployment. The new measure is based on the International Labour Organisation (ILO) definition of unemployment. It covers those who have looked for work in the past four weeks and are able to start work in the next two weeks.


The previous monthly count only included those who were unemployed and claiming benefit. This excluded a number of people who are classed as unemployed under the ILO definition.  The most significant group who are now included in the monthly unemployment statistics are women seeking work whose partners are on means tested benefit.




This is an adjustment made to economic data that allows for changes due solely to the period of time at which the data was collected, instead of examining the underlying forces in which we may in fact be interested.


For example, at Christmas, the unemployment figures may be artificially reduced due to the number of people taking temporary employment in the retail sector. The seasonally adjusted unemployment figures will exclude this rise in temporary employment from their calculations.


Costs Of Unemployment

Lost Output Of Goods And Services

Unemployment causes a waste of scarce economic resources and reduces the long run growth potential of the economy.  The hours that the unemployed do not work can never be recovered.


Costs To The Government

High unemployment has an impact on government expenditure, taxation and the level for government borrowing each year

·        An increase in unemployment results in higher benefit payments and lower tax revenues. When individuals are unemployed, not only do they receive benefits but also pay no income tax.

·        As they are spending less they contribute less to the government in indirect taxes, e.g., VAT.

·       This rise in government spending along with the fall in tax revenues may result in a higher government borrowing.


Deadweight Loss Of Investment In Human Capital

Workers who are unemployed for long periods become de-skilled as their skills become increasingly dated in a rapidly changing job market. This reduces their chances of gaining employment in the future, which in turn increases the economic burden on government and society.


Social Costs Of Unemployment

Rising unemployment is linked to social and economic deprivation - there is some relationship between rising unemployment and rising crime and worsening social dislocation (increased divorce, worsening health and lower life expectancy).


Areas of high unemployment will also see a decline in real income and spending together with a rising scale of income inequality. As younger workers are more geographically mobile than older employees, there is a risk that areas with above average unemployment will suffer from an ageing potential workforce - making them less attractive as investment locations for new businesses.


The Main Causes Of Unemployment

Cyclical Unemployment

Cyclical Unemployment is associated with an economic recession or a sharp economic slowdown. It occurs due to a fall in the level of national output in the economy causing firms to lay-off workers to reduce costs and protect profits.  This is a process known as labour-shedding.


Although cyclical unemployment is usually associated with economic recessions it can also exist when the economy is constantly run below capacity. As the economy recovers from a downturn, we expect to see the problem of cyclical unemployment decline.


Frictional Unemployment

This type of unemployment reflects job turnover in the labour market. Even when there are plenty of vacancies available, it takes time to search and find new employment and workers will remain frictionally unemployed.


Structural Unemployment

Structural unemployment exists even when there are unfilled job vacancies due to a mismatch between the skills of the registered unemployed and those required by employers. People made redundant in one sector of the economy cannot immediately take up jobs in other parts as they do not have the relevant skills.


For example, it would be hard for a redundant ship yard worker to instantly take a job in a high-tech electronics business. Likewise workers laid-off in steel manufacturing may have problems in finding re-employment in financial services. This type of unemployment is linked to occupational immobility of labour.


Structural unemployment often occurs more heavily in certain regions because of the long-run decline of traditional industries. For example the loss of manufacturing jobs in the north-east of England, the closure of coal mines in Scotland and Wales and the long-run decline of ship-building in the United Kingdom.


Real Wage Unemployment

Real wage unemployment occurs when wages are forced above the normal market level.  Traditionally, trade unions and wages councils are seen as the institutions causing this type of unemployment although the importance of trade unions in the UK labour market has diminished significantly over recent years.  It has been argued by some that the minimum wage has caused some real wage unemployment.


New Deal - New Hope?

Labour’s New Deal programme for young unemployed people was introduced across the UK in April 1998. In June 1998 the Government launched a separate New Deal for Long-Term Unemployed People aged over 25+.


Three years later we are starting to see some of the effects of these active labour market policies on the UK economy.


People enter New Deal by moving into a Gateway where they are given an interview and support in choosing a suitable option.


The main options are:

·        a subsidised job with an employer

·        remaining in full-time education and training

·        work within the accredited voluntary sector and

·        work experience with an environmental task force.


The fifth option of staying on benefits has been taken away!


The programme is designed to provide pathways back into work for the long term unemployed – many of whom have become outsiders in the labour market despite the continuing strength of the British economy. Higher levels of employment and economic activity add to total national output and should help to improve the overall performance of the labour market in sustaining long run economic growth.


Is New Deal Delivering?

The latest data on New Deal participants published shows that up to the end of July 2000, over 518,000 people have now passed through the New Deal scheme, 402,000 have left leaving 116,000 currently on the programme. 237,040 young people had entered employment. Of which 180,600 were in sustained jobs, and 56,440 in jobs lasting less than 13 weeks.


There are wide differences in the success rate in getting New Deal participants into work across the regions. Just over one third of participants among 18-24 year olds have moved into employment but in some cities (including Birmingham) the percentage is only 25%.


The New Deal programme for workers aged 25+ has been running for a shorter time period. Nonetheless less than 15% of participants have moved into employment. In some areas (Glasgow for example) only one person in ten has passed through the programme into either a subsidised job or non-subsidised employment.





E-mail Steve Margetts