Evaluate possible strategies that could be used by the UK government to reduce unemployment

Evaluate possible strategies that could be used by the UK government to reduce unemployment

How can the UK government reduce unemployment?

INTRODUCTION

This essay evaluates the possible strategies that could be used by the UK government to reduce unemployment.Unemployment usually refers to a state of involuntary unemployment experienced by people who are willing to work at the going labour rate but are unable to get a job. Generally, there are four types of unemployment: deficient-demand unemployment, frictional unemployment, real wage unemployment and structural unemployment. All four may contribute to total unemployment at any particular time. Below is an evaluation of all four types of unemployment and some of the measurements that the UK government could use to tackle the unemployment problems in Britain.

TYPES OF UNEMPLOYMENT

Demand-deficient Unemployment

Demand-deficient unemployment is the type that is caused by insufficient demand in the economy to buy the entire out put that an economy at full employment would produce. When an economy experiences full employment, there is no demand-deficient employment and any other unemployment that occurs at this point is often due to other causes that have nothing to do with demand.

Frictional Unemployment

Fictional unemployment refers to unemployment that occurs as a result of labour turnover when people are in the course of leaving existing jobs or finding new jobs. As existing workers change jobs for whatever reason, it takes time to find new jobs; old workers may also retire and new jobs wait to be filled but this takes time hence leaving a pool of people that are frictionally unemployed (Lipsey and Chrystal 2003).

Structural Unemployment

Structural unemployment occurs when changes in the regional, occupational and industrial structure of the demand for labour are not matched by equivalent changes in the structure of the supply of labour. An example of this type of unemployment in the UK is youth unemployment which stood at 21% in 2013 in the UK compared to the unemployment rate in the general population which stood at around 7.2% (BBC 2014). Structural unemployment can be caused by changes in the economy, a shortage of skills or even social policies that discourage occupational or regional mobility of labour. Youth joblessness in the UK is thus a product of major changes in the economy and occupational structure – changes that have been greatly accentuated by the recession rather than being caused by the limitations of the education system (The Guardian 2014)

Real Wage Unemployment

Real Wage unemployment sometimes also called classical unemployment occurs when wages are above the equilibrium level causing the supply of labour to be greater than demand. This is especially prevalent in countries that implement minimum wage structures that take no account of local market conditions leading to very high wages. Wages can also be held above their equilibrium level by unions which can result in longterm unemployment as was the situation in the UK economy in the 1970’s and early 1980’s (Lipsey and Chrystal 2003)

CURES FOR UNEMPLOYMENT

Measurements for tackling demand-deficient unemployment

Because insufficient demand is at the root cause of demand-deficient unemployment, policies designed to tackle it must first address the demand issue principally through demand management. Demand management occurs when the government attempts to influence the level and growth of aggregate demand (AD) hence the levels of employment, and other variables such as rate of national income, inflation, economic growth and the balance of payments position. In principle, the most effective measurements that can eliminate deficient-demand unemployment are through the use of expansionary fiscal and monetary policies that increase the demand for labour (Lipsey and Chrystal 2003).

1. Cut taxes: One such fiscal policy that the UK government has used to tackle demand-deficient unemployment is cutting back taxes that hinder consumer consumption. For example, the Coalition Government implemented tax cuts over the course of 2013 and the result of these tax cuts meant take-home pay for all but the richest 10% grew by 2.5% in 2013 – marginally above the rate of inflation (Mintel 2014).

2. Increase government spending: Another fiscal policy that the UK government has deployed since the 2008 recession in an effort to reduce unemployment is more government expenditure to stimulate consumer demand, often associated with Keynesian demand management. The aim of this fiscal policy to increase public and private spending in the hope that such spending will stimulate AD thus encourage firms to produce more. When this happens, the result is an increase in demand for labour and hence lowering demand-deficient unemployment (Lipsey and Chrystal 2003). Nevertheless, the problem with more government spending is that it requires the UK government to borrow more. Further, such spending takes time to have an effect on increasing AD.

3. Cut interest rates: Monetary policy has also been used by the UK government to tackle the unemployment problem since 2008 mainly through the Bank of England cutting interest rates. 2014 marked five years since the 0.5% rate was established and the Bank of England noted in March 2014 that any rate increases were likely to be small and gradual (Mintel 2014). Lower interest rates lower the cost of borrowing (low interest rates have kept mortgage repayments low for many UK consumers) which encourages consumers to spend and invest. This in return increases AD, boosts GDP hence reducing demand deficient unemployment.

Measurements for tackling structural and frictional unemployment

The most effective approach that can be taken to reduce structural or frictional unemployment is to use supply side policies. Supply side policies are long run economic policies designed to improve the efficiency of market forces by for example providing incentives for people to get new jobs or incentives that increase geographical and occupational mobility of labour in order to reduce unemployment. In order to tackle the high level of youth unemployment, the UK government deployed a number of supply side policies of investing in youth education and apprenticeship training. It also set up subsidies to encourage firms to train and employ young people under the age of 24 (employment subsidies). It also made reforms to the benefits system.

Case study example: Tackling youth unemployment in the UK

For example, the UK government set up the Future Jobs Fund (FJF) in October 2009 across Great Britain with the aim of preventing long term ‘scarring’ of young people as a result of the recession. The UK government spent more than 650 million during the lifetime of the project in an effort to support young people looking for employment. The programme was mostly for 18 to 24-year-olds in receipt of Jobseeker’s Allowance (JSA). As a supply side programme, the FJF was thus designed from the beginning to build skills and work experience for disadvantaged young jobseekers and help them secure long-term unsubsidised employment after they finish their FJF subsidised job. By the end of March 2011, two years after it was first introduced, the FJF programme had created over 105,000 jobs. Over the lifetime of the fund, over 481 organisations, mainly in the public and third sector, received funding to provide jobs through FJF (Marlow, Hillmore & Ainsworth 2012).

Another supply side policy implemented by the UK government to tackle both structural and frictional unemployment was the introduction of the Work Programme targeted at people who are unemployed for more than a year. Its aim is to give such people the chance to develop work-related skills and experience. The most important thing for those out of work is the development of new skills and work experience, whether this is through work placements, free courses or taking on new responsibilities, along with maintaining their confidence and believing in their ability to get a job (BBC 2013).

Other supply side policies that the UK government could use is to guarantee a real job, created by the charitable sector and paid at the minimum wage, to anyone who has been out of work for a year. More critically is to insist that those who are on unemployment benefits should take any available job or lose their benefits - limiting the time people can be unemployed

Measurements for tackling real wage unemployment

Whenever classical unemployment exists, it’s not the type that has easy solutions to because it generally requires a fall in the real product wage combined with measures that increase AD in order to create enough total employment. Some economists go so far as to say all unemployment reflects disequilibrium in the labour market. If wages were allowed to fall to the market level, then unemployment would be solved. Therefore classical economists place great emphasis on reducing the power of trades unions and expansionary fiscal and monetary legislation which leads to artificially high real wages (Lipsey and Chrystal 2003).

REFERENCES

BBC (2013) “How should long-term unemployment be tackled?” [Online] at http://www.bbc.co.uk/news/uk-24330111 [Accessed 01 January 2015]

BBC (2014) “Full economic recovery 'will not solve youth unemployment”

http://www.bbc.co.uk/news/business-28765465 [Accessed 01 January 2015]

Marlow, S., Hillmore, A., & Ainsworth, P. (2012) “Impacts and Costs and Benefits of the Future Jobs Fund” Department for Work and Pensions Paper, [Online] at https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/223120/impacts_costs_benefits_fjf.pdf [Accessed 01 January 2015]

Mintel (2014) “Food and Drink Retailing UK” London

Lipsey, R., & Chrystal, A. (2003) “Economics” 10th ed., OUP Oxford

The Guardian (2014) “Structural changes lie behind youth unemployment” [Online] at http://www.theguardian.com/society/2014/jan/08/structural-changes-youth-unemployment [Accessed 01 January 2015]

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