Unemployment : An Economic Issue


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Introduction to Unemployment or joblessness

Unemployment or joblessness occurs in a nation when people who actively seek work are without work. A relatively high rate of unemployment is experienced by an economy during periods of recession (Floyd, 2003). There are several factors that assume an important place in explaining the changing level of unemployment in a country. Also, the government of a nation takes certain corrective measures for tackling these factors and curing the problem of unemployment. These are geographical and occupational mobility of labor, flexibility of the labor market etc. There are certain economic factors also that affect the level of unemployment. These are inflation rate, interest rates, productivity etc. the following report makes an attempt to critically evaluate and discuss the factors that assume the most important place in explain the changing level of unemployment in the UK over the last 10 years. The impact of these factors has been critically analyzed. Also, the steps taken by the government to deals with the situation have been discussed in the report.


Several economic issues are being faced by the individuals and organizations in the UK. These are the issues that have been important in changing the level of unemployment in the UK. During the long boom of the 2000s, unemployment fell to a low of 5 per cent. This showed the condition of being near full employment (Floyd, 2011). However, in 2008, the deep recession caused a sharp rise in the unemployment. It was mainly because the people were being laid off in the recession. During the prolonged recession of 2008 to 2013, the unemployment fell. However, the unemployment rate of United Kingdom has dropped to a five year low of 6.9 per cent in the quarter to February (Hardy, Lawless and Martin, 2013). The graph below shows the trend of unemployment in the UK over the past ten years.

 As such, there has been a continuous change in the level of unemployment in the UK over the past ten years from 2003 to 2013. Various economic factors are responsible which are faced by the people and the organizations in the UK. They are the following:


In the UK, consumer price inflation rose to 3.4 per cent up from 3 per cent in the February (Hardy, Lawless and Martin, 2013). Inflation is one of the biggest economic issues that the individuals and organizations of UK are facing. By eroding the value of money and assets, it makes the business adjust the prices. It disrupts business planning and makes the budgeting difficult. This is because it leads to rise in both the costs and prices. This leads to reduction in the planned investment spending. In medium terms, prevailing inflation is important in changing the level of unemployment in the UK. This is because as inflation will affect the costs, there will be loss of jobs. As the costs rise owing to inflation, the business often go for substituting labor with other factors such as new technology.

There has been deceleration in the inflation rate of UK for the sixth consecutive month to 1.6 per cent (Mallik and Bhar, 2011). This has impact on the unemployment in the UK. With inflation, the wages have also caught up for the first time in nearly four years. The businesses of UK have been impacted by the inflation. There is increase in prices that leads to higher wage demands. This is because the people try to maintain their standard of living. At the same time, the prices of raw materials such as oil, steel and copper increase. This has impacted the turnover of the business in the UK. Further, inflation has led to loss of international competitiveness. This worsens the trade performance of the organizations. As such, they cut down jobs which lead to an increase in the unemployment level in the UK.

In case of the inflation exceeding the target of the government, the interest rates were increased. These have helped in reducing the rate of growth and inflationary pressures. Interest rates have been set by the government for meeting the inflation target in the future (Keynes, 2006). These have impacted the aggregate demand in a number of ways. Market rates are affected by the changes in the official rates. This has had its effects on the consumer demand including effect on savings. With this, the spending is directly impacted. In case of a new debt for funding spending, borrowing is encouraged or discouraged as a result of the changes in the interest rates. The general expectations and confidence has also been affected by the changes in the interest rates (Livanos, Yalkin and Nuñez, 2009). As a result of this, the consumer and corporate behavior has been encouraged. By having an impact on the exchange rate, interest rates also influenced export demand in the UK.


Recession was experienced in the second quarter of 2008 in the UK economy. This was based on both the decline in the output and increases in the unemployment. the real output experienced a fall by 6.4 per cent. From the trough, there was a growth in the GDP by 1.9 per cent in the second quarter. Being the most significant damage to the output of UK, this collapse was termed as the great recession (Leschke, 2009). It was a result of the inaction of the government to the long standing economic imbalances. The labor market consequences were affected by the recession. Many changes took place in the labor market of the UK between the years 2008 and 2010. One of them was the fall in employment. The employment fell by 5, 80,000 in the years 2008 to 2010. The decline in the employment was observed more in case of males. There was a fall in the male unemployment by 3 per cent (Plagnol and Scott, 2009). This decline in the employment among the males accounted for about 84 % of the overall fall in the employment. The young people also suffered disproportionately as a result of the recession. Although, only 19.5 per cent of the working population of the UK consisted of the young people, but there was a 74 per cent decline in the employment among those aged 16 to 24. During the period in which great recession was being experienced, the unemployment rate rose to 7.8 per cent from 5.2 per cent. There was an increase in the unemployed by 857, 000 (Ripley, 2013).The prime reason behind this was the movement of people towards unemployment from inactivity.

These changes in the level of unemployment took place on account of the collapse in the demand for labor owing to the fall in the product demand. This in turn was reflective of severe credit rationing, falling confidence of the consumers, responses to transitory shocks in the raw material prices and delay in the response by the monetary authorities to these developments. There was a shrink in the vacancies. as a result of this, it was harder to get the people back on work. Recession had much greater impact on the perceptions of job security and consumer confidence. As during this time, there was a contraction in the GDP, many companies were faced to cut labor costs (Leschke, 2009). This was done as an adjustment to the reduction in demand for the products of the companies. The cut in the labor costs led to change in the labor markets. The companies were forced to take several measures that were inclusive of introducing redundancies, implementing alternative strategies of cutting back on labor costs. The redundancies increased the inflow of people into unemployment.

The government of UK used monetary and fiscal policy for dealing with the recession that was leading to the issue of unemployment. With the fall of inflation below the government target of 2 per cent, and recession being experienced by the economy, government cut down the interest rates (Dinh, Mullineux and Muriu, 2012). Lower interest rates stimulated economic activity by reducing the borrowing costs. With this the disposable income of the consumers with mortgage interest payments increased. Also, with this, spending is increased. This has been the loose monetary policy adopted by the UK government. The loose policy has been effective in the times when the economy was experiencing recession.

Government spending has been broken down into transfer payments, current government spending and capital spending. Transfer payments are made by the UK government that is inclusive of the welfare payments which are made available through the social security systems (Mallik and Bhar, 2011). These consist of the allowances to the job seekers, income support etc. Through transfer payments, a basic floor of income is provided which allows the government to change the final distribution of income. This government spending is used for managing the level and growth of aggregate demand. Welfare spending also included the unemployment benefits (Pavlopoulos and Fouarge, 2010). This public spending has its target to achieve a wide range of economic benefits which were inclusive of unemployment. However, if the confidence is low, there will be no effect of cutting the taxes. This is because the people will then prefer to save. Also, if the economy is close to full capacity, increase in aggregate demand will lead to inflation.


Various contemporary challenges are faced by the organizations that lead to the changes in the level of unemployment in the UK. These are:

  • Frictional unemployment is affected by the level of unemployed benefits. It has been seen that there is little incentive present to do a particular job in the situation of high ratio of benefits to paid employment. It has been seen that since 1980s, the unemployment benefits have been index linked. It can be seen that the tendency of rising of the wages is faster than the inflation. As such, there has been growth of the difference between the benefits and paid employment (Briscoe and Wilson, 2003). With this, the incentive to get a job has increased. As such, a reduction has been observed in the natural rate o unemployment in the UK. The incentives to take a job are also affected by the wages of those who are paid the lowest. In the UK, a national minimum wage has been introduced by the government and this has shown steady increase. With this, work appears to be more attractive than living on benefits. There has also been introduction of the New Deal that encourages the unemployed people back to work. In this are included giving workers retraining schemes and interviews to help them find the work. With this there has been a reduction in the unemployment in the UK.

  • The changes in the level of unemployment have also been as a result of geographical and occupational mobility of the labor. This has had impact on the level of structural unemployment. The unemployment that is caused by a mismatch of skills and geographical location is reduced if the workers are more mobile. For example, in the past decade, there has been reduction in the North South divide in the UK on account of the regeneration in the areas suffering from high rate of unemployment (Hussain, 2002). The place of former heavy industry has been taken by the new industries. With this, geographical unemployment has reduced. Occupational immobility is also reduced by making the workers more skilled with the help of education and training.

  • Rate of unemployment is also affected by the flexibility of the labor market. Labor markets could become more flexible if minimum wages were abolished and restrictive practices of the trade unions were reduced (Livanos, Yalkin and Nuñez,  2009). Hence, inflexible working practices are a challenge that the individuals in the UK face. These are inclusive of practices such as maximum working week, imposing restrictions on dismissal of workers and paying minimum wages.

However, there are other challenges that are being faced by the organizations and individuals in the UK as a result of the unemployment. They are the following:

  • Unemployment involves the loss of output. As a result of this, during long periods of unemployment, the skills of the workers can be lost. This can cause loss of human capital to the organizations.

  • People who are unemployed for long time suffer from disadvantage of trying to find work. The effects of unemployment depend on the duration for which the person has been unemployed (Thomas, 2007). With the increase in the duration of unemployment, the morale of the people sinks. This presents several challenges for the individuals as well as for the organizations.


The following theories and models can be discussed in understanding and addressing the issue of changing level of unemployment in the UK:

Hysteresis hypothesis
Hysteresis is the possibility that periods of high unemployment tend to increase the rate of unemployment below which the inflation begins to accelerate. This is known as natural rate of unemployment or non accelerating inflation rate of unemployment (NAIRU). As per this, the natural rate of unemployment is the equilibrium rate which could be seen at the time of full employment output of an economy (Mtlndell, 2000). Hysteresis Hypothesis states that if there is an increase in the unemployment, for example during recession, then there exists a possibility of it remaining for more time. This is because the workers become demotivated and unskilled while they remain unemployed. This makes it difficult for them to find a job in the future.

Phillips curve
The relationship between the rate of inflation and unemployment is represented by the Phillips curve. According to this, the lower the rate of unemployment, tighter is the labor market. Hence, the firms must raise the wages factor for attracting scarce labor (Hoover, 2008). The average relationship between the wage behavior and the unemployment over the business cycle is explained by this curve. The long run Phillip curve is a vertical line. The situation of permanent tradeoff between the inflation and unemployment is illustrated by the long run Phillip curve. However, the short run Phillip curve is in the form of L shape. This is reflective of the initial inverse relationship between the two variables. With the increase in the unemployment rate, inflation decreases and vice versa. For addressing the changing levels of unemployment, the policy makers can apply the Phillip curve. They can exploit the tradeoff between unemployment and inflation (Spence and Crick, 2001). However, it is argued that on account o the effectiveness of the supply side policies, the economy can continue to expand without inflation. This means that UK can expand without experiencing inflation. The pressure in the labor market at the times of growth has been eased. This is on account of the improvements in the labor market flexibility and increased labor immigration.


It can be concluded from the report that the level of unemployment in the UK has been changing since the pats ten years ion account of several factors. Among these factors are the economic issues such as inflation and recession period of 2008 to early 2010. These factors lead to increase in the rates of unemployment (Plagnol and Scott, 2009). These are several other factors such as geographical and occupational mobility of the labor, unemployment benefits and flexibility of the labor market that are responsible for the changes in the level of unemployment in the UK in past ten years. For addressing this, monetary and fiscal policy is employed by the government of the UK. These policies regulate the economic activity and help in reducing the rates of unemployment.


Journals and Books

  • Briscoe, G. and Wilson, R., 2003. Modelling UK occupational employment. International Journal of Manpower. 24(5). pp.568-589.
  • Collis, J. and Hussey, R., 2009. Business Research, A Practical Guide for Undergraduate and Post Graduate Students, London: Palgrave.
  • Dinh, T. H. M., Mullineux, W. A. and Muriu, P., 2012. Macroeconomic factors influencing UK household loan losses. Journal of Financial Regulation and Compliance.  20(4). pp.385-401.
  • Floyd, D., 2003. How can a flexible labour market influence the amount of foreign direct investment attracted by a host nation?. The case of the UK, European Business Review.  15(5). pp.334 - 339.
  • Floyd, D., 2011. Assessing the ways to recovery from the global financial crisis. Business Strategy Series. 12(6). pp.321 - 324.

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